PSS World Medical (PSSI) 10-Q 2011 Q2 Quarterly report

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 October 1, 2010

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 0-23832

PSS WORLD MEDICAL, INC.

(Exact name of Registrant as specified in its charter)

Florida	59-2280364
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
4345 Southpoint Blvd. Jacksonville, Florida	32216
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code (904) 332-3000

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.    x  Yes    ¨  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).    x  Yes    ¨  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 “large 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	¨	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    x  No

The number of shares of common stock, par value $0.01 per share, of the registrant outstanding as of November 4, 2010 was 55,260,559 shares.

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

OCTOBER 1, 2010

TABLE OF CONTENTS

Item		Page
	Information Regarding Forward-Looking Statements		1
	Part I—Financial Information
1.	Financial Statements:
	Unaudited Condensed Consolidated Balance Sheets as of October 1, 2010 and April 2, 2010		2
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended October 1, 2010 and October 2, 2009		3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 1, 2010 and October 2, 2009		4
	Unaudited Notes to Condensed Consolidated Financial Statements		5
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
3.	Quantitative and Qualitative Disclosures About Market Risk		23
4.	Controls and Procedures		23
	Part II—Other Information
1A.	Risk Factors		24
2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
6.	Exhibits		26
	Signature		27

CAUTIONARY STATEMENTS

Forward-Looking Statements

Management may from time-to-time make written or oral statements with respect to the Company’s annual or long-term goals, including statements contained in this Quarterly Report on Form 10-Q, the Annual Report on Form 10-K for the fiscal year ended April 2, 2010, Reports on Form 8-K, and reports to shareholders that are “forward-looking statements” within the meaning, and subject to the protections of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical earnings and those currently anticipated or projected. Management cautions readers not to place undue reliance on any of the Company’s forward-looking statements, which speak only as of the date made.

Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “assumes,” “should,” “indicates,” “projects,” “targets” and similar expressions identify forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q that involve risks and uncertainties include, without limitation:

• Management’s expectation that overall revenue growth will be slower than historical growth rates, due to current market conditions;

• Management’s expectation that the Company’s business strategies will have a positive impact on future periods, helping to offset the impact of the economic slowdown on net sales;

• Management’s estimation and expectation of future payouts of long-term incentive compensation;

• Management’s expectation that cash flows from operations, in conjunction with borrowings under the revolving line of credit, capital markets, and/or other financing arrangements will fund future working capital needs, capital expenditures, and the overall growth in the business; and its belief that the Company continues to be well positioned to weather the current crisis in the financial markets; and

• Management’s belief that the outcome of legal proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, management has identified important factors that could affect the Company’s financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements about the Company’s goals or expectations. The Company’s future results could be adversely affected by a variety of factors, including those discussed in Item 1A-Risk Factors in the Company’s 2010 Form 10-K and this Form 10-Q. In addition, all forward-looking statements that are made by or attributable to the Company are qualified in their entirety by and should be read in conjunction with this cautionary notice and the risks described or referred to in Item 1A-Risk Factors of the Company’s 2010 Form 10-K and this Form 10-Q. The Company has no obligation to and does not undertake to update, revise, or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements are made.

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 1, 2010 AND APRIL 2, 2010

(Dollars in Thousands)

	October 1, 2010		April 2, 2010
ASSETS
Current Assets:
Cash and cash equivalents	$	22,949	$	52,751
Accounts receivable, net of allowance for doubtful accounts of $6,113 and $6,310 as of October 1, 2010 and April 2, 2010, respectively		232,014		227,888
Inventories		220,846		218,911
Prepaid expenses		7,283		5,294
Other current assets		53,209		36,820
Total current assets		536,301		541,664
Property and equipment, net of accumulated depreciation of $129,213 and $117,580 as of October 1, 2010 and April 2, 2010, respectively		101,269		105,220
Other Assets:
Goodwill		128,745		121,772
Intangibles, net of accumulated amortization of $25,616 and $25,084 as of October 1, 2010 and April 2, 2010, respectively		26,440		24,548
Other assets		84,933		78,862
Total assets(a)	$	877,688	$	872,066
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	137,431	$	123,970
Accrued expenses		33,804		50,253
Revolving line of credit and current portion of long-term debt		1,297		881
Other current liabilities		26,574		10,954
Total current liabilities		199,106		186,058
Long-term debt, excluding current portion		191,667		187,941
Other noncurrent liabilities		86,420		90,053
Total liabilities(a)		477,193		464,052
Commitments and contingencies (Note 10)
Equity:
PSS World Medical Inc. shareholders’ equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.01 par value; 150,000,000 shares authorized, 54,930,039 and 57,168,296 shares issued and outstanding as of October 1, 2010 and April 2, 2010, respectively		540		562
Additional paid in capital		118,437		162,469
Retained earnings		278,293		244,983
Total PSS World Medical, Inc. shareholders’ equity		397,270		408,014
Noncontrolling interest		3,225		—
Total equity		400,495		408,014
Total liabilities and equity	$	877,688	$	872,066

(a) See Footnote 3,Variable Interest Entity, for discussion of the assets and liabilities related to the Company’s consolidated variable interest entity.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 1, 2010 AND OCTOBER 2, 2009

(In Thousands, Except Per Share Data)

	For the Three Months Ended						For the Six Months Ended
	October 1, 2010			October 2, 2009			October 1, 2010			October 2, 2009
Net sales	$	496,188		$	561,976		$	975,045		$	1,055,530
Cost of goods sold		339,063			389,405			670,074			736,985
Gross profit		157,125			172,571			304,971			318,545
General and administrative expenses		87,398			97,208			177,384			188,846
Selling expenses		34,298			36,728			66,908			69,415
Income from operations		35,429			38,635			60,679			60,284
Other (expense) income:
Interest expense		(4,226	)		(4,532	)		(8,363	)		(8,793	)
Interest and investment income		46			95			112			230
Other income, net		412			452			955			4,447
Other expense		(3,768	)		(3,985	)		(7,296	)		(4,116	)
Income before provision for income taxes		31,661			34,650			53,383			56,168
Provision for income taxes		12,017			12,964			19,908			21,178
Net income		19,644			21,686			33,475			34,990
Net income attributable to noncontrolling interest		87			—			165			—
Net income attributable to PSS World Medical, Inc.	$	19,557		$	21,686		$	33,310		$	34,990
Earnings per common share attributable to PSS World Medical, Inc.:
Basic	$	0.36		$	0.37		$	0.60		$	0.60
Diluted	$	0.35		$	0.37		$	0.59		$	0.59
Weighted average common shares outstanding:
Basic		54,985			58,566			55,539			58,477
Diluted		55,887			59,390			56,905			59,172

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED OCTOBER 1, 2010 AND OCTOBER 2, 2009

(Dollars in Thousands)

