UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 (I.R.S. Employer
incorporation or organization) Identification No.)
4800 Cox Road, Glen Allen, Virginia 23060
(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)747-9794
(Former name, former address and former fiscal year,
if changed since last report)
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 _____
The number of shares of Owens & Minor, Inc.'s common
stock outstanding as of April 29, 1997 was 31,992,349 shares.
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Income - Three Months
Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
Part II. Other Information 11-12
2
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
March 31, December 31,
1997 1996
Assets
Current assets
Cash and cash equivalents $ 596 $ 743
Accounts and notes receivable,
net 154,658 147,243
Merchandise inventories 268,292 281,839
Other current assets 25,949 25,675
Total current assets 449,495 455,500
Property and equipment, net 27,637 29,231
Excess of purchase price over
net assets acquired, net 166,230 167,366
Other assets, net 26,354 27,404
Total assets $ 669,716 $ 679,501
Liabilities and shareholders'
equity
Current liabilities
Accounts payable $ 208,548 $ 224,037
Accrued payroll and related
liabilities 5,982 5,001
Other accrued liabilities 37,506 33,472
Total current liabilities 252,036 262,510
Long-term debt 165,320 167,549
Accrued pension and retirement
plans 7,186 7,042
Total liabilities 424,542 437,101
Shareholders' equity
Preferred stock,
par value $100 per share;
authorized - 10,000 shares
Series A; Participating
Cumulative Preferred
Stock; none issued - -
Series B; Cumulative Preferred
Stock; 4.5%, convertible;
issued and outstanding -
1,150 shares 115,000 115,000
Common stock, par value $2
per share; authorized -
200,000 shares; issued and
outstanding - 31,933 shares
at March 31, 1997 and 31,907
shares at December 31, 1996 63,866 63,814
Paid-in capital 5,549 5,086
Retained earnings 60,759 58,500
Total shareholders' equity 245,174 242,400
Total liabilities and
shareholders' equity $ 669,716 $ 679,501
See accompanying notes to consolidated financial
statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
Net sales $749,623 $771,312
Cost of goods sold 674,521 697,133
Gross margin 75,102 74,179
Selling, general and
administrative expenses 56,437 61,040
Depreciation and
amortization 4,205 3,930
Interest expense, net 3,947 5,800
Discount on accounts
receivable securitization 1,866 744
Total expenses 66,455 71,514
Income before income taxes 8,647 2,665
Income tax provision 3,653 1,146
Net income 4,994 1,519
Dividends on preferred stock 1,294 1,294
Net income attributable
to common stock $ 3,700 $ 225
Net income per common share $ 0.12 $ 0.01
Cash dividends per
common share $ 0.045 $ 0.045
Weighted average common
shares and common share
equivalents 32,000 31,140
See accompanying notes to consolidated financial
statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
Operating Activities
Net income $ 4,994 $ 1,519
Adjustments to reconcile
net income to cash
provided by operating
activities
Depreciation and
amortization 4,205 3,930
Provision for LIFO
reserve 1,300 2,748
Changes in operating
assets and
liabilities
Accounts and notes
receivable (7,306) (4,669)
Merchandise
inventories 12,247 7,302
Accounts payable (4,514) (2,464)
Net change in other
current assets
and current
liabilities 5,157 2,423
Other, net 942 1,830
Cash provided by operating
activities 17,025 12,619
Investing Activities
Additions to property
and equipment (1,845) (1,249)
Additions to computer
software (894) (2,483)
Proceeds from sale of
property and equipment 1,588 27
Cash used for investing
activities (1,151) (3,705)
Financing Activities
Reductions of long-term
debt (2,500) (10,362)
Other short-term
financing, net (10,975) 4,094
Cash dividends paid (2,735) (2,683)
Exercise of stock options 189 117
Cash used for financing
activities (16,021) (8,834)
Net increase (decrease)
in cash and cash
equivalents (147) 80
Cash and cash equivalents
at beginning of year 743 215
Cash and cash equivalents
at end of period $ 596 $ 295
See accompanying notes to consolidated financial
statements.
5
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Accounting Policies
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(which are comprised only of normal recurring accruals and
the use of estimates) necessary to present fairly the
consolidated financial position of Owens & Minor, Inc. and
its wholly owned subsidiaries (the Company) as of March 31,
1997 and the consolidated results of operations and cash
flows for the three month periods ended March 31, 1997 and
1996.
2. Interim Results of Operations
The results of operations for interim periods are not
necessarily indicative of the results to be expected for the
full year.
