SELECTED FINANCIAL DATA(1) (in thousands, except ratios and per share data)
Owens & Minor, Inc. and Subsidiaries
Year ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $2,976,486 $2,395,803 $1,396,971
Cost of sales 2,708,668 2,163,459 1,249,660
- ------------------------------------------------------------------------------------------------------------------------
Gross margin 267,818 232,344 147,311
Selling, general and administrative expenses 225,897 165,564 107,771
Depreciation and amortization 15,416 13,034 7,593
Interest expense, net 25,538 10,155 1,530
Discount on accounts receivable securitization 641 - -
Nonrecurring restructuring expenses (2) 16,734 29,594 -
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 284,226 218,347 116,894
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (16,408) 13,997 30,417
Income tax provision (benefit) (5,100) 6,078 11,900
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (11,308) 7,919 18,517
Discontinued operations - - 911
Cumulative effect of change in accounting principles - - 706
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) (11,308) 7,919 20,134
Dividends on preferred stock 5,175 3,309 -
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common stock $ (16,483) $ 4,610 $ 20,134
- ------------------------------------------------------------------------------------------------------------------------
Common Share Data:
Net income (loss) per common share:
Continuing operations $ (.53) $ .15 $ .60
Discontinued operations - - .03
Cumulative effect of change in accounting principles - - .02
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (.53) $ .15 $ .65
- ------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ .180 $ .170 $ .140
- ------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and common share equivalents 30,820 31,108 31,013
- ------------------------------------------------------------------------------------------------------------------------
Price range of common stock per share:
High $ 14.88 $ 18.13 $ 15.59
Low $ 11.63 $ 13.25 $ 8.42
- ------------------------------------------------------------------------------------------------------------------------
Selected Ratios of Continuing Operations:
Gross margin as a percent of net sales 9.0% 9.7% 10.5%
Selling, general and administrative expenses as a percent of net sales 7.6% 6.9% 7.7%
Average receivable days sales outstanding (3) 37.7 35.9 34.2
Average inventory turnover 8.3 8.8 11.5
Return on average total equity (4.6%) 3.7% 14.6%
Current ratio 2.1 1.8 2.0
- ------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 331,663 $ 281,788 $ 139,091
Total assets 857,803 868,560 334,322
Long-term debt 323,308 248,427 50,768
Capitalization ratio 57.9% 49.2% 27.1%
Shareholders' equity 235,271 256,176 136,943
Shareholders' equity per common share outstanding $ 3.90 4.59 $ 4.50
- ------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (1) (continued)
Year ended December 31, 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $1,177,298 $1,021,014 $916,709 $708,089
Cost of Sales 1,052,998 918,304 827,441 641,011
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Margin 124,300 102,710 89,268 67,078
- ---------------------------------------------------------------------------------------------------------------------------------
Selling, general and adminsitrative expenses 91,371 78,191 67,171 57,943
Depreciation and amortization 5,861 4,977 4,210 2,795
Interest expense, net 1,128 3,192 5,858 5,078
Discount on acounts receivable securitization - - - -
Nonrecurring restructuring expenses (2) - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total Expenses 98,360 86,360 77,239 65,816
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 25,940 16,350 12,029 1,262
Income tax provision (benefit) 10,505 6,681 4,634 628
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 15,435 9,669 7,395 634
Discontinued operations 5,687 2,358 1,380 1,855
Cumulative effect of change in accounting principals (730) - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 20,392 12,027 8,775 2,489
Dividends on preferred stock - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common stock $ 20,392 $ 12,027 $ 8,775 $ 2,489
- ---------------------------------------------------------------------------------------------------------------------------------
Common Share Data:
Net income (loss) per common share:
Continuing operations $ .52 $ .33 $ .26 $ .02
Discontinued operations .20 .08 .05 .07