	Six Months Ended
	October 1, 2010			October 2, 2009
Cash Flows From Operating Activities:
Net income	$	33,475		$	34,990
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		12,041			10,501
(Benefit) provision for deferred income taxes		(2,842	)		1,256
Noncash compensation expense		5,262			10,430
Amortization of debt discount and issuance costs		4,636			4,613
Amortization of intangible assets		2,944			2,442
Provision for doubtful accounts		814			2,461
Provision for deferred compensation		805			781
Loss on sales of property and equipment		19			63
Gain on sale of available for sale securities		—			(3,635	)
Changes in operating assets and liabilities, net of effects from business combinations:
Accounts receivable, net		(3,755	)		(29,764	)
Inventories		(1,744	)		(4,247	)
Prepaid expenses and other current assets		(13,812	)		(10,102	)
Other assets		(4,136	)		(3,215	)
Accounts payable		12,543			28,761
Accrued expenses and other liabilities		(7,710	)		8,219
Net cash provided by operating activities		38,540			53,554
Cash Flows From Investing Activities:
Capital expenditures		(7,961	)		(14,885	)
Payments for business acquisitions, net of cash acquired		(6,453	)		(3,887	)
Payment for investment in variable interest entity, net of cash		(3,277	)		—
Proceeds from sale of available for sale securities		—			10,681
Other		(548	)		12
Net cash used in investing activities		(18,239	)		(8,079	)
Cash Flows From Financing Activities:
Purchase and retirement of common stock		(51,727	)		(451	)
Repayments on the revolving line of credit		(17,150	)		—
Proceeds from borrowings on the revolving line of credit		17,150			—
Excess tax benefits from share-based compensation arrangements		1,102			1,130
Proceeds from exercise of stock options		874			2,364
Payments under capital lease obligations		(425	)		(460	)
Other		73			—
Net cash (used in) provided by financing activities		(50,103	)		2,583
Net (decrease) increase in cash and cash equivalents		(29,802	)		48,058
Cash and cash equivalents, beginning of period		52,751			82,031
Cash and cash equivalents, end of period	$	22,949		$	130,089

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

OCTOBER 1, 2010 AND OCTOBER 2, 2009

(In Thousands, Except Share and Per Share Data, Unless Otherwise Noted)

1. BACKGROUND AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to the SEC rules and regulations. The unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations for the periods indicated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The accompanying unaudited condensed consolidated financial statements include the consolidated accounts of PSS World Medical, Inc. and its wholly-owned subsidiaries. The Company holds an interest in a variable interest entity (“VIE”) that is consolidated by the Company. See Footnote 3,Variable Interest Entity,for additional information. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company conducts business through two operating segments, the Physician Business and the Elder Care Business. These strategic segments serve a broad customer base. A third segment, Corporate Shared Services, includes corporate departments which support the operating activities and various initiatives of the operating segments, and engage in certain other operating and administrative activities.

The condensed consolidated balance sheet as of April 2, 2010 has been derived from the Company’s audited consolidated financial statements for the fiscal year ended April 2, 2010 except as noted in theReclassification section below. The financial statements and related notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2010.

The Company reports its year-end and quarter-end financial position, results of operations, and cash flows as of the Friday closest to calendar month end, determined using the number of business days. Fiscal years 2011 and 2010 consist of 52 weeks or 253 selling days and 53 weeks or 258 selling days, respectively. The three and six months ended October 1, 2010 consisted of 63 and 127 selling days, respectively, while the three and six months ended October 2, 2009 consisted of 68 and 132 selling days, respectively. Fluctuations in the number of selling days during a period can have a significant impact on the Company’s results of operations and cash flows.

The results of operations for the interim periods covered by this report may not be indicative of operating results for the full fiscal year or any other interim periods.

Reclassification

Certain items previously reported in financial statement captions have been reclassified to conform to the current financial statement presentation.

Stock Repurchase Program

From time to time, the Company’s Board of Directors authorizes the purchase of its outstanding common shares. The Company is authorized to repurchase a determined amount of its total common stock. Repurchases can be made in the open market, privately negotiated transactions, and other transactions that will be disclosed publicly through filings with the SEC. This authorization is in addition to any shares remaining available under existing repurchase programs.

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The following table summarizes the common stock repurchases and Board of Directors authorizations during the period from April 2, 2010 to October 1, 2010.

(in thousands)	Shares
Shares available for repurchase, April 2, 2010		3,317
Additional shares authorized for repurchase		2,763
Shares repurchased		(2,593	)
Shares available for repurchase, October 1, 2010		3,487

During the six months ended October 1, 2010, the Company repurchased approximately 2,593,000 shares of common stock at an average price of $19.95 per common share for $51,727, which reducedAdditional paid in capital on theUnaudited Condensed Consolidated Balance Sheets by approximately $51,702.

2. RECENT ACCOUNTING PRONOUNCEMENTS

During fiscal year 2011, the Company adopted a new accounting standard that changes the consolidation model for VIEs. Variable interest entities are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk to finance the entity’s activities without additional subordinated financial support. VIEs are consolidated by the primary beneficiary, defined as the party which (i) has the power to direct those activities that most significantly impact the entity’s economic performance and (ii) has an obligation to absorb an entity’s losses or a right to receive benefits from an entity that could be potentially significant to the entity. The standard requires ongoing reassessments to determine whether an enterprise is the primary beneficiary of a VIE. The standard expands the disclosure requirements for enterprises with a variable interest in a VIE. See Footnote 3,Variable Interest Entity,for further discussion.

In October 2009, Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) for multiple deliverable revenue arrangements. The update requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The update eliminates the residual method of revenue allocation and requires revenues to be allocated using the relative selling price method. The Company will adopt this update prospectively for revenue arrangements entered into or materially modified beginning in the first quarter of fiscal year 2012. The Company is currently evaluating the impact of adoption of this update.

In July 2010, the FASB issued an ASU which amended accounting guidance for receivables to require further disaggregated disclosures that improve financial statement users’ understanding of (i) the nature of an entity’s credit risk associated with its financing receivables and (ii) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The provisions of this accounting standard will not impact the Company’s consolidated financial position or statement of operations, as its requirements are disclosure-only in nature.

3. VARIABLE INTEREST ENTITY

On June 25, 2010, the Company entered into an agreement with Pathway Health Services, Inc. (“Pathway”), a consulting services company within the Elder Care market, under which the Company purchased a $3.3 million convertible note issued by Pathway. The note may be converted, at the Company’s discretion, into 73% of Pathway’s common stock. The Company also acquired a call option and issued a put option for Pathway’s common stock, both of which may be exercised if certain sales thresholds are met and time restrictions lapse. Under the agreement, the Company obtained a majority of seats and control of Pathway’s Board of Directors. The convertible note was considered to be a variable interest and the Company was determined to be the primary beneficiary of Pathway.

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The Company has consolidated Pathway under the purchase method of accounting and recorded noncontrolling interest under current accounting guidance for consolidations. The consolidated assets and liabilities, operating results and cash flows of Pathway are not considered significant to the Company’s financial position, operating results, or cash flows. Pathway’s assets cannot be used to settle the Company’s obligations and Pathway’s creditors have no recourse to the general credit of the Company.

4. EQUITY INVESTMENT

In April 2009, the Company sold its remaining investment in athenahealth, Inc. (“athena”) for $10,681, resulting in a gain of $3,635, or $2,254 net of tax, recorded inOther income, neton theUnaudited Condensed Consolidated Statements of Operationsfor the six months ended October 2, 2009.

5. EARNINGS PER SHARE

Basic earnings per common share attributable to PSS World Medical, Inc. is computed by dividingNet income attributable to PSS World Medical, Inc. by the weighted average number of the Company’s common shares outstanding during the period. Diluted earnings per common share attributable to PSS World Medical, Inc. is computed by dividingNet income attributable to PSS World Medical, Inc. by the weighted average number of the Company’s common shares and common equivalent shares outstanding during the period adjusted for the potential dilutive effect of stock options and restricted stock using the treasury stock method and the potential impact of outstanding convertible senior notes. Common equivalent shares are excluded from the computation in periods in which they have an antidilutive effect.

