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 June 30, 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 August 8, 1997 was 32,118,971
shares.
Page 1
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Consolidated Balance Sheets - June 30,
1997 and December 31, 1996 3
Consolidated Statements of Income -
Three Months and Six Months Ended June 30,
1997 and 1996 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Part II. Other Information 11-12
Page 2
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
June 30, December 31,
1997 1996
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 238 $ 743
Accounts and notes receivable,
net of allowance of $6,286
and $6,495 163,322 147,243
Merchandise inventories 301,763 281,839
Other current assets 24,881 25,675
Total current assets 490,204 455,500
Property and equipment, net of
accumulated depreciation of
$38,496 and $35,242 28,159 29,231
Excess of purchase price over
net assets acquired, net of
accumulated of amortization
of $16,025 and $13,752 165,093 167,366
Other assets, net 25,547 27,404
Total assets $ 709,003 $ 679,501
Liabilities and shareholders
equity
Current liabilities
Accounts payable $ 265,014 $ 224,037
Accrued payroll and related
liabilities 4,435 5,001
Other accrued liabilities 33,098 33,472
Total current liabilities 302,547 262,510
Long-term debt 150,000 167,549
Accrued pension and retirement
plans 7,361 7,042
Total liabilities 459,908 437,101
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 - 32,038 shares
and 31,907 shares 64,076 63,814
Paid-in capital 6,220 5,086
Retained earnings 63,799 58,500
Total shareholders equity 249,095 242,400
Total liabilities and
shareholders equity $ 709,003 $ 679,501
See accompanying notes to consolidated financial statements.
Page 3
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Net sales $ 776,722 $ 749,938 $1,526,345 $1,521,250
Cost of goods sold 698,681 675,427 1,373,202 1,372,560
Gross margin 78,041 74,511 153,143 148,690
Selling, general and
administrative expenses 58,597 58,474 115,034 119,514
Depreciation and
amortization 4,332 4,071 8,537 8,001
Interest expense, net 3,759 4,974 7,706 10,774
Discount on accounts
receivable securitization 1,487 1,851 3,353 2,595
Total expenses 68,175 69,370 134,630 140,884
Income before income
taxes 9,866 5,141 18,513 7,806
Income tax provision 4,096 2,210 7,749 3,356
Net income 5,770 2,931 10,764 4,450
Dividends on preferred
stock 1,294 1,294 2,588 2,588
Net income attributable
to common stock $ 4,476 $ 1,637 $ 8,176 $ 1,862
Net income per
common share $ 0.14 $ 0.05 $ 0.26 $ 0.06
Cash dividends per
common share 0.045 0.045 $ 0.090 $ 0.090
Weighted average
common shares and
common share equivalents 32,100 32,000 32,050 31,560
See accompanying notes to consolidated financial statements.
Page 4
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1997 1996
Operating Activities
Net income $ 10,764 $ 4,450
Adjustments to reconcile net
income to cash provided
by operating activities
Depreciation and amortization 8,537 8,001
Provision for LIFO reserve 1,750 2,248
Changes in operating assets
and liabilities
Accounts and notes receivable (16,122) 94,020
Merchandise inventories (21,674) 27,058
Accounts payable 47,911 (5,091)
Net change in other
current assets and current
liabilities 392 9,659
Other, net 1,652 (1,970)
Cash provided by operating
activities 33,210 138,375
Investing Activities
Additions to property
and equipment (4,567) (3,152)
Additions to computer software (2,005) (3,940)
Proceeds from sale of property
and equipment 1,741 5,312
Cash used for investing
activities (4,831) (1,780)
Financing Activities
Additions to long-term debt - 150,000
Reductions of long-term debt (17,549) (274,022)
Other short-term financing, net (6,934) (8,014)
Cash dividends paid (5,466) (5,411)
Exercise of stock options 1,065 1,183
Cash used for financing activities (28,884) (136,264)
Net increase (decrease)
in cash and cash equivalents (505) 331
Cash and cash equivalents at
beginning of year 743 215
Cash and cash equivalents at
end of period $ 238 $ 546
(/TABLE)
See accompanying notes to consolidated financial statements.
Page 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 June 30, 1997 and the consolidated
results of operations for the three and six month
periods and cash flows for the six month periods ended
June 30, 1997 and 1996.
Derivative Financial Instruments
The Company enters into off-balance sheet interest rate
swap agreements as part of its interest rate risk
management strategy. These swaps are not held for
trading purposes and are classified as synthetic
alterations. In order for the swaps to be accounted for
as synthetic alterations they must satisfy the following
criteria: (1) the asset or liability to be converted
creates exposure to interest rate risk, and (2) the off-
balance sheet agreement is designated and effective as
a synthetic alteration of the balance sheet item.