Cumulative effect of change in accounting principals (.03) - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ .69 $ .41 $ .31 $ .09
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ .110 $ .088 $ .077 $ .077
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and common share equivalents 29,682 29,462 28,755 28,412
- ---------------------------------------------------------------------------------------------------------------------------------
Price range of common stock per share:
High $ 10.11 $ 10.78 $ 4.45 $ 4.71
Low $ 7.33 4.17 $ 3.19 $ 3.37
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Ratios of Continuing Operations:
Gross margin as a percent of net sales 10.6% 10.1% 9.7% 9.5%
Selling, general and administrative expenses as a percent of net sales 7.8% 7.7% 7.3% 8.2%
Average receivable days sales outstanding (3) 35.7 38.1 39.2 41.4
Average inventory turnover 11.4 11.1 10.8 8.5
Return on average total equity 14.4% 10.6% 9.1% .8%
Current ratio 1.8 1.9 1.9 2.4
- ---------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 99,826 $ 122,675 $ 117,983 $133,309
Total assets 274,540 311,786 290,233 258,683
Long-term debt 24,986 67,675 71,339 85,324
Capitalization ratio 17.6% 41.1% 45.6% 52.4%
Shareholders' equity 116,659 97,091 85,002 77,560
Shareholders' equity per common share outstanding $ 3.97 3.34 $ 2.99 $ 2.75
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (1) (continued)
Year ended December 31, 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $500,435 $367,034 $272,222 $199,294
Cost of Sales 445,456 326,651 239,170 171,099
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Margin 54,979 40,383 33,052 28,195
- ---------------------------------------------------------------------------------------------------------------------------------
Selling, general and adminsitrative expenses 42,668 31,302 26,204 23,196
Depreciation and amortization 2,416 1,922 1,319 1,050
Interest expense, net 2,230 2,006 1,789 1,303
Discount on acounts receivable securitization - - - -
Nonrecurring restructuring expenses (2) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total Expenses 47,314 35,230 29,312 25,549
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7,665 5,153 3,740 2,646
Income tax provision (benefit) 3,032 2,148 1,806 1,224
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 4,633 3,005 1,934 1,422
Discontinued operations 3,734 3,481 2,968 2,986
Cumulative effect of change in accounting principals - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 8,367 6,486 4,902 4,408
Dividends on preferred stock - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common stock $ 8,367 $ 6,486 $ 4,902 $ 4,408
- ---------------------------------------------------------------------------------------------------------------------------------
Common Share Data:
Net income (loss) per common share:
Continuing operations $ .16 $ .11 $ .07 $ .06
Discontinued operations .13 .12 .11 .12
Cumulative effect of change in accounting principals - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ .29 $ .23 $ .18 $ .18
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ .075 $ .065 $ .059 $ .053
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and common share equivalents 28,263 28,187 27,702 24,245
- ---------------------------------------------------------------------------------------------------------------------------------
Price range of common stock per share:
High $ 4.52 $ 4.37 $ 4.00 $ 3.61
Low $ 2.62 $ 2.32 $ 2.62 $ 1.75
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Ratios of Continuing Operations:
Gross margin as a percent of net sales 11.0% 11.0% 12.1% 14.1
Selling, general and administrative expenses as a percent of net sales 8.5% 8.5% 9.6% 11.6
Average receivable days sales outstanding (3) 41.0 41.0 40.6 45.9
Average inventory turnover 7.6 8.0 8.3 7.9
Return on average total equity 6.3% 5.4% 5.0% 4.2
Current ratio 2.7 2.8 2.7 2.6
- ---------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $106,545 $ 89,056 $ 71,317 $ 54,248
Total assets 189,916 154,390 126,779 96,825
Long-term debt 46,819 33,713 42,562 27,546
Capitalization ratio 37.8% 32.3% 51.0% 43.4
Shareholders' equity 77,170 70,761 40,878 35,914
Shareholders' equity per common share outstanding $ 2.75 $ 2.52 $ 2.05 $ 1.85
- ---------------------------------------------------------------------------------------------------------------------------------
(1) See Note 2 of Notes to Consolidated Financial Statements for a discussion of
acquisitions and divestitures that may affect comparability of data.