The following table sets forth computational data for the denominator in the basic and diluted earnings per common share calculation for the three and six months ended October 1, 2010 and October 2, 2009:

	For the Three Months Ended				For the Six Months Ended
(in thousands)	October 1, 2010		October 2, 2009		October 1, 2010		October 2, 2009
Denominator-weighted average shares outstanding used in computing basic earnings per common share		54,985		58,566		55,539		58,477
Assumed exercise of stock options(a)		179		342		203		334
Assumed vesting of restricted stock		723		482		758		361
Assumed conversion of the 2008 Notes		—		—		405		—
Denominator-weighted average shares outstanding used in computing diluted earnings per common share		55,887		59,390		56,905		59,172

(a) There were no antidilutive options outstanding as of October 1, 2010 and October 2, 2009.

In accordance with accounting guidance for calculating earnings per share, the Company included shares underlying the $230.0 million principal amount of 3.125% senior convertible notes (“2008 Notes”) in its diluted weighted average shares outstanding during the six months ended October 1, 2010. Under the treasury stock method of accounting for share dilution, shares that would be issuable upon conversion were included, based upon the amount by which the average stock price for the period exceeded the conversion price of $21.22. The average stock price did not exceed the conversion price during the three months ended October 1, 2010 and the three and six months ended October 2, 2009. If the price of the Company’s common stock exceeds $28.29 per share, additional potential shares that may be issued related to the warrants, using the treasury stock method, will also be included. Prior to conversion, the purchased options are not considered for purposes of the dilutive earnings per share calculation as their effect is considered to be anti-dilutive.

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6. COMPREHENSIVE INCOME

The following table includes the components of comprehensive income for the three and six months ended October 1, 2010 and October 2, 2009:

	For the Three Months Ended				For the Six Months Ended
(in thousands)	October 1, 2010		October 2, 2009		October 1, 2010		October 2, 2009
Net income	$	19,644	$	21,686	$	33,475	$	34,990
Unrealized holding gains on available-for-sale investments, net of income taxes		—		—		—		56
Unrealized holding gains on interest rate swap, net of income taxes		—		146		—		237
Reclassification of gains on available for sale investments included in net income previously recognized in other comprehensive income		—		—		—		(2,260	)
Comprehensive income		19,644		21,832		33,475		33,023
Comprehensive income attributable to noncontrolling interest		87		—		165		—
Comprehensive income attributable to PSS World Medical, Inc.	$	19,557	$	21,832	$	33,310	$	33,023

The unrealized holding gains and losses on available-for-sale investments relate to the Company’s previous investment in athena, as discussed in Footnote 4,Equity Investment.

The unrealized holding gains and losses on the interest rate swap relate to the interest rate swap on the Company’s revolving line of credit, which matured during fiscal year 2010.

7. INCENTIVE AND STOCK-BASED COMPENSATION

Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee directors. The Company measures stock-based compensation at the grant date, based on the estimated fair value of the award, and recognizes the cost as compensation expense on a straight-line basis, net of estimated forfeitures, over the awards estimated vesting period. The Company’s stock-based compensation expense is recorded inGeneral and administrative expenses on theUnaudited Condensed Consolidated Statements of Operations.

Restricted Stock Awards

The Company issues (i) restricted stock which vests based on the recipient’s continued service over time (“Time-Based Awards”) and (ii) restricted stock or restricted stock units which vest based on the Company achieving specified performance measurements (“Performance-Based Awards”).

Performance-Based Awards

On June 10, 2010, the Company’s Compensation Committee of the Board of Directors (the “Committee”), approved awards of performance-based restricted stock units (“Performance Shares”) and performance-accelerated restricted stock units (“PARS Units”) to certain of the Company’s executive officers. These awards were granted under the Company’s 2006 Incentive Plan.

Fiscal Year 2011 Issuances

The Performance Shares will vest after three years and convert to shares of common stock based on the Company’s achievement of certain earnings per share growth targets, the calculation of which will not be impacted by any change in generally accepted accounting principles promulgated by standard setting bodies. These awards, which are denominated in terms of a target number of shares, will be forfeited if

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performance falls below a designated threshold level and may vest for up to 250% of the target number of shares for exceptional performance. The ultimate number of shares delivered to recipients and the related compensation cost recognized as expense will be based on actual performance.

The PARS Units will vest on the five-year anniversary of the grant date and convert to shares of common stock, subject to accelerated vesting after three years if the Company achieves an earnings per share growth target, the calculation of which will not be impacted by any change in generally accepted accounting principles promulgated by standard setting bodies. Upon vesting, the grantees may defer acceptance of the units to a later date, whereas the units will remain outstanding.

Change in Estimate

During the six months ended October 1, 2010, the Company changed the number of estimated shares to be delivered on previously issued Performance Shares. The impact of the change in estimate was not considered significant to the Company’s operating results or financial position.

During the six months ended October 2, 2009, the Company changed (i) the number of estimated shares to be delivered on previously issued Performance Shares due to an increase in estimated achievement of performance conditions based on actual and expected future financial performance above previous estimates and (ii) the vesting period of previously issued PARS awards, which impacted the related expected forfeitures over the remaining vesting period.

As a result of the change in accounting estimates during the three and six months ended October 2, 2009, stock based compensation expense increased $2,197, $1,362 net of tax, or $0.02 per diluted share for the three months ended October 2, 2009 and increased $6,507, $4,034 net of tax, or $0.07 per diluted share for the six months ended October 2, 2009.

These estimates may be adjusted in future periods based on actual experience and changes in management assumptions.

Total stock-based compensation expense during the three months ended October 1, 2010 and October 2, 2009 was approximately $2,556 and $4,042, respectively, with related income tax benefits of $972 and $1,536, respectively. Total stock-based compensation expense during the six months ended October 1, 2010 and October 2, 2009 was approximately $5,262 and $9,954, respectively, with related income tax benefits of $2,001 and $3,378, respectively.

As of October 1, 2010, there was $13,232 of unrecognized compensation cost related to non-vested restricted stock and restricted stock units granted under the stock incentive plans. The compensation cost related to these non-vested awards is expected to be recognized over a weighted average period of 1.5 years.

Outstanding stock-based awards granted under equity incentive plans as of October 1, 2010 and April 2, 2010 are as follows:

	Performance-Based Awards								Time-Based Awards					Stock Options
	Performance Shares			PARS		PARS			Shares			Deferred Units		Shares
(in thousands)	Units			Units		Shares
Balance, April 2, 2010		515			88		652			321			11		558
Granted		92			101		—			63			2		—
Addition from change in estimate		43			—		—			—			—		—
Vested / Exercised		(164	)		—		(67	)		(79	)		—		(144	)
Forfeited		—			—		(23	)		(11	)		—		—
Balance, October 1, 2010		486			189		562			294			13		414

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Corporate Long-Term Executive Cash-Based Incentive Plans

During fiscal year 2009, the Compensation Committee of the Board of Directors approved the 2008 Shareholder Value Plan (“2008 SVP”), a cash based performance award program under the 2006 Incentive Plan. The performance period under the 2008 SVP is the 36-month period from March 31, 2008 to April 1, 2011. The Company had approximately $8,571 and $6,820 of accrued compensation cost related to the 2008 SVP as of October 1, 2010 and April 2, 2010, respectively. The accrual was recorded inOther current liabilitiesandOther noncurrent liabilities as of October 1, 2010 and April 2, 2010, respectively, due to the timing of the projected payout in June 2011.