Accrual accounting is applied for these agreements and
the net payments or receipts are accrued as other
accrued liabilities and are recorded as adjustments to
interest expense. If the outstanding financing were to
drop below the notional amount of the related swap, the
excess portion of the related swap would be marked to
market and the resulting gain or loss included in
income. If a swap were to be terminated, the gain or
loss would be deferred and amortized over the remaining
life of the agreement.
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
and six month periods ended June 30, 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.
Page 6
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 (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.
(In thousands)
As of and for the Owens Guarantor
six months ended & Minor, Subsid- Elimi- Consoli-
June 30, 1997 Inc. aries OMF nations dated
Current assets $148,335 $ 471,613 $73,219 $(202,963) $ 490,204
Noncurrent assets 306,324 227,335 - (314,860) 218,799
Total assets $454,659 $ 698,948 $73,219 $(517,823) $ 709,003
Current liabilities $ 2,532 $ 447,861 $55,719 $(203,565) $ 302,547
Noncurrent
liabilities 150,000 7,361 - - 157,361
Shareholders equity 302,127 243,726 17,500 (314,258) 249,095
Total liabilities
and shareholders
equity $454,659 $ 698,948 $73,219 $(517,823) $ 709,003
Net sales $ 7,963 $1,526,345 $ 7,221 $ (15,184) $1,526,345
Expenses 8,657 1,516,933 5,776 (15,785) 1,515,581
Net income (loss) $ (694) $ 9,412 $ 1,445 $ 601 $ 10,764
As of and for the Owens Guarantor
six months ended & Minor, Subsidi- Elimina- Consoli-
June 30, 1996 Inc. aries OMF tions dated
Current assets $201,166 $ 470,512 $69,866 $(254,420) $ 487,124
Noncurrent assets 306,152 240,288 - (314,859) 231,581
Total assets $507,318 $ 710,800 69,866 $(569,279) $ 718,705
Current liabilities $ 3,578 $ 466,457 $54,775 $(254,420) $ 270,390
Noncurrent
liabilities 190,000 19,352 - - 209,352
Shareholders
equity 313,740 224,991 15,091 (314,859) 238,963
Total liabilities and
shareholders equity $507,318 $ 710,800 $69,866 $ 569,279 $ 718,705
Net sales $ 14,633 $1,521,250 $ 3,912 $ (18,545) $1,521,250
Expenses 13,471 1,518,279 3,595 (18,545) 1,516,800
Net income $ 1,162 $ 2,971 $ 317 $ - $ 4,450
Page 7
Item 2.
Owens & Minor, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following management discussion and analysis describes
material changes in the Company's financial condition since
December 31, 1996. Trends of a material nature are discussed
to the extent known and considered relevant. This discussion
should be read in conjunction with the consolidated
financial statements, related notes thereto and management's
discussion and analysis of financial condition and results
of operations included in the Company's 1996 Annual Report
to Stockholders and Annual Report on Form 10-K for the year
ended December 31, 1996.
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, outcome of outstanding litigation, 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.
Results of Operations
Second quarter and first six months of 1997 compared with
1996
Net sales. Net sales increased 3.6% to $776.7 million in
the second quarter of 1997 from $749.9 million in the second
quarter of 1996. Net sales increased 0.3% to $1,526.3
million in the first six months of 1997 from $1,521.3
million in the first six months of 1996. The modest increase
in sales was a result of the Company's continued emphasis
on profitable sales growth. The Company will continue this
commitment to profitable sales growth and has entered into
several new agreements in 1997 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 second quarter of 1997 from 9.9%
in the second quarter of 1996. Gross margin as a percentage
of net sales increased to 10.0% in the first six months of
1997 from 9.8% in the first six months of 1996. The
improvement has been a result of the Company's efforts to
reduce unprofitable sales by negotiating price increases
where appropriate or reducing sales to unprofitable
customers. Also, the improvement has been the result of
product and supplier standardization. During the first six
months of 1997, the Company's LIFO (last-in, first-out)
provision declined $0.5 million as compared to the first six
months of 1996. The decrease was due primarily to lower
price increases from manufacturers through the first six
months of 1997 compared to 1996. The Company will continue
to focus on maintaining this margin level through its
continued focus on profitable sales and continued
standardization of suppliers and products.
Page 8
Selling, general and administrative expenses. Selling,
general and administrative (SG&A) expenses as a percentage
of net sales decreased to 7.5% in the second quarter of 1997
from 7.8% in the second quarter of 1996 and decreased to
7.5% in the first six months of 1997 from 7.9% in the first
six months of 1996. The SG&A expense decline was a result
of many cost-saving initiatives, including the reduction of
over 250 full-time equivalent employees since June 30, 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; 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 in operational
improvement.
Depreciation and amortization. Depreciation and
amortization increased by 6.4% in the second quarter of 1997
compared to the second quarter of 1996 and increased by 6.7%
in the first six months of 1997 compared to the first six
months 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.