(2) The Company incurred $16.7 and $29.6 million in 1995 and 1994, respectively,
or $.33 and $.57, respectively, per common share, of nonrecurring
restructuring expenses related to its restructuring plans developed in
conjunction with its combination with Stuart Medical, Inc. See further
discussion in Note 3 of Notes to Consolidated Financial Statements.
(3) Excludes impact of off balance sheet receivables securitization agreement.
See further discussion in Note 7 of Notes to Consolidated Financial
Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Owens & Minor, Inc. and Subsidiaries
GENERAL
Owens & Minor, Inc. and subsidiaries (the Company or O&M) is one of the two
largest distributors of medical/surgical supplies in the United States. The
Company distributes approximately 300,000 finished medical/surgical products
produced by approximately 3,000 manufacturers to over 4,000 customers from 49
distribution centers nationwide. The Company's customers are primarily hospitals
and also include alternate care facilities, such as physicians' offices,
clinics, nursing homes and surgery centers. The majority of the Company's sales
consists of dressings, endoscopic products, intravenous products, needles and
syringes, sterile procedure trays, surgical products and gowns, sutures and
urological products.
In May 1994, the Company acquired Stuart Medical, Inc. (Stuart), then the
third largest distributor of medical/surgical supplies in the United States with
1993 pro forma net sales of approximately $934.0 million. In addition to
expanding its customer base, the Stuart acquisition significantly enhanced the
Company's distribution capabilities in the Northeastern and Midwestern regions
of the United States, thus strengthening the Company's national distribution
capabilities.
In conjunction with the Stuart acquisition, the Company implemented a
restructuring plan designed to eliminate duplicate costs and increase
efficiencies within the combined company. During 1994 and 1995, the Company
incurred approximately $42.8 million of nonrecurring restructuring expenses in
connection with the restructuring plan. These expenses were comprised primarily
of costs associated with eliminating, consolidating, relocating or expanding 12
distribution centers (which were specifically associated with the Stuart
acquisition), eliminating Stuart's headquarters operations, redesigning and
implementing processes to adopt the best practices and systems of O&M and Stuart
within the combined company and outsourcing the operation of the Company's
mainframe computer system. The implementation of the restructuring plan was
completed during the fourth quarter of 1995.
During 1995, the Company experienced a decline in profitability due to a
decrease in gross margin and an increase in selling, general and administrative
(SG&A) expenses as a percentage of net sales. The decline in the gross margin
percentage was primarily attributable to increased sales to larger accounts that
were offered reduced pricing in return for the expectation of increased volume.
To mitigate the decline in the gross margin percentage, the Company implemented
price increases in December 1995 and January 1996 that included both direct
price increases as well as the introduction of charges for certain enhanced
delivery and management services that were previously provided to certain
customers at no additional cost. These increases were implemented with the goal
of achieving an overall increase in the gross margin percentage equal to at
least one percent of net sales. Virtually all of the group purchasing
organizations representing the majority of the Company's customers have agreed
to the new price levels. The Company believes that sales growth from new
accounts and penetration of existing accounts will more than offset any business
lost as a result of the price increases, but such growth cannot be assured.
The increase in SG&A expenses as a percentage of net sales was primarily a
result of increased personnel costs caused by new contracts providing for
enhanced service levels and services not previously provided by the Company, a
significant increase in the number of SKUs distributed by the Company, system
conversions, opening or expanding 11 distribution centers and reconfiguring
warehouse systems. In an effort to reduce SG&A expenses, O&M is reducing
overtime and temporary employee costs, reducing distribution center costs
further through the closure of two and the downsizing of five distribution
centers, which resulted in $3.5 million of the Company's nonrecurring
restructuring charges in the fourth quarter of 1995, and improving inventory
management systems.