8. ACCRUED EXPENSES

Accrued expenses as of October 1, 2010 and April 2, 2010 were as follows:

	As of
	October 1, 2010		April 2, 2010
Accrued payroll	$	14,380	$	14,848
Accrued annual incentive compensation		5,484		17,912
Other		13,940		17,493
Accrued expenses	$	33,804	$	50,253

9. SEGMENT INFORMATION

The Company’s reportable segments are strategic businesses that offer products and services to different segments of the healthcare industry, and are the basis on which management regularly evaluates the Company. These segments are managed separately based on the unique product and service offering required by the markets they serve. The Company evaluates the operating performance of its segments based mainly on net sales and income from operations. Corporate Shared Services allocates a portion of its costs and interest expense to the operating segments. The allocation of shared operating costs is generally proportionate to the revenues of each operating segment. Interest expense is allocated based on an internal carrying value of historical capital used to acquire or develop the operating segments’ operations. The following tables present financial information about the Company’s business segments:

	For the Three Months Ended						For the Six Months Ended
	October 1, 2010			October 2, 2009			October 1, 2010			October 2, 2009
Net Sales:
Physician Business	$	343,403		$	398,531		$	670,806		$	740,823
Elder Care Business		152,173			162,970			303,376			313,351
Corporate Shared Services		612			475			863			1,356
Total net sales	$	496,188		$	561,976		$	975,045		$	1,055,530
Income (Loss) from Operations:
Physician Business	$	37,130		$	42,546		$	64,753		$	71,264
Elder Care Business		8,759			11,632			16,688			18,755
Corporate Shared Services		(10,460	)		(15,543	)		(20,762	)		(29,735	)
Total income from operations	$	35,429		$	38,635		$	60,679		$	60,284
Income (Loss) Before Provision for Income Taxes:
Physician Business	$	36,399		$	41,858		$	63,382		$	69,850
Elder Care Business		6,736			9,631			12,725			14,806
Corporate Shared Services		(11,474	)		(16,839	)		(22,724	)		(28,488	)
Total income before provision for income taxes	$	31,661		$	34,650		$	53,383		$	56,168

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	As of
	October 1, 2010		April 2, 2010
Total Assets:
Physician Business	$	461,006	$	440,916
Elder Care Business		307,922		298,063
Corporate Shared Services		108,760		133,087
Total assets	$	877,688	$	872,066

10. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is party to various legal and administrative proceedings and claims arising in the normal course of business. While any litigation contains an element of uncertainty, the Company believes the outcome of proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.

Commitments and Other Contingencies

The Company has employment agreements with certain executive officers which provide that in the event of their termination or resignation, under certain conditions, the Company may be required to pay severance to the executive officers in amounts ranging from one-fourth to one times their annual base salary and target annual bonus. In the event that a termination or resignation follows or is in connection with a change in control, the Company may be required to pay severance to the executive officers in amounts ranging from three-fourths to two times their annual base salary and target annual bonus. The Company may also be required to continue welfare benefit plan coverage for the executive officers following a termination or resignation for a period ranging from three months to two years.

If a supply agreement for Select products between a vendor and the Physician Business or the Elder Care Business were to be terminated, the Company may be required to purchase from the vendor all remaining finished and unfinished products and product-materials held by the vendor. As of October 1, 2010, the Company had no material obligation to purchase remaining products or materials due to a termination of a supply agreement with a vendor who supplies Select products to the Company.

11. FAIR VALUE MEASUREMENTS

The Company records and discloses certain financial and non-financial assets and liabilities at their fair value. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1:	Inputs using unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2:	Inputs or other than quoted prices in markets that are observable for the asset or liability, either directly or indirectly.
Level 3:	Inputs that are both significant to the fair value measurement and unobservable.

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The following table presents the Company’s assets and liabilities which are measured at fair value on a recurring basis as of October 1, 2010, by level within the fair value hierarchy:

(in thousands)
October 1, 2010	Level 1		Level 2		Level 3		Total
Assets:
Conversion option on VIE convertible note(a)	$	—	$	—	$	913	$	913
Liabilities:
Deferred compensation(b)	$	74,554	$	—	$	—	$	74,554
April 2, 2010	Level 1		Level 2		Level 3		Total
Liabilities:
Deferred compensation(b)	$	69,263	$	—	$	—	$	69,263

(a) Relates to the Company’s conversion option to acquire 73% of the outstanding common stock in the Company’s consolidated VIE, which is located inOther assets on the Company’sUnaudited Condensed Consolidated Balance Sheets.See Footnote 3,Variable Interest Entity, for further information. The conversion option was calculated using an internal model that utilizes as its basis, unobservable inputs, including estimated interest rates based upon the estimated market interest rate which the VIE would have paid on a high-yield note in the open market. The remaining investment in Pathway has been eliminated in consolidation.

(b) Relates to the Company’s obligation to pay benefits under its non-qualified deferred compensation plans, which is included inOther noncurrent liabilities on the Company’sUnaudited Condensed Consolidated Balance Sheets. The obligation to pay benefits is based on participants’ allocation percentages to plan investments. The investments are measured using quoted market prices.

The following table summarizes the change in the fair value for Level 3 instruments for the six months ended October 1, 2010:

	Level 3 Instruments
Balance, April 2, 2010	$	—
Additions		947
Fair value adjustment included in earnings		(34	)
Balance, October 1, 2010	$	913

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, short-term trade receivables, and accounts payable, approximate their fair values due to the short-term nature of these assets and liabilities. The gross carrying value of the Company’s 2008 Notes at October 1, 2010 and April 2, 2010 was $230,000 and the fair value, which is estimated using a third party valuation model, was approximately $270,273 and $285,800, respectively.

12. INCOME TAXES

The Company files a United States federal income tax return and income tax returns in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to income tax examinations for years prior to the fiscal year ended March 31, 2006.

As of October 1, 2010 and April 2, 2010, the Company recorded an income tax receivable of $3,491 inOther current assetson theUnaudited Condensed Consolidated Balance Sheets, and an income tax payable of $237 inOther current liabilitieson theUnaudited Condensed Consolidated Balance Sheets, respectively, related to the timing of payments on the Company’s income tax filings.

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The Company’s deferred tax asset and liability balances as of October 1, 2010 and April 2, 2010 are presented in the following table:

	As of
(in thousands)	October 1, 2010			April 2, 2010
Current deferred tax assets(a)	$	19,514		$	15,629
Noncurrent deferred tax liabilities(b)		(5,771	)		(4,590	)
Net deferred tax asset	$	13,743		$	11,039

(a) Current deferred tax assets are recorded inOther current assets on theUnaudited Condensed Consolidated Balance Sheets.

(b) Noncurrent deferred tax liabilities are recorded inOther noncurrent liabilities on theUnaudited Condensed Consolidated Balance Sheets.

Uncertain Tax Positions

There were no significant changes to the Company’s uncertain tax positions during the six months ended October 1, 2010. For a detail of the Company’s uncertain tax positions, please refer to Footnote 12,Income Taxes in the Company’s Annual Report Form 10-K for the fiscal year ended April 2, 2010.

13. SUPPLEMENTAL CASH FLOW INFORMATION

The Company’s supplemental disclosures for the six months ended October 1, 2010 and October 2, 2009 are as follows:

	Six Months Ended
Cash paid for:	October 1, 2010		October 2, 2009
Interest	$	3,891	$	4,927
Income taxes, net	$	25,017	$	13,699

During the six months ended October 1, 2010 and October 2, 2009, the Company did not have any material non-cash transactions.

During the six months ended October 1, 2010, the Company paid $5,266 related to the Company’s fiscal year 2010 federal and state tax liabilities.