Interest expense, net and discount on accounts receivable
securitization (financing costs). Financing costs, net of
finance charge income of $0.8 million and $1.2 million in
the second quarter of 1997 and 1996, respectively, decreased
to $5.2 million in the second quarter of 1997 from $6.8
million in the second quarter of 1996. Financing costs, net
of finance charge income of $1.8 million and $2.4 million
in the first six months of 1997 and 1996, respectively,
decreased to $11.1 million in the first six months of 1997
from $13.4 million in the first six months 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.
As the result of the reduction in working capital
requirements, the Company has reduced outstanding borrowing
by approximately $90.9 million since June 30, 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
$7.7 million in the first six months of 1997 (representing
an effective tax rate of 41.9%) compared with $3.4 million
in the first six months of 1996 (representing an effective
tax rate of 43.0%). The decline in the effective tax rate
is due primarily to increased income before taxes reducing
the impact of nondeductible goodwill amortization.
Page 9
Net income. Net income increased $2.8 million in the second
quarter of 1997 compared to the second quarter of 1996. Net
income increased $6.3 million in the first six months of
1997 compared to the first six months 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 six months of 1997 compared
to the first six months of 1996. Outstanding financing was
reduced $90.9 million to $250.6 million on June 30, 1997
from $341.5 million on June 30, 1996 and $42.9 million from
$293.5 million on December 31, 1996. The capitalization
ratio (excluding the impact of the off balance sheet
accounts receivable securitization) decreased to 50.2% at
June 30, 1997 from 58.8% at June 30, 1996 and from 54.8% at
December 31, 1996. The improvement was the result of reduced
working capital requirements and increased earnings.
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
June 30, 1997, the Company had approximately $225.0 million
of unused credit under its revolving credit facility and
$15.5 million under its receivable financing facility.
Working Capital Management. During the second quarter of
1997, the Company s working capital management improved
significantly compared to the second quarter of 1996.
Inventory turnover improved to 9.8 times in the second
quarter of 1997 from 8.9 times in the second 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. The Company has
also reduced accounts receivable days sales outstanding
(excluding the impact of the off balance sheet accounts
receivable securitization) to 30.9 days in the second
quarter of 1997 from 39.4 days in the second 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 $6.6 million in the first six months of 1997,
of which approximately $3.8 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 position
or results of operations of the Company.
Page 10
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129 ( SFAS 129 ), Disclosure of
Information about Capital Structure. SFAS 129 establishes
standards for disclosing information about an entity's
capital structure. This standard is effective for reporting
periods ending after December 15, 1997. Management believes
the adoption of this new standard will not have an impact
on the financial position or results of operations of the
Company.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130 ( SFAS 130 ), Reporting
Comprehensive Income. SFAS 130 establishes standards for
reporting and presentation of comprehensive income and its
components in a full set of general-purpose financial
statements. This standard is effective for fiscal years
beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for
comparative purposes is required. Management believes the
adoption of this new standard will not have a material
impact on the financial position or results of operations
of the Company.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 ( SFAS 131 ), Disclosures about
Segments of an Enterprise and Related Information. SFAS 131
establishes standards for the way that public business
enterprises report information about operating segments in
annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports issued to
shareholders. This statement also establishes standards for
related disclosures about products and services, geographic
areas, and major customers. This standard is effective for
reporting periods beginning after December 15, 1997.
Management believes the adoption of this new standard will
not have a material impact on the financial position or
results of operations of the Company.
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings pending against Stuart Medical,
Inc., a wholly owned subsidiary of the Company, are
described in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997. Through June 30, 1997
there have been no material developments in any legal
proceedings reported in such Quarterly Report.
Page 11
Item 4. Submission of Matters to a Vote of Shareholders
The following matters were submitted to a vote of Owens &
Minor, Inc. s shareholders at its annual meeting held on
April 29, 1997, with the voting results designated below
each such matter:
(1) Election of Josiah Bunting, III, James E. Rogers and
James E. Ukrop as directors of Owens & Minor, Inc.
for a three-year term.
<CATPION>
Votes Against Broker
Directors Votes For or Withheld Abstentions Non-Votes
Josiah Bunting, III 34,879,891 100,212 0 0
James E. Rogers 34,887,550 92,553 0 0
James E. Ukrop 34,885,107 94,996 0 0
(2) Ratification of the appointment of KPMG Peat Marwick
LLP as Owens & Minor, Inc. s independent auditors.
Votes Against
Votes For or Withheld Abstentions Broker
34,860,280 28,595 91,228 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three months
ended June 30, 1997.
Page 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 August 12, 1997 /s/ Ann Greer Rector
Ann Greer Rector
Senior Vice President &
Chief Financial Officer
Date August 12, 1997 /s/ Olwen B. Cape
Olwen B. Cape
Vice President & Controller
Chief Accounting Officer