(Chart showing the Gross Margin as a % of Net Sales
vs SG&A as a % of Net Sales appears here)
1991 1992 1993 1994 1995
2.4% 2.8% 2.8% 2.8% 1.4%
(Chart showing the Number of Distribution Centers appears here)
1991 1992 1993 1994 1995
27 29 36 53 49
(Chart showing the Number of Facility Relocations,
Expansions, Closures and Openings appears here)
1991 1992 1993 1994 1995
6 8 10 12 22
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
NET SALES
Net sales increased 24.2% to $3.0 billion in 1995 from $2.4 billion in
1994. Assuming the Stuart acquisition had occurred January 1, 1994, the increase
would have been approximately 8.2% due to the additional sales volume from
contracts entered into in 1993 and 1994 with large healthcare providers, such as
Columbia/HCA Healthcare Corporation (Columbia/HCA), the largest investor owned
healthcare organization in the country, the United States Department of Defense
and AmHS/Premier/ SunHealth (Premier), a major group purchasing organization,
and price increases from manufacturers which are normally passed on to
customers.
GROSS MARGIN
Gross margin as a percentage of net sales declined to 9.0% in 1995 from
9.7% in 1994. The decrease was a result of the increase in sales to larger
accounts that were offered reduced pricing in return for the expectation of
increased volume. To address this issue, the Company has initiated several plans
to offset the gross margin percentage decline, including recent price increases
and the increasing utilization of an activity-based cost system designed to
identify costs associated with certain delivery and management services to
ensure that the Company charges its customers appropriately for incremental
services, such as more frequent deliveries and distribution of products in small
units of measure. Virtually all of the group purchasing organizations
representing the majority of the Company's customers have agreed to the new
price levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses as a percentage of net sales increased to 7.6% in 1995 from
6.9% in 1994. The increase in SG&A expenses as a percentage of net sales was
primarily a result of increased personnel costs caused by new contracts
providing for enhanced service levels and services not previously provided by
the Company, a significant increase in the number of SKUs distributed by the
Company, system conversions, opening or expanding 11 distribution centers and
reconfiguring warehouse systems. SG&A expenses as a percentage of net sales also
increased as a result of the Company's sales, marketing and operational efforts
designed to maintain the customer base of VHA Inc. (VHA), the second largest
national healthcare network, and the concentration of management's effort to
integrate the operations of Stuart. In an effort to reduce SG&A expenses, O&M is
implementing the following measures: (i) reduction of overtime and temporary
employee costs by improving productivity through performance tracking systems
and functional best practices training programs; (ii) further reduction of
distribution center costs through the closure of two and the downsizing of five
distribution centers, which resulted in $3.5 million of the Company's
nonrecurring restructuring charges in the fourth quarter of 1995; and (iii)
improvement of inventory management by completing the implementation of a new
inventory forecasting system, reconfiguring warehouse systems and limiting the
number of SKUs from multiple manufacturers distributed by the Company through
the standardization of products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by 18.3% in 1995 compared to 1994.
This increase was due primarily to the Company's continued investment in
improved information technology (IT) and the amortization of goodwill and
depreciation associated with the Stuart acquisition. The Company anticipates
similar increases in depreciation and amortization in 1996 associated with
additional capital investment in IT.
INTEREST EXPENSE, NET
Interest expense, net of finance charge income of $3.8 million and $2.0
million in 1995 and 1994, respectively, increased from $10.2 million in 1994 to
$25.5 million in 1995 primarily due to an increase in debt to finance the Stuart
acquisition, high inventory levels, the Company's restructuring plan and
technology initiatives, as well as due to higher interest rates. Finance charge
income represents payments from customers for past due balances on their
accounts. Management has taken action to reduce interest expense, by completing
the implementation of the Company's new inventory forecasting system in all
distribution centers by mid-1996, limiting the number of SKUs from multiple
manufacturers distributed by the Company and reducing its effective interest
rate through alternative financing such as the off balance sheet receivables
securitization, discussed in the liquidity section that follows.