3. Interim Gross Margin Reporting
In general, the Company uses estimated gross margin rates to
determine the cost of goods sold during interim periods. To
improve the accuracy of its estimated gross margins for
interim reporting purposes, the Company takes physical
inventories at selected distribution centers. Reported
results of operations for the three month periods ended March
31, 1997 and 1996 reflect the results of such inventories, if
materially different. Management will continue a program of
interim physical inventories at selected distribution centers
to the extent it deems appropriate to ensure the accuracy of
interim reporting and to minimize year-end adjustments.
4. Condensed Consolidating Financial Information
The following table presents condensed consolidating
financial information for: Owens & Minor, Inc.; on a combined
basis, the guarantors of Owens & Minor, Inc.'s Senior
Subordinated 10-year Notes (all of the wholly owned
subsidiaries of Owens & Minor, Inc. except for O&M Funding
Corp. (OMF)); and OMF, Owens & Minor, Inc.'s only non-
guarantor subsidiary of the Notes. Separate financial
statements of the guarantor subsidiaries are not presented
because the guarantors are jointly, severally and
unconditionally liable under the guarantees and the Company
believes the condensed consolidating financial statements are
more meaningful in understanding the financial position of
the guarantor subsidiaries.
6
(In thousands)
As of and for
the three Owens
months ended & Minor, Guarantor
March 31, 1997 Inc. Subsidiaries OMF
Eliminations Consolidated
Current assets $157,917 $ 430,884 $ 79,897
$(219,203) $ 449,495
Noncurrent assets 306,530 228,550 -
(314,859) 220,221
Total assets $464,447 $ 659,434 $ 79,897
$(534,062) $ 669,716
Current
liabilities $ 6,087 $ 403,114 $ 63,238
$(220,403) $ 252,036
Noncurrent
liabilities 154,000 18,506 -
- 172,506
Shareholders'
equity 304,360 237,814 16,659
(313,659) 245,174
Total
liabilities and
shareholders'
equity $464,447 $ 659,434 $ 79,897
$(534,062) $ 669,716
Net sales $ 4,138 $ 749,623 $ 3,722
$(7,860) $ 749,623
Expenses 4,452 745,570 3,117
(8,510) 744,629
Net income
(loss) $ (314) $ 4,053 $ 605
$ 650 $ 4,994
7
Item 2.
Owens & Minor, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
First quarter of 1997 compared with first quarter of 1996
Net sales. Net sales decreased 2.8% to $749.6 million in the
first quarter of 1997 from $771.3 million in the first
quarter of 1996. The sales decline was a result of the
Company's late 1995 and early 1996 price increase initiative
and its continuing efforts to reduce unprofitable sales and
therefore increase the overall profitability of the Company.
The Company is committed to profitable sales growth and has
recently signed several new agreements that will provide an
opportunity for such future growth, although, such growth
cannot be assured.
Gross margin. Gross margin as a percentage of net sales
increased to 10.0% in the first quarter of 1997 from 9.6% in
the first quarter of 1996. The improvement has been a result
of the price increases discussed above, the standardization
of suppliers and products and the increased utilization of an
activity-based management system designed to identify costs
associated with certain delivery and management services.
During the first quarter of 1997, the Company's LIFO (last-
in, first-out) provision declined to $1.3 million as compared
to $2.7 million in the first quarter of 1996. The decrease
was due primarily to lower price increases from manufacturers
and lower inventory levels. The Company will continue to
focus on maintaining this margin level through the continued
utilization of the activity-based management system and
continued standardization of suppliers and products.
Selling, general and administrative expenses. Selling,
general and administrative (SG&A) expenses as a percentage of
net sales decreased to 7.5% in the first quarter of 1997 from
7.9% in the first quarter of 1996. The SG&A expense decline
was a result of many cost-saving initiatives including the
reduction of over 450 full-time equivalent (FTE) employees
since March 31, 1996; the reduction in the cost of employee
retirement plans; the more cost effective utilization of
computer resources; the implementation of improved inventory
management systems; the continuing automation of
administrative functions through the utilization of
electronic data interchange (EDI); and the refocus on best
practices within the Company. The results of these
initiatives have been and will be partially offset by costs
associated with computer system changes required to
accommodate the year 2000. Although the results of its
efforts cannot be assured, the Company believes it will be
able to maintain or reduce SG&A expense as a percentage of
net sales by continuing its efforts on operational
improvement.
Depreciation and amortization. Depreciation and amortization
increased by 7.0% in the first quarter of 1997 compared to
the first quarter of 1996. This increase was due primarily to
the Company's continued investment in information technology
(I/T). The Company anticipates similar increases in
depreciation and amortization for the remainder of 1997
associated with additional capital investment in I/T.