14. SUBSEQUENT EVENTS

On November 2, 2010, the Company entered into a definitive agreement to purchase the assets of an office-based physicians product and service provider for approximately $11,000. Additional consideration of up to $4,000 may be paid if the company achieves defined earnings targets over a two year period. The Company expects to finalize the transaction during the third quarter of fiscal year 2011 if certain closing conditions are met.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE COMPANY

PSS World Medical, Inc. (the “Company” or “PSSI”), a Florida corporation, began operations in 1983. The Company is a national distributor of medical products and equipment, pharmaceutical products, healthcare information technology and billing services to healthcare providers including physician offices, long-term care and assisted living facilities, home health care and hospice providers through 40 full-service distribution centers, which serve all 50 states throughout the United States (“U.S.”). The Company currently conducts business through two operating segments, the Physician Business and the Elder Care Business, which serve a diverse customer base. A third reporting segment, Corporate Shared Services, includes costs of corporate departments that provide services to the operating segments. For information on comparative segment revenue, segment profit and related financial information, refer to Footnote 9,Segment Information, of the condensed consolidated financial statements.

PSSI is a market leader in the two segments it serves as a result of value-added, solutions-based marketing programs; a differentiated customer distribution and service model; a consultative sales force with extensive product, disease state, reimbursement, and supply chain knowledge; unique arrangements with manufacturers; a full line of the Company’s own brand, Select Medical Products^® and other specialty brand products (collectively “Select”); innovative information systems and technology that serve its core markets; and a culture of performance.

EXECUTIVE OVERVIEW

The demand for the Company’s products is, among other factors, dependent upon the state of the economy in the markets in which it operates.

During the second quarter of fiscal year 2011, consolidated net sales decreased 11.7%, with net sales decrease of 4.7% per selling day. Compared to the same period in the prior year, the Company had five fewer selling days during the three and six months ended October 1, 2010.

Net sales in the Physician Business decreased 13.8%, with net sales decrease of 7.0% per selling day, compared to the same period in the prior year. The decline in net sales per selling day period over period is attributable to a decrease in patient visits to physician offices, driven by general economic conditions and relatively high unemployment in the U.S. The Company also recognized $23.2 million of H1N1 influenza related product sales during the second quarter of fiscal year 2010. The Company does not expect near term revenue growth rates to achieve historic levels, based on the current economic outlook.

Net sales in the Elder Care Business decreased 6.6% compared to the second quarter of the prior year, with net sales growth of 0.8% per selling day. Net sales decreased primarily due to five fewer selling days in the second quarter compared to the same period in the prior year.

General and administrative expenses decreased $9.8 million and $11.4 million during the three and six months ended October 1, 2010, respectively, when compared to the same period in the prior year. The decrease in general and administrative expenses was mainly attributable to reductions in incentive compensation costs and other cost containment measures.

Income from operations decreased 8.3% or $3.2 million to $35.4 million during the three months ended October 1, 2010 and increased 0.7% or $0.4 million to $60.7 million during the six months ended October 1, 2010 when compared to the same period in the prior year. The decrease in the second quarter was due to the decline in net sales as discussed above, offset by management’s continued focus on its margin improvement initiatives and a reduction in general and administrative expenses as discussed above.

Cash flow from operating activities during the three and six months ended October 1, 2010 was approximately $11.6 million and $38.5 million, respectively. The Company repurchased common shares, in open market transactions, of 2.0 million and 2.6 million during the three and six months ended October 1, 2010.

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NET SALES

The following table summarizes net sales period over period.

	For the Three Months Ended							For the Six Months Ended
(dollars in millions)	October 1, 2010		October 2, 2009		Percent Change			October 1, 2010		October 2, 2009		Percent Change
Physician Business	$	343.4	$	398.5		(13.8	)%	$	670.8	$	740.8		(9.5	)%
Elder Care Business		152.2		163.0		(6.6	)		303.4		313.4		(3.2	)
Corporate Shared Services		0.6		0.5		20.0			0.8		1.3		(35.7	)
Total Company	$	496.2	$	562.0		(11.7	)%	$	975.0	$	1,055.5		(7.6	)%

The comparability of net sales year over year was impacted by the number of selling days in each period. The three and six months ended October 1, 2010 consisted of 63 and 127 selling days, respectively, while the three and six months ended October 2, 2009 consisted of 68 and 132 selling days, respectively. Compared to prior year, net sales per selling day decreased 4.7% and 4.0%, respectively, as shown in the following table.

	For the Three Months Ended							For the Six Months Ended
	October 1, 2010		October 2, 2009					October 1, 2010		October 2, 2009
(dollars in millions)	Net Sales Per Selling Day		Net Sales Per Selling Day		Percent Change			Net Sales Per Selling Day		Net Sales Per Selling Day		Percent Change
Physician Business	$	5.5	$	5.9		(7.0	)%	$	5.3	$	5.6		(5.9	)%
Elder Care Business		2.4		2.4		0.8			2.4		2.4		0.6
Total Company	$	7.9	$	8.3		(4.7	)%	$	7.7	$	8.0		(4.0	)%

Physician Business

Management evaluates the Physician Business by product category. The following table summarizes the growth rate by product category period over period.

	For the Three Months Ended							For the Six Months Ended
(dollars in millions)	October 1, 2010		October 2, 2009		Percent Change			October 1, 2010		October 2, 2009		Percent Change
Branded(a)	$	183.2	$	222.7		(17.7	)%	$	362.4	$	412.9		(12.2	)%
Select (b)		51.4		53.4		(3.7	)		101.8		99.9		1.9
Pharmaceuticals		78.9		88.8		(11.1	)		151.0		166.2		(9.1	)
Equipment(c)		28.7		32.1		(10.4	)		52.5		58.9		(10.8	)
Other		1.2		1.5		(28.4	)		3.1		2.9		4.6
Total	$	343.4	$	398.5		(13.8	)%	$	670.8	$	740.8		(9.5	)%
Selling days		63		68					127		132

(a) Branded products are comprised of disposables and lab diagnostics from branded manufacturers.

(b) Select products are comprised of the Company’s brand of disposables, lab diagnostics, and equipment.

(c) Equipment from branded manufacturers.

Overall sales and branded product sales during the three and six months ended October 1, 2010 were impacted by decreased physician office visits, five fewer sales days during the current year period, and decreased product sales of approximately $23.2 and $32.2 million related to the fiscal year 2010 H1N1 influenza pandemic, respectively.

Select product sales increased during the six months ended October 1, 2010 due to continued focus on and expansion of the Select product line, partially offset by five fewer sales days during the six months ended October 1, 2010.

Pharmaceutical sales decreased during the three and six months ended October 1, 2010 due to decreased physician office visits as discussed above.

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Equipment sales decreased due to lenders’ tightened credit policies which negatively impacted customers’ ability to obtain equipment financing.

During the first quarter of fiscal year 2010, the Physician Business launchedReach, its strategic initiative to capture new customers. This initiative resulted in over 12,500 new customers during the six months ended October 1, 2010. The Company expects this strategic initiative to have a positive impact on future periods, helping to offset the impact of the economic slowdown on net sales.

Elder Care Business

Management evaluates the Elder Care business by customer category. The following table summarizes the change in net sales by customer category period over period.

	For the Three Months Ended							For the Six Months Ended
(dollars in millions)	October 1, 2010		October 2, 2009		Percent Change			October 1, 2010		October 2, 2009		Percent Change
Nursing home and assisted living facilities	$	86.9	$	100.3		(13.3	)%	$	175.6	$	192.1		(8.6	)%
Hospice and home health care agencies		48.2		47.3		1.8			96.3		91.3		5.5
Billing services		3.2		3.2		—			6.2		6.2		0.7
Other		13.9		12.2		13.7			25.3		23.8		6.4
Total	$	152.2	$	163.0		(6.6	)%	$	303.4	$	313.4		(3.2	)%
Selling days		63		68					127		132

Net sales during the three and six months ended October 1, 2010 compared to the same period in the prior year decreased approximately $10.8 million and $10.0 million, respectively. Net sales in the nursing home and assisted living customer segment was negatively impacted by competitive pressure within the regional nursing home group and five fewer billing days during the current period.