NONRECURRING RESTRUCTURING EXPENSES
During 1995, the Company incurred $13.2 million of nonrecurring
restructuring expenses related to the Company's restructuring plan developed in
connection with the Stuart acquisition and its related decision to outsource the
management and operation of its mainframe computer system. This restructuring
plan was completed during the fourth quarter of 1995. Also during the fourth
quarter of 1995, the Company incurred additional nonrecurring restructuring
charges of $3.5 million associated with its decision to close or downsize seven
distribution centers in 1996.
(Chart showing Net Sales (in billions) appears here)
1991 1992 1993 1994 1995
$1.0 $1.2 $1.4 $2.4 $3.0
INCOME TAXES
The Company had an income tax provision of $6.1 million in 1994
(representing an effective tax rate of 43.4%), compared with an income tax
benefit of $5.1 million in 1995. A complete reconciliation of the statutory
income tax rate to the Company's effective income tax rate is provided in Note
11 of Notes to Consolidated Financial Statements.
NET INCOME (LOSS)
The Company incurred a net loss of $11.3 million in 1995 compared to net
income of $7.9 million in 1994. Excluding the nonrecurring restructuring
expenses and the related tax benefit, the Company incurred a net loss of $1.0
million in 1995. As previously discussed, the loss incurred during 1995 was due
to the combination of a decline in gross margin percentage, an increase in SG&A
expenses and an increase in interest expense. Although the initiatives
previously discussed have been undertaken in an effort to improve the earnings
of the Company, their impact cannot be assured.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
NET SALES
Net sales increased 71.5% to $2.4 billion in 1994 from $1.4 billion in
1993. Assuming the Stuart acquisition occurred January 1, 1993, the increase
would have been approximately 16.6%. The 16.6% increase was due primarily to new
contracts with large healthcare providers, such as Columbia/HCA, the United
States Department of Defense and Premier; a new distribution agreement with VHA,
the Company's largest contract, which provided incentives to member hospitals to
increase purchases from the Company; and the continued product line expansion by
the Company. Sales under the VHA agreement grew to approximately $959.0 million,
or 40.0% of net sales, in 1994 from approximately $459.6 million, or 32.9% of
net sales, in 1993.
GROSS MARGIN
Gross margin as a percentage of net sales decreased to 9.7% in 1994 from
10.5% in 1993. The decrease was a result of the sales increases from large lower
margin contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses decreased to 6.9% of net sales in 1994 from 7.7% in 1993.
This decrease was primarily the result of the initial synergies obtained from
the Stuart acquisition and the sales volume increases from large customers, such
as VHA, Columbia/HCA and Premier.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by 71.7% in 1994 as compared to
1993, due primarily to the additional goodwill amortization and depreciation
expenses related to the Stuart acquisition and the depreciation of the Company's
continued investment in new and improved IT.
INTEREST EXPENSE, NET
Interest expense, net of finance charge income of $2.0 million, increased
$8.6 million to $10.2 million in 1994. The increase was due primarily to the
debt increase related to the Stuart acquisition and the increase in the
Company's average interest rate on its variable rate Senior Credit Facility from
3.8% in 1993 to 5.6% in 1994. The rate increase was due to the overall rate
increases in the lending markets. During 1994, the Company entered into interest
rate swap and cap agreements to fix the interest rate on a portion of the Senior
Credit Facility.
NONRECURRING RESTRUCTURING EXPENSES
As a result of the Stuart acquisition and the Company's related decision to
outsource the operation of its mainframe computer system, the Company
implemented a restructuring plan. The plan was designed to eliminate duplicate
costs within the Company by closing overlapping facilities and redesigning
ineffective processes. During 1994, the Company incurred approximately $29.6
million of nonrecurring expenses related to the plan. These expenses were
comprised primarily of duplicate facility costs (approximately $15.2 million),
costs associated with redesigning and implementing operating processes to
increase efficiencies within the combined company (approximately $7.1 million)
and costs associated with the contracting out of the Company's mainframe
computer operations (approximately $7.3 million).