8
Interest expense, net and discount on accounts receivable
securitization (financing costs). Financing costs, net of
finance charge income of $1.0 million and $1.2 million in the
first quarter of 1997 and 1996, respectively, decreased to
$5.8 million in the first quarter of 1997 from $6.5 million
in the first quarter of 1996. The decline in financing costs
has been a result of the Company s ability to reduce working
capital requirements by substantially completing the
implementation of its client/server-based inventory
forecasting system and strengthening its accounts receivable
collection procedures. Due to the reduction in working
capital requirements, the Company has reduced outstanding
financing by approximately $107.4 million since March 31,
1996. Additionally, during 1996, the Company completed a
refinancing plan that, in addition to the Company s improved
financial performance, reduced the effective rate of its
outstanding financing. The Company will continue to take
action to reduce financing costs by continuing its working
capital reduction initiatives, although, the results of these
initiatives cannot be assured.
Income taxes. The Company had an income tax provision of
$3.7 million in the first quarter of 1997 (representing an
effective tax rate of 42.2%) compared with an income tax
provision of $1.1 million (representing an effective tax rate
of 43.0%) in the first quarter of 1996. The decline in the
effective tax rate is due primarily to increased income
before taxes reducing the impact of nondeductible goodwill
amortization.
Net income. Net income increased $3.5 million in the first
quarter of 1997 compared to the first quarter of 1996. The
increase was primarily due to the initiatives previously
discussed related to gross margin, SG&A expenses and
financing costs. Although the trend has been favorable and
the Company continues to pursue these and other initiatives,
the future impact on net income cannot be assured.
Financial Condition, Liquidity and Capital Resources
Liquidity. The Company's liquidity position improved
significantly during the first quarter of 1997 compared to
the first quarter of 1996. Outstanding financing was reduced
$107.4 million from March 31, 1996 and $18.6 million from
December 31, 1996. The capitalization ratio (excluding the
impact of the off balance sheet accounts receivable
securitization) decreased to 52.9% at March 31, 1997 from
61.7% at March 31, 1996 and from 54.8% at December 31, 1996.
The improvement was the result of reduced working capital
requirements, increased earnings and the completion of the
Company's refinancing plan in the second quarter of 1996.
The Company expects that its available financing will be
sufficient to fund its working capital needs and long-term
strategic growth plans, although this cannot be assured. At
March 31, 1997, the Company had approximately $221.0 million
of unused credit under its revolving credit facility.
Working Capital Management. During the first quarter of
1997, the Company's working capital management improved
significantly compared to the first quarter of 1996.
Inventory turnover for the quarter improved to 9.9 times in
the first quarter of 1997 from 8.7 times in the first quarter
of 1996 and from 9.4 times in the fourth quarter of 1996.
This improvement was due to the implementation of the
Company's client/server-based inventory forecasting system
and the initiative to reduce the number of items from
multiple manufacturers distributed by the Company.
9
The Company has also reduced accounts receivable days sales
outstanding (DSO) (excluding the impact of the off balance
sheet accounts receivable securitization) to 32.3 days in the
first quarter of 1997 from 39.0 days in the first quarter of
1996 and from 33.9 days in the fourth quarter of 1996. This
reduction has been achieved through strengthening the
Company's methods of monitoring and enforcing contract
payment terms and basing a portion of its sales force
incentives on reducing days sales outstanding. The Company
will focus on maintaining these working capital management
measurements, although the results of its efforts cannot be
assured.
Capital Expenditures. Capital expenditures were
approximately $2.7 million in the first quarter of 1997, of
which approximately $1.2 million was for computer systems.
The Company expects to continue to invest in technology for
the foreseeable future as the most cost effective method of
reducing operating expenses. These capital expenditures are
expected to be funded through cash flow from operations.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
( FASB ) issued Statement of Financial Accounting Standards
No. 128 ( SFAS 128 ), Earnings per Share. SFAS 128 prescribes
the computation, presentation and disclosure requirements for
earnings per share. This standard is effective for reporting
periods ending after December 15, 1997. Management believes
the adoption of this new standard will not have a material
impact on the financial condition or results of operations of
the Company.
Forward-Looking Statements
Certain statements in this discussion constitute forward-
looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-
looking statements involve known and unknown risks,
including, but not limited to, general economic and business
conditions, competition, changing trends in customer profiles
and changes in government regulations. Although the Company
believes that its expectations with respect to the forward-
looking statements are based upon reasonable assumptions
within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results,
performance or achievements of the Company will not differ
materially from any future results, performance or
achievements expressed or implied by such forward-looking
statements.
10
Part II. Other Information
Item 1. Legal Proceedings
As of April 22, 1997, Stuart had been named as a defendant
along with product manufacturers, distributors, healthcare
providers, trade associations and others in approximately 290
lawsuits, filed in various federal and state courts (the
"Cases"). The Cases represent the claims of approximately 365
plaintiffs claiming personal injuries and approximately 245
spouses asserting claims for loss of consortium. The Cases
seek damages for personal injuries allegedly attributable to
spinal fixation devices. The great majority of the Cases seek
compensatory and punitive damages in unspecified amounts.
