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 September 30, 2000
------------------
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
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Owens & Minor, Inc.
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(Exact name of Registrant as specified in its charter)
Virginia 54-1701843
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 Cox Road, Glen Allen, Virginia 23060
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(Address of principal executive offices) (Zip Code)
Post Office Box 27626, Richmond, Virginia 23261-7626
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(Mailing address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 747-9794
--------------
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 October 31, 2000, was 33,092,045 shares.
1
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income - Three Months and
Nine Months Ended September 30, 2000 and 1999 3
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
2
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ------------------------------------
2000 1999 2000 1999
------------ ------------- --------------- --------------
Net sales $ 872,308 $ 811,917 $ 2,599,973 $ 2,325,361
Cost of goods sold 781,197 726,620 2,328,405 2,080,988
------------ ------------- --------------- --------------
Gross margin 91,111 85,297 271,568 244,373
------------ ------------- --------------- --------------
Selling, general and administrative expenses 63,742 61,623 193,785 179,709
Depreciation and amortization 5,399 4,919 15,830 14,064
Interest expense, net 3,060 2,702 9,418 8,833
Discount on accounts receivable securitization 1,744 1,527 5,562 3,316
Distributions on mandatorily redeemable
preferred securities 1,773 1,773 5,321 5,321
Nonrecurring restructuring credit - - (750) (1,000)
------------ ------------- --------------- --------------
Total expenses 75,718 72,544 229,166 210,243
------------ ------------- --------------- --------------
Income before income taxes 15,393 12,753 42,402 34,130
Income tax provision 6,927 5,611 19,081 15,017
------------ ------------- --------------- --------------
Net income $ 8,466 $ 7,142 $ 23,321 $ 19,113
============ ============= =============== ==============
Net income per common share-basic $ 0.26 0.22 $ 0.71 $ 0.59
============ ============= =============== ==============
Net income per common share-diluted $ 0.24 $ 0.21 $ 0.67 $ 0.57
============ ============= =============== ==============
Cash dividends per common share $ 0.0625 $ 0.0600 $ 0.1850 $ 0.1700
============ ============= =============== ==============
See accompanying notes to consolidated financial statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data) September 30, December 31,
(unaudited) 2000 1999
------------- ------------
Assets
Current assets
Cash and cash equivalents $ 706 $ 669
Accounts and notes receivable, net
of allowance of $6,570 and $6,479 258,499 226,927
Merchandise inventories 337,675 342,478
Other current assets 14,170 19,172
------------ ------------
Total current assets 611,050 589,246
Property and equipment, net of accumulated
depreciation of $58,006 and $52,516 24,698 25,877
Goodwill, net of accumulated amortization
of $32,480 and $27,989 206,346 210,837
Other assets, net 41,759 39,040
------------- ------------
Total assets $ 883,853 $ 865,000
============= ============
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 316,067 $ 303,490
Accrued payroll and related liabilities 6,544 6,883
Other accrued liabilities 61,680 59,425
------------- ------------
Total current liabilities 384,291 369,798
Long-term debt 157,272 174,553
Other liabilities 6,812 6,268
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Total liabilities 548,375 550,619
------------- ------------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust, holding solely convertible
debentures of Owens & Minor, Inc. 132,000 132,000
------------- ------------
Shareholders' equity
Preferred stock, par value $100 per share;
authorized - 10,000 shares
Series A; Participating Cumulative
Preferred Stock; none issued - -
Common stock, par value $2 per share;
authorized - 200,000 shares; issued and
outstanding - 33,057 shares and 32,711 shares 66,114 65,422
Paid-in capital 16,294 12,890
Retained earnings 121,302 104,069
Accumulated other comprehensive loss (232) -
------------- ------------
Total shareholders' equity 203,478 182,381
------------- ------------
Total liabilities and shareholders' equity $ 883,853 $ 865,000
============= ============