INCOME TAXES
The effective tax rate increased by 4.3 percentage points to 43.4% in 1994,
due primarily to the non-deductible goodwill arising out of the Stuart
acquisition. A complete reconciliation of the statutory income tax rate to the
Company's effective income tax rate is provided in Note 11 of Notes to
Consolidated Financial Statements.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations decreased by $10.6 million due to the
nonrecurring restructuring expenses previously discussed. Excluding these
expenses, the Company's income from continuing operations increased by $7.3
million or 39.3%.
FINANCIAL CONDITION
LIQUIDITY
During 1995, several factors unfavorably impacted the Company's liquidity,
including (i) increased working capital requirements, (ii) decreased earnings,
(iii) restructuring expenses and (iv) increased capital expenditures. The
Company funded a majority of these cash requirements through bank borrowings
under the Senior Credit Facility; consequently, the Company's capitalization
ratio increased to 57.9% at December 31, 1995 from 49.2% at December 31, 1994.
At December 31, 1995, the Company had approximately $111.7 million of unused
credit under the Senior Credit Facility.
On December 28, 1995, the Company entered into a Receivables Financing
Facility to diversify its financing sources and to reduce its cost of funds.
Pursuant to the Receivables Financing Facility, O&M Funding Corp. (OMF), a
special-purpose, wholly owned, non-operating subsidiary of the Company, is
entitled to receive up to $75.0 million from an unrelated third party purchaser
for consideration that reflects a cost of funds at commercial paper rates plus a
charge for administrative and credit support services. As of December 31, 1995,
the Company had received approximately $59.3 million under the Receivables
Financing Facility, the proceeds of which were used to reduce amounts
outstanding under the Senior Credit Facility. The Company believes that the
Senior Credit Facility will provide the Company with adequate financing
resources through the expiration of the Facility in 1999.
During 1995 and early 1996, the Company sought and obtained waivers of
non-compliance with, and amendments to, certain financial covenants included in
the Senior Credit Facility. Prior to the Company's obtaining waivers, such
non-compliance also could have prevented further use by the Company of the
Receivables Financing Facility and certain interest rate swap and cap
agreements. There can be no assurance that in the future the Company will not be
required to seek waivers of non-compliance or amendments to the Senior Credit
Facility or other credit agreements in effect from time to time or, if it is
required to do so, that it will be able to obtain such waivers.
WORKING CAPITAL MANAGEMENT
The Company's working capital turnover declined to 9.7 times in 1995 from
11.6 in 1994. The increase in days sales outstanding to 37.7 days in 1995
(excluding the impact of the Receivables Financing Facility) from 35.9 in 1994
and decrease in inventory turnover to 8.3 times in 1995 from 8.8 in 1994 were
the result of increased service levels, increases in the number of SKUs carried
by the Company, new customers, rationalization of distribution centers and the
development and implementation of new computer systems. The decrease in accounts
payable to $241.0 million in 1995 from $296.9 million in 1994 was primarily due
to successfully negotiated favorable discount terms with vendors, which provide
enhanced gross margin, but shorten payment terms, and to the timing of
purchasing patterns.
Subsequent to the completion of the restructuring plan related to the
Stuart acquisition in the fourth quarter of 1995, the Company refocused its
efforts on working capital management. In an effort to reduce inventory levels,
the Company plans on completing the implementation of its client/server-based
forecasting system by the middle of 1996 and limiting the number of SKUs from
multiple manufacturers distributed by the Company. In an effort to reduce
accounts receivable levels the Company has strengthened its methods of
monitoring and enforcing contract payment terms and has tied a portion of its
new salesforce incentive program to reducing days sales outstanding.
CAPITAL EXPENDITURES
Capital expenditures were approximately $21.3 million in 1995, of which
approximately $12.7 million was for computer systems, including the continued
conversion from a mainframe computer system to a client/server, local area
network system, and approximately $5.6 million was for warehousing equipment.