Prior to December 1992 and the Company's acquisition of
Stuart in 1994, Stuart distributed spinal fixation devices
manufactured by Sofamor SNC, a predecessor of Sofamor Danek
Group, Inc. ("Sofamor Danek"). Approximately 30% of the Cases
involve plaintiffs implanted with spinal fixation devices
manufactured by Sofamor Danek. Such plaintiffs allege that
Stuart is liable to them under applicable products liability
law for injuries caused by such devices distributed and sold
by Stuart. In addition, such plaintiffs allege that Stuart
distributed and sold the spinal fixation devices through
deceptive and misleading means and in violation of applicable
law. In the remaining Cases, plaintiffs seek to hold Stuart
liable for injuries caused by other manufacturers' devices
that were neither distributed nor sold by Stuart. Such
plaintiffs allege that Stuart engaged in a civil conspiracy
and concerted action with manufacturers, distributors and
others to promote the sale of spinal fixation devices through
deceptive and misleading means and in violation of applicable
law. Stuart never manufactured any spinal fixation devices.
The Company believes that affirmative defenses are available
to Stuart. All Cases filed against Stuart have been, and will
continue to be, vigorously defended.
A majority of the Cases have been transferred to, and
consolidated for pretrial proceedings, in the Eastern
District of Pennsylvania in Philadelphia under the style MDL
Docket No. 1014: In re Orthopedic Bone Screw Products
Liability Litigation. Discovery proceedings, including the
taking of depositions, have been ongoing in certain of the
Cases that were first to be filed. Discovery in certain Cases
filed later may begin in 1997. Because of the preliminary
status of the Cases, the Company is unable at this time to
determine with certainty whether or not Stuart may be held
liable.
In January 1997, the presiding judge entered an order
preliminarily approving a settlement agreement between one
manufacturer of spinal fixation devices, AcroMed Corporation
("AcroMed"), and the plaintiff's legal committee in the
multi-district litigation. Under the proposed terms of the
settlement, AcroMed would establish a settlement fund
consisting of $100 million in cash and the proceeds of its
product liability insurance coverage. Stuart did not
distribute devices manufactured by AcroMed and is not a party
to the AcroMed settlement. A final hearing will be held later
in 1997 to approve the fairness, adequacy and reasonableness
of the settlement. It is anticipated that nonsettling
defendants, including other manufacturers and distributors,
will object to the terms of the settlement and the proposed
terms of the notice of the settlement.
11
The Company believes that Stuart may be named as a defendant
in additional similar cases in the future as a result of the
pending AcroMed settlement or as statutes of limitations
approach expiration.
Based upon management's analysis of indemnification
agreements between Stuart and Sofamor Danek, the manufacturer
of the devices distributed by Stuart, the Company believes
that Stuart is entitled to indemnification by Sofamor Danek
at least with respect to claims brought by plaintiffs
implanted with devices manufactured by Sofamor Danek. Such
Cases are being defended by Stuart's insurance carriers.
Regarding those Cases filed by plaintiffs implanted with
other manufacturers' devices, one of Stuart's primary
insurance carriers has notified a representative of the
former shareholders of Stuart that it will withdraw its
provision of defense of such Cases and another one of
Stuart's primary insurance carriers has notified a
representative of the former shareholders of Stuart that it
has declined to provide a defense for such Cases, in both
instances asserting that such Cases involve only conspiracy
and concerted action claims. The former shareholders of
Stuart are contesting the insurance companies' withdrawal and
declination of the defense of such Cases. The Company and
Stuart are also contractually entitled to indemnification by
the former shareholders of Stuart for any liabilities and
related expenses incurred by the Company or Stuart in
connection with the foregoing litigation. The Company
believes that Stuart's available insurance coverage together
with the indemnification rights discussed above are adequate
to cover any losses should they occur, and accordingly has
accrued no liability therefor. Except as set forth above, the
Company is not aware of any uncertainty as to the
availability and adequacy of such insurance or
indemnification, although there can be no assurance that
Sofamor Danek and the former shareholders will have
sufficient financial resources in the future to meet such
obligations.
The Company is party to various other legal actions that are
ordinary and incidental to its business. While the outcome of
legal actions cannot be predicted with certainty, management
believes the outcome of these proceedings will not have a
material adverse effect on the Company's financial condition
or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(a) Amended and Restated Bylaws of the
Company.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three months
ended March 31, 1997.
12
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 12, 1997 /s/ Ann Greer Rector
Ann Greer Rector
Senior Vice President &
Chief Financial Officer