See accompanying notes to consolidated financial statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands) Nine Months Ended
(unaudited) September 30,
------------------------------
2000 1999
------------ -----------
Operating activities
Net income $ 23,321 $ 19,113
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 15,830 14,064
Nonrecurring restructuring credit (750) (1,000)
Provision for LIFO reserve 2,280 1,629
Provision for losses on accounts and notes receivable 263 656
Sales of (collections of sold) accounts receivable, net (35,612) 52,000
Changes in operating assets and liabilities:
Accounts and notes receivable 3,777 (10,418)
Merchandise inventories 2,523 (18,654)
Accounts payable 13,227 67,927
Net change in other current assets
and current liabilities 7,298 (680)
Other, net 4,876 2,064
------------ -----------
Cash provided by operating activities 37,033 126,701
------------ -----------
Investing activities
Net cash paid for acquisition of business - (85,112)
Additions to property and equipment (5,981) (7,263)
Additions to computer software (9,415) (6,477)
Other, net (181) (1,143)
------------ -----------
Cash used for investing activities (15,577) (99,995)
------------ -----------
Financing activities
Reduction of debt (16,625) -
Other financing, net (1,896) (21,194)
Cash dividends paid (6,088) (5,558)
Proceeds from exercise of stock options 3,190 80
------------ -----------
Cash used for financing activities (21,419) (26,672)
------------ -----------
Net increase in cash and cash equivalents 37 34
Cash and cash equivalents at beginning of period 669 546
------------ -----------
Cash and cash equivalents at end of period $ 706 $ 580
============ ===========
See accompanying notes to consolidated financial statements.
5
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
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 (O&M or the company) as of September 30, 2000 and
the consolidated results of operations for the three and nine month periods
and cash flows for the nine month periods ended September 30, 2000 and 1999.
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
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 inventory
counts at selected distribution centers. Reported results of operations for
the three and nine month periods ended September 30, 2000 and 1999 reflect
the results of such counts, to the extent that they are materially different
from estimated amounts. 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. Investment
In October 1999, in a private offering, the company purchased an equity
investment in Neoforma.com, Inc. (Neoforma), a provider of business-to-
business e-commerce services in the healthcare industry. In January 2000,
Neoforma made an initial public offering, at which time the shares held by
O&M were converted to common stock. The investment is classified as
available- for-sale in accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and is included in other assets, net in the consolidated balance
sheets at fair value, with unrealized gains and losses, net of tax, reported
as accumulated other comprehensive income (loss). At September 30, 2000, the
estimated fair value (based on the quoted market price), gross unrealized
loss and cost basis of this investment were $0.8 million, $0.4 million and
$1.2 million. At December 31, 1999, the investment was stated at its cost
basis of $1.2 million, as there was no market for the securities at that
time.
6
5. Acquisition
On July 30, 1999, the company acquired certain net assets of Medix, Inc.
(Medix), a distributor of medical and surgical supplies. In connection with
the acquisition, management adopted a plan for integration of the businesses
which includes closure of some Medix facilities and consolidation of certain
administrative functions. An accrual was established to provide for certain
costs of this plan. The following table sets forth the activity in the
accrual since December 31, 1999:
(in thousands) Balance at Balance at
December 31, 1999 Charges September 30, 2000
- --------------------------------------------------------------------------------------------------
Losses under lease commitments $1,609 $268 $1,341
Employee separations 339 222 117
Other 685 34 651
- --------------------------------------------------------------------------------------------------
Total $2,633 $524 $2,109
==================================================================================================
As of September 30, 2000, approximately 40 employees had been terminated since
the inception of the plan.