The Company expects capital expenditures to continue at this level in 1996 as it
continues system conversions. These capital expenditures are expected to be
funded through cash flow from operations.
(Chart showing Working Capital Turnover
vs Capitalization Ratio appears here)
1991 1992 1993 1994 1995
Working Capital Turnover 12.0 12.5 11.5 11.6 9.7
Capitalization Ratio 41% 18% 27% 49% 58%
INFLATION AND CHANGING PRICES
Inflation has not had a significant effect on the Company's results of
operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, in October 1995. SFAS 123 prescribes accounting and reporting
standards for all stock-based compensation plans. The new standard allows
companies to continue to follow present accounting rules which often result in
no compensation expense being recorded or to adopt the SFAS 123 fair-value-based
method. The fair-value-based method will generally result in higher compensation
expense based on the estimated fair value of stock-based awards on the grant
date. Companies electing to continue following present accounting rules will be
required to provide pro forma disclosures of net income and earnings per share
as if the fair-value-based method had been adopted. The Company intends to
continue following present accounting rules and to implement the new disclosure
requirements in 1996 as required. The adoption of SFAS 123, therefore, will not
impact the financial condition and results of operations of the Company.
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Owens & Minor, Inc. and Subsidiaries
Year ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $2,976,486 $2,395,803 $1,396,971
Cost of sales 2,708,668 2,163,459 1,249,660
- ---------------------------------------------------------------------------------------------------------------------------
Gross margin 267,818 232,344 147,311
Selling, general and administrative expenses 225,897 165,564 107,771
Depreciation and amortization 15,416 13,034 7,593
Interest expense, net 25,538 10,155 1,530
Discount on accounts receivable securitization 641 - -
Nonrecurring restructuring expenses 16,734 29,594 -
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 284,226 218,347 116,894
Income (loss) before income taxes (16,408) 13,997 30,417
Income tax provision (benefit) (5,100) 6,078 11,900
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (11,308) 7,919 18,517
Discontinued operations - - 911
Cumulative effect of change in accounting principle - - 706
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) (11,308) 7,919 20,134
Dividends on preferred stock 5,175 3,309 -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common stock $ (16,483) $ 4,610 $ 20,134
Net income (loss) per common share:
Continuing operations $ (.53) $ .15 $ .60
Discontinued operations - - .03
Cumulative effect of change in accounting principle - - .02
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (.53) $ .15 $ .65
Cash dividends per common share $ .18 $ .17 $ .14
Weighted average common shares and common
share equivalents 30,820 31,108 31,013
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
Owens & Minor, Inc. and Subsidiaries
December 31, 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 215 $ 513
Accounts and notes receivable, net of allowance of $6,010 in 1995
and $5,340 in 1994 265,238 290,240
Merchandise inventories 326,380 323,851
Other current assets 32,069 26,222
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 623,902 640,826
Property and equipment, net 39,049 38,620
Excess of purchase price over net assets acquired, net 171,911 175,956
Other assets, net 22,941 13,158
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $857,803 $868,560
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 4,055 $ 236
Accounts payable 241,048 296,878
Accrued payroll and related liabilities 5,534 11,294
Other accrued liabilities 41,602 50,630
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 292,239 359,038
Long-term debt 323,308 248,427
Accrued pension and retirement plans 6,985 4,919
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 622,532 612,384
- ---------------------------------------------------------------------------------------------------------------------------
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 - 1,150 shares 115,000 115,000
Common stock, par value $2 per share; authorized - 200,000 shares;
issued - 30,862 shares in 1995 and 30,764 shares in 1994 61,724 61,528
Paid-in capital 2,144 1,207
Retained earnings 56,403 78,441
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 235,271 256,176
Total Liabilities and Shareholders' Equity $857,803 $868,560
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Owens & Minor, Inc. and Subsidiaries
Year ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $(11,308) $ 7,919 $ 20,134
Noncash charges (credits) to income