Net sales growth in the hospice and home health care customer segment reflected the continued successful execution of strategies to diversify the Company’s customer base through expansion in the home health care market and other non-facility based care.

Net sales growth in the other sales segment for the three and six months ended October 1, 2010 reflects net sales attributed to the Company’s noncontrolling interest in Pathway of $2.7 million and $3.0 million, respectively. Pathway is a consulting service provider within the Elder Care market, which was consolidated by the Company during the current fiscal year. See Footnote 3,Variable Interest Entity, for additional information.

Across its Elder Care customer segments, Select product sales decreased 6.7% and 5.2% during the three and six months ended October 1, 2010, when compared to the same period in the prior year. This decrease is attributed to increased competitive pricing pressure, decreased sales in the nursing home and assisted living customer segments, and five fewer billing days during the current period.

GROSS PROFIT

In the Physician Business, gross profit dollars decreased $11.9 million and $11.6 million during the three and six months ended October 1, 2010, when compared to the same period in the prior year, resulting from a decrease in sales volume. Gross profit as a percentage of net sales (“gross margin”) increased 156 basis points and 150 basis points during the three and six months ended October 1, 2010, when compared to the same period in the prior year, resulting from gross margin enhancement initiatives including a shift from branded to Select product sales, which have higher gross margins.

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In the Elder Care Business, gross profit dollars decreased $3.5 million during the three months ended October 1, 2010 and gross margin decreased 17 basis points, from the same quarter in the prior year. The decrease in gross profit and gross margin resulted from decreased sales, increased product costs, and increased customer incentive program costs. Gross profit dollars decreased $1.8 million during the six months ended October 1, 2010, while gross margin increased 35 basis points when compared to the same quarter in the prior year. The decrease in gross profit resulted from decreased sales, while the increase in gross margin resulted from gross margin enhancement initiatives, favorable freight charges, and sales related to the Company’s consulting services, which have higher gross margins.

GENERAL AND ADMINISTRATIVE EXPENSES

	For the Three Months Ended													For the Six Months Ended
	October 1, 2010					October 2, 2009								October 1, 2010					October 2, 2009
(dollars in millions)	Amount		% of Net Sales			Amount		% of Net Sales			Decrease			Amount		% of Net Sales			Amount		% of Net Sales			(Decrease) Increase
Physician Business(a)	$	46.8		13.6	%	$	51.1		12.8	%	$	(4.3	)	$	96.6		14.4	%	$	99.3		13.4	%	$	(2.7	)
Elder Care Business(a)		30.1		19.8			30.4		18.7			(0.3	)		60.1		19.8			59.6		19.0			0.5
Corporate Shared Services(b)		10.5		2.1			15.7		2.8			(5.2	)		20.7		2.1			29.9		2.8			(9.2	)
Total Company(b)	$	87.4		17.6	%	$	97.2		17.3	%	$	(9.8	)	$	177.4		18.2	%	$	188.8		17.9	%	$	(11.4	)

(a) General and administrative expenses as a percentage of net sales is calculated based on reportable segment net sales.

(b) General and administrative expenses as a percentage of net sales is calculated based on consolidated net sales.

Physician Business

General and administrative expenses decreased $4.3 million during the three months ended October 1, 2010, when compared to the same period in the prior year. This decrease was mainly attributable to (i) a reduction in bonus expense of $3.4 million due to the Company’s estimated performance achievement and (ii) decreased payroll-related expenses of $1.2 million due to five fewer payroll days in the current period.

General and administrative expenses decreased $2.7 million during the six months ended October 1, 2010, when compared to the same period in the prior year. This decrease was primarily attributable to (i) a reduction in bonus expense of $4.1 million due to the Company’s estimated performance achievement, partially offset by an increase in corporate overhead allocations of $1.8 million.

Elder Care Business

General and administrative expenses remained relatively consistent in the Elder Care Businesses when compared to the same period in the prior year but increased as a percentage of net sales due to a decrease in net sales versus fixed costs.

Corporate Shared Services

General and administrative expenses for the three months ended October 1, 2010 decreased $5.2 million when compared to the same period in the prior year. This decrease was largely attributable to (i) a reduction in bonus expense of $3.0 million related to the Company’s estimated performance achievement, (ii) decreased stock-based compensation expense of $1.5 million, related to a change in estimated performance achievement during the three months ended October 2, 2009 and the related compensation accrual recognized during that period, and (iii) increased overhead cost allocations of $1.3 million to the Elder Care and Physician Businesses.

General and administrative expenses for the six months ended October 1, 2010 decreased $9.2 million when compared to the same period in the prior year. This decrease was mainly attributable to (i) a reduction in stock-based compensation expense of $4.7 million, related to a change in estimated performance achievement during the six months ended October 2, 2009 and the related compensation accrual recognized during that period, (ii) decreased

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bonus expense of $4.2 million related to the Company’s estimated performance achievement, and (iii) increased overhead cost allocations of $3.0 million to the Elder Care and Physician Businesses. The overall decrease in expense was partially offset by (i) increased payroll and payroll related costs of $1.7 million related to general merit and benefit increases and a reduction in capitalized salaries related to internally developed software projects and (ii) additional depreciation expense of $1.1 million due to increased investments in information technology infrastructure.

SELLING EXPENSES

The following table summarizes selling expenses as a percentage of net sales period over period.

	For the Three Months Ended													For the Six Months Ended
	October 1, 2010					October 2, 2009								October 1, 2010					October 2, 2009
(dollars in millions)	Amount		% of Net Sales			Amount		% of Net Sales			Decrease			Amount		% of Net Sales			Amount		% of Net Sales			Decrease
Physician Business	$	29.0		8.5	%	$	31.2		7.8	%	$	(2.2	)	$	56.5		8.4	%	$	58.8		7.9	%	$	(2.3	)
Elder Care Business		5.3		3.4			5.5		3.4			(0.2	)		10.4		3.4			10.6		3.4			(0.2	)
Total Company	$	34.3		6.9	%	$	36.7		6.5	%	$	(2.4	)	$	66.9		6.9	%	$	69.4		6.6	%	$	(2.5	)

Selling expenses are principally driven by commission expenses, which are generally paid to sales representatives based on gross profit dollars and gross margin. The change in selling expenses for the Physician Business was due to the net sales decrease and a change in commission structure during fiscal year 2011. Selling expenses as a percentage of net sales for the Elder Care Business was consistent period over period.

PROVISION FOR INCOME TAXES

The following table summarizes the provision for income taxes period over period.

	For the Three Months Ended													For the Six Months Ended
	October 1, 2010					October 2, 2009								October 1, 2010					October 2, 2009
(dollars in millions)	Amount		Effective Rate			Amount		Effective Rate			Decrease			Amount		Effective Rate			Amount		Effective Rate			Decrease
Total Company	$	12.0		38.0	%	$	13.0		37.4	%	$	(1.0	)	$	19.9		37.3	%	$	21.2		37.7	%	$	(1.3	)

The increase in the effective rate for the three months ended October 1, 2010 is a reflection of the timing of favorable adjustments related to meals and entertainment that occurred during the three months ended October 2, 2009.