6. Restructuring Reserve
As a result of the Columbia/HCA Healthcare Corporation contract cancellation
in the second quarter of 1998, the company recorded a nonrecurring
restructuring charge to downsize operations. In the second quarter of 2000,
the company re-evaluated its estimate of the remaining costs to be incurred
in connection with the restructuring plan and reduced the reserve by $750
thousand. The following table sets forth the activity in the restructuring
reserve since December 31, 1999:
(in thousands) Balance at Balance at
December 31, 1999 Charges Adjustments September 30, 2000
- --------------------------------------------------------------------------------------------------------------
Losses under lease commitments $2,304 $ 814 $ 1,379 $2,869
Asset write-offs 3,316 716 (1,681) 919
Employee separations 13 7 (6) -
Other 477 35 (442) -
- --------------------------------------------------------------------------------------------------------------
Total $6,110 $1,572 $ (750) $3,788
==============================================================================================================
7. Revolving Credit Facility
Effective April 24, 2000, the company replaced its revolving credit facility
with a new agreement expiring in April 2003. The credit limit of the new
facility is $225.0 million, unchanged from the previous facility, and the
interest is based on LIBOR or the Prime Rate, at the company's discretion.
Under the new facility, the company is charged a commitment fee of between
0.20% and 0.275% on the unused portion of the facility and a utilization fee
of 0.25% if borrowings exceed $112.5 million. The terms of the new agreement
limit the amount of indebtedness that the company may incur, require the
company to maintain certain levels of net worth, current ratio, leverage
ratio and fixed charge coverage, and restrict the ability of the company to
materially alter the character of the business through consolidation,
merger, or purchase or sale of assets.
7
8. Receivables Financing Facility
Effective July 14, 2000, the company replaced its receivables financing
facility with a new facility expiring in July 2001. Under the terms of the
new facility, O&M Funding is entitled to transfer, without recourse, up to
$225.0 million of its trade receivables to a group of unrelated third party
purchasers at a cost of funds equal to commercial paper rates, the prime
rate, or LIBOR (plus a charge for administrative and credit support
services). The terms of the new facility require the company to maintain
certain levels of net worth, current ratio, leverage ratio and fixed
coverage, and restrict the company's ability to materially alter the
character of the business through consolidation, merger, or purchase or sale
of assets.
9. Comprehensive Income
The company's comprehensive income for the three months and nine months
ended September 30, 2000 and 1999 is shown in the table below. Other
comprehensive loss is comprised of unrealized loss on investment, net of
income tax.
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2000 1999 2000 1999
------- ------- ------- -------
Net income $8,466 $7,142 $23,321 $19,113
Other comprehensive loss - increase in unrealized
loss on investment, net of tax (392) - (232) -
-------------------------------------------------
Comprehensive income $8,074 $7,142 $23,089 $19,113
-------------------------------------------------
10. Net Income per Common Share
The following sets forth the computation of basic and diluted net income per
common share:
(in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
------- ------- ------- -------
Numerator:
Numerator for basic net income per common
share - net income $ 8,466 $ 7,142 $23,321 $19,113
Distributions on convertible mandatorily redeemable
preferred securities, net of income taxes 976 993 2,927 2,980
- ----------------------------------------------------------------------------------------------------------------------
Numerator for diluted net income per common share -
net income attributable to common stock after
assumed conversions $ 9,442 $ 8,135 $26,248 $22,093
- ----------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic net income per
common share - weighted average shares 32,793 32,582 32,658 32,570
Effect of dilutive securities:
Conversion of mandatorily redeemable preferred
securities 6,400 6,400 6,400 6,400
Stock options and restricted stock 526 120 366 125
- ----------------------------------------------------------------------------------------------------------------------
Denominator for diluted net income per common
share - adjusted weighted average shares and
assumed conversions 39,719 39,102 39,424 39,095
- ----------------------------------------------------------------------------------------------------------------------
Net income per common share - basic $ 0.26 $ 0.22 $ 0.71 $ 0.59
Net income per common share - diluted $ 0.24 $ 0.21 $ 0.67 $ 0.57
======================================================================================================================
8
11. Contingency
In August 2000, the company received notice from the Internal Revenue
Service that it has disallowed certain deductions for interest on loans
associated with the company's corporate-owned life insurance (COLI) program.
Management believes that the company has complied with the tax law as it
relates to its COLI program, and plans to vigorously pursue appropriate
appeals options. The total amount of the disallowance of these deductions,
if appeals were unsuccessful, would be approximately $8.5 million after tax,
including interest. The ultimate resolution of this matter may take several
years and a determination adverse to the company could have a material
impact on the company's results of operations.
9
12. Condensed Consolidating Financial Information
The following tables present condensed consolidating financial information
for: Owens & Minor, Inc.; on a combined basis, the guarantors of Owens &
Minor, Inc.'s 10 7/8% Senior Subordinated 10-year Notes (Notes); and the
non- guarantor subsidiaries 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 information is more
meaningful in understanding the financial position, results of operations
and cash flows of the guarantor subsidiaries.
Condensed Consolidating Financial Information
(in thousands)
- -------------------------------------------------------------------------------------------------------------------------
For the three months ended Owens & Guarantor Non-guarantor
September 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ - $ 872,308 $ - $ 872,308
Cost of goods sold - 781,197 - 781,197
- ------------------------------------------------------------------------------------------------------------------------
Gross margin - 91,111 - 91,111
- ------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 155 62,895 692 63,742
Depreciation and amortization - 5,399 - 5,399
Interest expense, net 4,480 (1,420) - 3,060
Intercompany interest expense, net (1,886) 8,490 (6,604) -
Discount on accounts receivable securitization - 4 1,740 1,744
Distributions on mandatorily redeemable preferred - - 1,773 1,773
securities
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 2,749 75,368 (2,399) 75,718
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,749) 15,743 2,399 15,393
Income tax provision (benefit) (1,210) 7,044 1,093 6,927
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,539) $ 8,699 $ 1,306 $ 8,466
========================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------
For the three months ended Owens & Guarantor Non-guarantor
September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Consolidated
- ------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ - $ 811,917 $ - $ 811,917
Cost of goods sold - 726,620 - 726,620
- ------------------------------------------------------------------------------------------------------------------------
Gross margin - 85,297 - 85,297
- ------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 4 61,431 188 61,623
Depreciation and amortization - 4,919 - 4,919
Interest expense, net 4,217 (1,515) - 2,702
Intercompany interest expense, net (1,731) 6,550 (4,819) -
Discount on accounts receivable securitization - 8 1,519 1,527
Distributions on mandatorily redeemable preferred - - 1,773 1,773
securities
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 2,490 71,393 (1,339) 72,544
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,490) 13,904 1,339 12,753
Income tax provision (benefit) (1,095) 6,021 685 5,611
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,395) $ 7,883 $ 654 $ 7,142
========================================================================================================================
10
Condensed Consolidating Financial Information
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
For the nine months ended Owens & Guarantor Non-guarantor
September 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ - $ 2,599,973 $ - $ 2,599,973
Cost of goods sold - 2,328,405 - 2,328,405
- ---------------------------------------------------------------------------------------------------------------------------------
Gross margin - 271,568 - 271,568
- ---------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 155 192,378 1,252 193,785
Depreciation and amortization - 15,830 - 15,830
Interest expense, net 13,418 (4,000) - 9,418
Intercompany interest expense, net (5,913) 23,068 (17,155) -
Discount on accounts receivable securitization - 13 5,549 5,562
Distributions on mandatorily redeemable preferred - - 5,321 5,321
securities
Nonrecurring restructuring credit - (750) - (750)
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,660 226,539 (5,033) 229,166
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7,660) 45,029 5,033 42,402
Income tax provision (benefit) (3,371) 19,884 2,568 19,081
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,289) $ 25,145 $ 2,465 $ 23,321
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
For the nine months ended Owens & Guarantor Non-guarantor
September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ - $ 2,325,361 $ - $ 2,325,361
Cost of goods sold - 2,080,988 - 2,080,988
- ---------------------------------------------------------------------------------------------------------------------------------
Gross margin - 244,373 - 244,373
- ---------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 9 179,205 495 179,709
Depreciation and amortization - 14,064 - 14,064
Interest expense, net 12,503 (3,670) - 8,833
Intercompany interest expense, net (5,158) 18,002 (12,844) -
Discount on accounts receivable securitization - 24 3,292 3,316