The effective rate for the six months ended October 1, 2010 was favorably impacted by a decrease in the accrual for non-deductible compensation and an increase in the Company’s non-U.S. earnings which are generally subject to tax at rates lower than the U.S.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources Highlights

Cash flows from operations are impacted by segment profitability and changes in operating working capital. Management monitors operating working capital performance through the following metrics:

	As of
	October 1, 2010			October 2, 2009
Days Sales Outstanding:(a)
Physician Business		40.1			38.9
Elder Care Business		48.7			49.0
Days On Hand:(b)
Physician Business		57.6			54.0
Elder Care Business		59.9			51.3
Days in Accounts Payable:(c)
Physician Business		39.9			40.4
Elder Care Business		23.2			22.8
Cash Conversion Days:(d)
Physician Business		57.8			52.5
Elder Care Business		85.4			77.5
Inventory Turnover:(e)
Physician Business		6.2x			6.7x
Elder Care Business		6.0x			7.0x
Return on Committed Capital(f)
Total Company		36.7	%		42.5	%

(a) Days sales outstanding (“DSO”) is average accounts receivable divided by average daily net sales. Average accounts receivable is the sum of accounts receivable, net of the allowance for doubtful accounts, at the beginning and end of the most recent four quarters divided by five. Average daily net sales are net sales for the most recent four quarters divided by 360.

(b) Days on hand (“DOH”) is average inventory divided by average daily cost of goods sold (“COGS”). Average inventory is the sum of inventory at the beginning and end of the most recent four quarters divided by five. Average daily COGS is COGS for the most recent four quarters divided by 360.

(c) Days in accounts payable (“DIP”) is average accounts payable divided by average daily COGS. Average accounts payable is the sum of accounts payable at the beginning and end of the most recent four quarters divided by five.

(d) Cash conversion days is the sum of DSO and DOH, less DIP.

(e) Inventory turnover is 360 divided by DOH.

(f) Return on committed capital (“ROCC”) is defined as return divided by average committed capital. Return is calculated as net income less (i) provision for income taxes, (ii) amortization, and (iii) interest expense. Committed capital is calculated as total assets, less (i) cash, (ii) goodwill and intangibles, and (iii) liabilities, excluding current and long-term debt.

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In addition to cash flow, the Company monitors other components of liquidity, including the following:

	As of
(dollars in millions)	October 1, 2010			April 2, 2010
Capital Structure:
Convertible senior notes, net	$	191.3		$	187.1
Revolving line of credit		0.5			—
Other debt		1.1			1.7
Cash and cash equivalents		(22.9	)		(52.8	)
Net debt		170.0			136.0
Total equity		400.5			408.0
Total Capital	$	570.5		$	544.0
Operating Working Capital:
Accounts receivable, net	$	232.0		$	227.9
Inventories		220.8			218.9
Accounts payable		(137.4	)		(124.0	)
	$	315.4		$	322.8

Cash Flows from Operating Activities

Net cash provided by operating activities was $38.5 million and $53.6 million for the six months ended October 1, 2010 and October 2, 2009, respectively.

Net cash provided by operating activities during the six months ended October 1, 2010 was the result of net income adjusted for noncash expenses, which included $5.3 million related to noncash compensation expense, and an increase in operating working capital of approximately $7.0 million.

As of October 1, 2010, the Company has a deferred income tax liability of $17.4 million (tax effected) related to interest deductions taken for tax purposes on its 2004 Notes. The liability will be fully deferred for the next three years and paid ratably from fiscal year 2014 to fiscal year 2018 in accordance with the American Recovery and Reinvestment Act of 2009.

Cash Flows from Investing Activities

Net cash used in investing activities was $18.2 million and $8.1 million during the six months ended October 1, 2010 and October 2, 2009, respectively, and was impacted by the following factors:

• Capital expenditures totaled $8.0 million and $14.9 million during the six months ended October 1, 2010 and October 2, 2009, respectively, of which approximately $5.0 million and $12.0 million, respectively, related to development and enhancement of the Company’s ERP system, contracts and rebates system, warehouse management system, electronic commerce platforms, and supply chain integration. Capital expenditures related to distribution center expansions and enhancements were approximately $1.3 million and $0.6 million during the six months ended October 1, 2010 and October 2, 2009, respectively.

• During the six months ended October 1, 2010, the Company purchased a $3.3 million convertible note issued by Pathway. See Footnote 3,Variable Interest Entity,for additional information.

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• Payments for business combinations, net of cash acquired, were $6.5 million and $3.9 million during the six months ended October 1, 2010 and October 2, 2009, respectively, and consisted of the following:

During the six months ended October 1, 2010, the Company completed two acquisitions not deemed significant for individual disclosure. Payments totaling $6.4 million were made during the six months ended October 1, 2010 from cash on hand.

During the six months ended October 2, 2009, the Company completed four acquisitions not deemed significant for individual disclosure. Payments totaling $3.7 million were made during the six months ended October 2, 2009 from cash on hand.

• During the six months ended October 2, 2009, the Company sold its remaining investment in athenahealth for $10.7 million, resulting in a gain of approximately $3.6 million or $2.3 million, net of taxes.

Cash Flows from Financing Activities

Net cash (used in) provided by financing activities was $(50.1) million and $2.6 million during the six months ended October 1, 2010 and October 2, 2009, respectively, and was impacted by the following factors:

• The Company repurchased approximately 2.6 million shares of common stock at an average price of $19.95 per common share for approximately $51.7 million, during the six months ended October 1, 2010.

• The Company borrowed and repaid $17.2 million on its revolving line of credit during the six months ended October 1, 2010.

• The Company received proceeds from the exercise of stock options of approximately $0.9 million and $2.4 million during the six months ended October 1, 2010 and October 2, 2009, respectively.

Capital Resources

The capital and credit markets continue to experience adverse conditions. The resulting restricted access to capital along with significant volatility in the capital markets have increased the costs associated with issuing or refinancing debt. While the Company believes it is well positioned, there can be no guarantee the recent disruptions in the overall economy and the financial markets will not adversely impact the business and results of operations.

The Company finances its business through cash generated from operations, proceeds from the $230.0 million senior convertible notes offering (“2008 Notes”) and the $200.0 million revolving line of credit. The ability to generate sufficient cash flows from operations is dependent on the continued demand for the Company’s products and services, and access to products and services from suppliers. Given current operating, economic and industry conditions, management believes demand for products and services will grow at slower than historical rates. The Company’s capital structure provides the financial resources to support the business strategies of customer service and revenue growth. The revolving line of credit, which is an asset-based agreement, is collateralized by the Company’s accounts receivable and inventory. The Company’s long-term priorities for use of capital are internal growth, acquisitions, and repurchase of the Company’s common stock.

As the Company’s business grows, its cash and working capital requirements are expected to increase. The Company expects the overall growth in the business will be funded through a combination of cash flows from operating activities, borrowings under the revolving line of credit, capital markets, and/or other financing arrangements.

Based on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors, the Company may seek to retire a portion of its outstanding equity through cash purchases and/or reduce its debt. The Company may also seek to issue additional debt or equity to meet its future liquidity requirements. Such transactions may occur in the open market, privately negotiated transactions, or otherwise. The amounts involved could be material.

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Convertible Note Hedge Transactions

In connection with the offering of the 2008 Notes, the Company also entered into convertible note hedge transactions with respect to its common stock (the “purchased options”) with a major financial institution (the “counterparty”). The purchased options cover, subject to anti-dilution adjustments substantially identical to those in the notes, approximately 10.8 million shares of common stock at a strike price that corresponds to the initial conversion price of the notes, also subject to adjustment, and are exercisable at each conversion date of the notes. The purchased options will expire upon the earlier of (i) the last day the notes remain outstanding or (ii) the second scheduled trading day immediately preceding the maturity date of the notes.