Distributions on mandatorily redeemable preferred - - 5,321 5,321
securities
Nonrecurring restructuring credit - (1,000) - (1,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,354 206,625 (3,736) 210,243
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7,354) 37,748 3,736 34,130
Income tax provision (benefit) (3,236) 16,513 1,740 15,017
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,118) $ 21,235 $ 1,996 $ 19,113
=================================================================================================================================
11
Condensed Consolidating Financial Information
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Owens & Guarantor Non-guarantor
September 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 507 $ 198 $ 1 $ - $ 706
Accounts and notes receivable, net - 19,835 238,664 - 258,499
Merchandise inventories - 337,626 49 - 337,675
Intercompany advances, net 139,164 70,081 (209,245) - -
Other current assets 29 14,141 - - 14,170
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 139,700 441,881 29,469 - 611,050
Property and equipment, net - 24,695 3 - 24,698
Goodwill, net - 206,346 - - 206,346
Intercompany investments 305,441 15,001 136,083 (456,525) -
Other assets, net 9,711 31,477 571 - 41,759
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 454,852 $ 719,400 $ 166,126 $ (456,525) $ 883,853
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ - $ 316,067 $ - $ - $ 316,067
Accrued payroll and related liabilities - 6,544 - - 6,544
Other accrued liabilities 5,166 54,798 1,716 - 61,680
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,166 377,409 1,716 - 384,291
Long-term debt 156,600 672 - - 157,272
Intercompany long-term debt 136,083 - - (136,083) -
Other liabilities - 6,812 - - 6,812
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 297,849 384,893 1,716 (136,083) 548,375
- -----------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust, holding
solely convertible debentures of Owens & Minor, Inc. - - 132,000 - 132,000
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 66,114 40,879 5,583 (46,462) 66,114
Paid-in capital 16,294 258,979 15,001 (273,980) 16,294
Retained earnings 74,827 34,649 11,826 - 121,302
Accumulated other comprehensive loss (232) - - - (232)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 157,003 334,507 32,410 (320,442) 203,478
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 454,852 $ 719,400 $ 166,126 $ (456,525) $ 883,853
===================================================================================================================================
12
Condensed Consolidating Financial Information
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Owens & Guarantor Non-guarantor
December 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 507 $ 158 $ 4 $ - $ 669
Accounts and notes receivable, net - 112,088 114,839 - 226,927
Merchandise inventories - 342,478 - - 342,478
Intercompany advances, net 157,711 (69,220) (88,491) - -
Other current assets - 19,172 - - 19,172
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 158,218 404,676 26,352 - 589,246
Property and equipment, net - 25,877 - - 25,877
Goodwill, net - 210,837 - - 210,837
Intercompany investments 305,441 15,001 136,083 (456,525) -
Other assets, net 9,894 27,933 1,213 - 39,040
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 473,553 $ 684,324 $ 163,648 $(456,525) $ 865,000
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ - $ 303,490 $ - $ - $ 303,490
Accrued payroll and related liabilities - 6,883 - - 6,883
Other accrued liabilities 1,354 56,368 1,703 - 59,425
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,354 366,741 1,703 - - 369,798
Long-term debt 172,600 1,953 - - 174,553
Intercompany long-term debt 136,083 - - (136,083) -
Other liabilities - 6,268 - - 6,268
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 310,037 374,962 1,703 (136,083) 550,619
- -----------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust, holding
solely convertible debentures of Owens & Minor, Inc. - - 132,000 - 132,000
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 65,422 40,879 5,583 (46,462) 65,422
Paid-in capital 12,890 258,979 15,001 (273,980) 12,890
Retained earnings 85,204 9,504 9,361 - 104,069
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 163,516 309,362 29,945 (320,442) 182,381
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 473,553 $ 684,324 $ 163,648 $(456,525) $ 865,000
====================================================================================================================================
13
Condensed Consolidating Financial Information
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
For the nine months ended Owens & Guarantor Non-guarantor
September 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Consolidated
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating activities
Net income (loss) $ (4,289) $ 25,145 $ 2,465 $ 23,321
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization - 15,830 - 15,830
Nonrecurring restructuring credit - (750) - (750)
Provision for LIFO reserve - 2,280 - 2,280
Provision for losses on accounts and notes receivable - 579 (316) 263
Collections of sold accounts receivable, net - - (35,612) (35,612)
Changes in operating assets and liabilities:
Accounts and notes receivable - 91,674 (87,897) 3,777
Merchandise inventories - 2,572 (49) 2,523
Accounts payable - 13,227 - 13,227
Net change in other current assets
and current liabilities 3,785 3,764 (251) 7,298
Other, net 2,256 1,716 904 4,876
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities 1,752 156,037 (120,756) 37,033
- --------------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to property and equipment - (5,978) (3) (5,981)
Additions to computer software - (9,415) - (9,415)
Other, net (155) (26) - (181)
- --------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (155) (15,419) (3) (15,577)
- --------------------------------------------------------------------------------------------------------------------------
Financing activities
Reduction of debt (16,000) (625) - (16,625)
Change in intercompany advances 18,547 (139,303) 120,756 -
Other financing, net (1,246) (650) - (1,896)
Cash dividends paid (6,088) - - (6,088)
Proceeds from exercise of stock options 3,190 - - 3,190
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (1,597) (140,578) 120,756 (21,419)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents - 40 (3) 37
Cash and cash equivalents at beginning of period 507 158 4 669
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 507 $ 198 $ 1 $ 706
==========================================================================================================================
14
Condensed Consolidating Financial Information
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------
For the nine months ended Owens & Guarantor Non-guarantor
September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating activities
Net income (loss) $ (4,118) $ 21,235 $ 1,996 $ 19,113
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization - 14,064 - 14,064
Nonrecurring restructuring provision - (1,000) - (1,000)
Provision for LIFO reserve - 1,629 - 1,629
Provision for losses on accounts and notes receivable - 389 267 656
Sales of accounts receivable, net - - 52,000 52,000
Changes in operating assets and liabilities:
Accounts and notes receivable - 16,862 (27,280) (10,418)
Merchandise inventories - (18,654) - (18,654)
Accounts payable - 67,927 - 67,927
Net change in other current assets
and current liabilities 3,582 (4,589) 327 (680)
Other, net 1,389 396 279 2,064
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 853 98,259 27,589 126,701
- --------------------------------------------------------------------------------------------------------------------------
Investing activities
Cash paid for acquisition of business - (85,112) - (85,112)
Additions to property and equipment - (7,263) - (7,263)
Additions to computer software - (6,477) - (6,477)
Other, net - 57 (1,200) (1,143)
- --------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities - (98,795) (1,200) (99,995)
- --------------------------------------------------------------------------------------------------------------------------
Financing activities
Change in intercompany advances 4,627 21,762 (26,389) -
Other financing, net - (21,194) - (21,194)
Cash dividends paid (5,558) - - (5,558)
Proceeds from exercise of stock options 80 - - 80
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (851) 568 (26,389) (26,672)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2 32 - 34
Cash and cash equivalents at beginning of period 505 40 1 546
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 507 $ 72 $ 1 $ 580
==========================================================================================================================
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following management discussion and analysis describes material changes in
the financial condition of Owens & Minor, Inc. and its wholly-owned subsidiaries
(O&M or the company) since December 31, 1999. 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 Annual Report on Form 10-K for
the year ended December 31, 1999.
Financial Condition, Liquidity and Capital Resources
Liquidity. As a result of favorable cash flow from operations, the company's
liquidity improved during the first nine months of 2000. Combined outstanding
debt and off balance sheet accounts receivable securitization were reduced by
$52.2 million to $228.6 million at September 30, 2000, from $280.8 million at
December 31, 1999. Excluding the impact of the receivables financing facility,
$72.6 million of cash was provided by operating activities in the first nine
months of 2000.