The purchased options are intended to reduce the potential dilution upon conversion of the notes in the event that the market value per share of the common stock, as measured under the notes, at the time of exercise is greater than the conversion price of the notes.

The purchased options are separate transactions, entered into by the Company with the counterparty, and are not part of the terms of the notes. Holders of the notes will not have any rights with respect to the purchased options.

Warrant Transactions

The Company also entered into warrant transactions (the “warrants”), whereby the Company sold to the counterparty warrants to acquire, subject to anti-dilution adjustments, up to 10.8 million shares of common stock at a strike price of $28.29 per share of common stock. The warrants will expire after the purchased options in approximately ratable portions on a series of expiration dates commencing on November 3, 2014. The warrants have been accounted for as an adjustment to the Company’s stockholders’ equity.

The warrants are separate transactions, entered into by the Company with the counterparties, and are not part of the terms of the notes. Holders of the notes do not have any rights with respect to the warrants.

The purchased options and warrant contracts will generally have the effect of increasing the conversion price of the 2008 Notes to approximately $28.29 per share, representing a 68.5% premium based on the closing sale price of the Company’s common stock of $16.79 per share on August 4, 2008.

Impact on Diluted Weighted Average Shares

In accordance with accounting guidance for calculating earnings per share, the 2008 Notes will impact diluted earnings per share when the Company’s average common stock price, as defined, exceeds the conversion price of $21.22 per share (the conversion price for the 2008 Notes). See Footnote 5,Earnings Per Share,for further information.

The purchased options are not included in the calculation of diluted earnings per share prior to the conversion of the 2008 Notes, as their effect is considered anti-dilutive. As of October 1, 2010, the purchased options were “in the money” and would have been convertible into approximately 40,000 shares of the Company’s common stock. The exercise of the purchased options is restricted to each conversion date of the 2008 Notes.

Future Contractual Obligations

In the normal course of business, the Company enters into obligations and commitments that require future contractual payments. There were no material changes outside the normal course of business from the obligations reported as of April 2, 2010.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Critical Accounting Estimates are disclosed in the Annual Report on Form 10-K for the fiscal year ended April 2, 2010 filed on May 26, 2010 under the heading“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”There have been no material changes in the Company’s Critical Accounting Estimates, as disclosed in the Annual Report.

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Recent Accounting Pronouncements

During fiscal year 2011, the Company adopted a new accounting standard that changes the consolidation model for VIEs. Variable interest entities are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk to finance the entity’s activities without additional subordinated financial support. VIEs are consolidated by the primary beneficiary, defined as the party which (i) has the power to direct those activities that most significantly impact the entity’s economic performance and (ii) has an obligation to absorb an entity’s losses or a right to receive benefits from an entity that could be potentially significant to the entity. The standard requires ongoing reassessments to determine whether an enterprise is the primary beneficiary of a VIE. The standard expands the disclosure requirements for enterprises with a variable interest in a VIE. See Footnote 3,Variable Interest Entity,for further discussion.

In October 2009, Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) for multiple deliverable revenue arrangements. The update requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The update eliminates the residual method of revenue allocation and requires revenues to be allocated using the relative selling price method. The Company will adopt this update prospectively for revenue arrangements entered into or materially modified beginning in the first quarter of fiscal year 2012. The Company is currently evaluating the impact of adoption of this update.

In July 2010, the FASB issued an ASU which amended accounting guidance for receivables to require further disaggregated disclosures that improve financial statement users’ understanding of (i) the nature of an entity’s credit risk associated with its financing receivables and (ii) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The provisions of this accounting standard will not impact the Company’s consolidated financial position or statement of operations, as its requirements are disclosure-only in nature.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company believes there has been no material change in its exposure to market risk from that discussed in Item 7A in the Annual Report on Form 10-K for the fiscal year ended April 2, 2010 filed on May 26, 2010.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 240.15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report (the “Evaluation Date”). Based on the evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is accumulated and communicated to the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the six months ended October 1, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, investors should carefully consider the factors discussed in Part I, Item 1A,Risk Factors, in the Company’s Annual Report Form 10-K for the fiscal year ended April 2, 2010, filed on May 26, 2010. Such factors could have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company has potential exposure to risks other than those described in the Company’s Annual Report on Form 10-K. Additional risks and uncertainties not currently known to management, or risks that management currently deem to be immaterial, could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Except as set forth below, there have been no material changes from the risk factors disclosed in Part I, Item 1A,Risk Factors, in the Company’s Annual Report Form 10-K for the fiscal year ended April 2, 2010.

The viability of the Company’s customers may be threatened by various factors.

The Company has been negatively impacted in the past, and could be negatively impacted in the future, when customers experience disruptions resulting from tighter capital and credit markets or a loss of patient revenue due to changes in the general economy. Customers have, and may continue to modify, delay, or cancel plans to purchase the Company’s products or services. Additionally, if customers’ operating and financial performance deteriorate, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, accounts receivable owed to the Company. Any inability of customers to pay for products and services, may adversely affect the Company’s earnings and cash flow.

The Company’s customers are also impacted by increasing costs of malpractice claims and liability insurance. Insurance rates for customers of the Elder Care and Physician Businesses have greatly increased and many of the Company’s customers may be adversely affected which, in turn, could affect their profitability. As a result, customer financial viability may adversely impact the Company’s financial condition, net sales, results of operations, and cash flows from operations.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Sales and Purchases of Equity Securities

The Company repurchases its common stock under a stock repurchase program authorized by the Company’s Board of Directors. As of April 2, 2010, there were 3.3 million shares available for repurchase under existing stock repurchase program. On August 25, 2010, the Company’s Board of Directors approved a stock repurchase program authorizing the Company, depending on market conditions and other factors, to repurchase up to a maximum of 5% of its common stock, which was approximately 2.8 million common shares. These shares may be purchased in the open market, in privately negotiated transactions, or otherwise. The share repurchase program does not have an expiration date.

The following table summarizes the Company’s repurchase activity during the three months ended October 1, 2010.

Period	Total Number of Shares Purchased(a)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May yet be Purchased Under the Plans or Programs
July 3 - August 1		—	$	—		—		2,745,708
August 2 - September 1		2,011,416		19.12		2,011,416		3,496,846
September 2 - October 1		9,710		20.43		9,710		3,487,136
Total second quarter		2,021,126	$	19.13		2,021,126		3,487,136

(a) Includes shares repurchased for net share settlement of employee share-based awards.

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ITEM 6. EXHIBITS

(a) Exhibits required by Item 601 of Regulation S-K:

Exhibit Number	Description
10.1	Amended and Restated Credit Agreement, dates as of May 20, 2003, by and among the Company, each of the Company’s subsidiaries therein named, the Lenders from time to time party thereto, Bank of America, N.A., as Agent, and Banc of America Securities LLC, as Arranger.**
10.2	Second Amendment to Credit Agreement, dated as of December 16, 2003, by and among the Company, each of the Company’s subsidiaries therein named, the Lenders from time to time party thereto, Bank of America, N.A., as Agent, and Banc of America Securities LLC, as Arranger.
10.3	Purchase Agreement dated as of July 29, 2008 among PSS World Medical and Goldman, Sachs & Co.
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1	Section 1350 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

** Certain portions of this Exhibit have been omitted based upon a request for confidential treatment pursuant to 24b-2 of the Securities Exchange Act of 1934, as amended. The omitted portions have been filed separately with the Securities Exchange Commission.

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SIGNATURE

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, in the City of Jacksonville, State of Florida, on November 10, 2010.

PSS WORLD MEDICAL, INC.
By:	/s/ David M. Bronson
	David M. Bronson
	Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

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