The company expects that its available financing will be sufficient to fund its
working capital needs and long-term strategic growth, although this cannot be
assured. In April 2000, the company replaced its revolving credit facility with
a new agreement expiring in April 2003, and in July, the company replaced its
receivables financing facility with a new agreement which allows O&M to sell up
to $225 million of accounts receivable through July 2001. At September 30,
2000, the company had $218.4 million of unused credit under the revolving credit
facility and the ability to sell an additional $155.0 million of accounts
receivable under the receivables financing facility.
Working Capital Management. The company's working capital increased by $7.3
million from December 31, 1999 to $226.8 million at September 30, 2000,
primarily due to an increase in accounts receivable. This increase was driven
by a reduction in the amount of receivables sold under the financing facility.
At September 30, 2000, only $70.0 million of receivables had been sold, compared
to $105.6 million at December 31, 1999. Accounts receivable, excluding the
impact of the financing facility, decreased by $4.0 million to $328.5 million at
September 30, 2000.
Capital Expenditures. Capital expenditures were $15.4 million in the first nine
months of 2000, of which $9.4 million was for computer hardware and software.
The company expects to continue supporting strategic initiatives and improving
operational efficiency through investments in technology, including system
upgrades and the development of electronic commerce. The company expects future
expenditures to be funded through cash flow from operations.
Results of Operations
Third quarter and first nine months of 2000 compared with 1999
Net sales. Net sales increased 7% to $872.3 million in the third quarter of
2000 from $811.9 million in the third quarter of 1999. Net sales increased 12%
to $2.6 billion in the first nine months of 2000 from $2.3 billion in the first
nine months of 1999. Excluding the sales generated by customers acquired from
the Medix acquisition in July 1999, net sales increased 6% for the third quarter
and 7% for the first nine months of 2000. Most of this increase resulted from
increased penetration of existing accounts, most significantly Tenet BuyPower,
whose distribution contract began in February 1999.
16
Gross margin. For both the third quarter and the first nine months of 2000,
gross margin was 10.4% of net sales, a slight decrease from 10.5% in the same
periods of 1999. The decrease was a result of changes in the company's sales
mix, including lower margins on business acquired through the Medix acquisition.
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses as a percentage of net sales decreased to 7.3%
for the third quarter of 2000, compared to 7.6% for the third quarter of 1999.
SG&A expense decreased to 7.4% of net sales for the first nine months of 2000,
compared to 7.7% for the same period of 1999. The decrease as a percentage of
sales was the result of economies of scale created by a higher sales base in
2000, operating efficiencies driven by improved warehouse technology, continued
management of administrative costs, and the elimination of the need for Year
2000 remediation efforts.
Depreciation and amortization. Depreciation and amortization expense for the
third quarter and first nine months of 2000 increased by 10% and 13% from the
same periods in 1999. Excluding goodwill amortization on the Medix acquisition,
depreciation and amortization increased by 8% for the third quarter and 7% for
the first nine months, as a result of higher capital spending associated with
information technology initiatives. O&M anticipates similar increases in
depreciation through the remainder of 2000 as the company continues to invest in
information technology.
Interest expense, net, and discount on accounts receivable securitization
(financing costs). Financing costs totaled $4.8 million for the third quarter
of 2000, compared with $4.2 million for the same period of 1999. Excluding
collections of customer finance charges, financing costs for the third quarter
increased 11% to $6.3 million in 2000 from $5.7 million in 1999 due to higher
interest rates. For the first nine months of 2000, financing costs totaled
$15.0 million, compared with $12.1 million for the same period of 1999.
Excluding collections of customer finance charges, financing costs increased 22%
to $18.9 million in 2000 from $15.6 million in 1999. The increase in financing
costs for the first nine months was driven by higher average outstanding
financing combined with higher interest rates. Average combined outstanding
debt and accounts receivable securitization balances were approximately $274.6
million for the first nine months of 2000 compared to $235.9 million for the
same period of 1999. Average outstanding financing was higher in 2000 because
the Medix acquisition took place in late July of 1999.
The company expects to continue to manage its financing costs by continuing its
working capital reduction initiatives and management of interest rate risks,
although the future results of these initiatives cannot be assured.
Nonrecurring restructuring credits. As a result of the Columbia/HCA contract
cancellation in the second quarter of 1998, the company recorded a nonrecurring
restructuring charge of $6.6 million, after taxes, to downsize operations. In
the second quarters of 2000 and 1999, the company re-evaluated its restructuring
reserve. Since the actions under this plan resulted in lower projected total
costs than originally anticipated, the company recorded reductions in the
reserve that increased net income by approximately $0.4 million in 2000 and $0.6
million in 1999, after taxes.
Income taxes. The income tax provision was $19.1 million for the first nine
months of 2000 compared with $15.0 million for the first nine months of 1999.
The effective tax rate was 45.0%, compared to 44.0% for the same period in 1999.
This rate increase results primarily from increases in certain nondeductible
expenses.
17
Net income. Net income increased to $8.5 million for the third quarter of 2000
from $7.1 million for the third quarter of 1999 and increased to $23.3 million
for the first nine months of 2000 from $19.1 million for the same period of
1999. Excluding the second quarter adjustments to the restructuring reserve,
net income increased to $22.9 million for the first nine months of 2000 from
$18.6 million for the same period of 1999. The increase is primarily due to the
increase in sales and success in controlling operating expenses through
productivity improvements.
Recent Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. In May 1999, the FASB delayed
the effective date of this standard by one year. In September 2000, the FASB
amended SFAS No. 133 with SFAS No. 138, Accounting for Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133. The company
will be required to adopt the provisions of these standards beginning on January
1, 2001. The effect of the adoption of these standards on O&M's results will
depend on the ability of the company's interest rate swaps to effectively hedge
the variability of future cash flows, as well as changes in interest rates
between now and the end of 2000. Management believes that based on current
interest rates, adoption of these standards will be limited primarily to balance
sheet presentation and is unlikely to have a material effect on the company's
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which
clarifies the application of generally accepted accounting principles to revenue
recognition in financial statements. The company will be required to adopt the
provisions of SAB No. 101 in the fourth quarter of 2000. Management believes
the adoption of SAB No. 101 will have no material effect on the company's
financial condition or results of operations.
In July 2000, the FASB Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue 00-10, Accounting for Shipping and Handling Fees and Costs. This
consensus requires that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenue and should be
classified as revenue. The company currently classifies amounts billed to
customers for shipping as a reduction of outbound freight costs in SG&A
expenses. O&M will be required to adopt the provisions of EITF Issue 00-10 in
the fourth quarter of 2000, and net sales and SG&A will be reclassified for
prior periods in the consolidated statements of income. As a result, net sales,
gross margin and total expenses will each be increased by approximately $8
million annually; however, net income and net income per common share will
remain unchanged.
Risks
The company is subject to risks associated with changes in the medical industry,
including continued efforts to control costs, which place pressure on operating
margin, and changes in the way medical and surgical services are delivered to
patients. The loss of one of the company's larger customers could have a
significant effect on its business. However, management believes that the
company's competitive position in the marketplace and its ability to control
costs would enable it to continue profitable operations and attract new
customers in the event of such a loss.
18
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, outcome of outstanding litigation and changes in
government regulations. Although O&M believes 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.
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 company's Annual Report on Form 10-K
for the year ended December 31, 1999.
19
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings pending against the company are described in the
company's Annual Report on Form 10-K for the year ended December 31, 1999.
Through September 30, 2000, there have been no material developments in any
legal proceedings reported in such Annual Report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the company during the quarter for
which this Quarterly Report is filed.
20
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 November 13, 2000
----------------- -------------------------------
Richard F. Bozard
Vice President & Treasurer
Acting Chief Financial Officer
Date November 13, 2000
----------------- ------------------------------
Olwen B. Cape
Vice President & Controller
Chief Accounting Officer
Exhibits Filed with SEC
-----------------------
Exhibit #
---------
27 Financial Data Schedule