Depreciation and amortization 15,416 13,034 7,593
Provision for losses on accounts and notes receivable 827 1,149 497
Provision for LIFO reserve 3,700 671 661
Gain on disposals of business segments, net - - (911)
Cumulative effect of change in accounting principle - - (706)
Other, net 2,581 1,093 897
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by net income (loss) and noncash charges 11,216 23,866 28,165
Changes in operating assets and liabilities,
net of effects from acquisitions
Accounts and notes receivable 24,175 (144,917) (23,424)
Merchandise inventories (6,229) (81,318) (28,232)
Accounts payable (17,107) 22,375 13,307
Net change in other current assets and current liabilities (18,753) 25,323 (258)
Other, net (4,732) 790 431
- ---------------------------------------------------------------------------------------------------------------------------
Cash used for operating activities (11,430) (153,881) (10,011)
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Business acquisitions, net of cash acquired - (40,608) (2,416)
Additions to property and equipment (13,876) (6,634) (6,288)
Additions to computer software (7,396) (1,586) (3,453)
Other, net 3,597 73 76
- ---------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (17,675) (48,755) (12,081)
Financing Activities
Additions to long-term debt 77,970 197,088 37,000
Reductions of long-term debt (242) (55,032) (17,471)
Other short-term financing, net (38,723) 65,426 765
Cash dividends paid (10,730) (7,664) (4,222)
Exercise of options 532 1,283 1,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 28,807 201,101 17,072
Net decrease in cash and cash equivalents (298) (1,535) (5,020)
Cash and cash equivalents at beginning of year 513 2,048 7,068
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 215 $ 513 $ 2,048
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except ratios and per share data)
Owens & Minor, Inc. and Subsidiaries
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
Owens & Minor, Inc. and subsidiaries (the Company) is one of the two largest
distributors of medical/surgical supplies in the United States. The consolidated
financial statements include the accounts of Owens & Minor, Inc. and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated. The preparation of the consolidated financial statements in
accordance with generally accepted accounting principles requires management
assumptions and estimates that affect amounts reported. Actual results may
differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and marketable securities with an
original maturity of three months or less. Cash and cash equivalents are stated
at cost, which approximates market value.
Merchandise Inventories
As of December 31, 1995, the Company's merchandise inventories were
valued on a last-in, first-out (LIFO) basis. At December 31, 1994, 64% of the
Company's inventories was valued on a LIFO basis with the remainder valued on
a first-in first-out (FIFO) basis.
Property and Equipment
Property and equipment are stated at cost or, if acquired under capital
leases, at the lower of the present value of minimum lease payments or fair
market value at the inception of the lease. Normal maintenance and repairs are
expensed as incurred, and renovations and betterments are capitalized.
Depreciation and amortization are provided for financial reporting purposes on
the straight-line method over the estimated useful lives of the assets or, for
capital leases and leasehold improvements, over the terms of the lease, if
shorter. In general, the estimated useful lives for computing depreciation and
amortization are: 40 years for buildings and improvements; 4 to 8 years for
warehouse equipment; and 3 to 8 years for computer, office and other equipment.
Accelerated methods of depreciation are used for income tax purposes.
Excess of Purchase Price Over Net Assets
Acquired The excess of purchase price over net assets acquired (goodwill) is
amortized on a straight-line basis over 40 years from the dates of
acquisition. As of December 31, 1995 and 1994, goodwill was $181,118 and
$180,615, respectively, and the related accumulated goodwill amortization
was $9,207 and $4,659, respectively. Based upon management's assessment of
future cash flows of acquired businesses, the carrying value of goodwill at
December 31, 1995 has not been impaired. The assessment of the
recoverability of goodwill will be impacted if estimated future cash flows are
not achieved.
Computer Software
Computer software purchased in connection with major system development is
capitalized. Additionally, certain software development costs are
capitalized when incurred and when technological feasibility has been
established. Amortization of all capitalized software costs is computed on a
product-by-product basis over the estimated economic life of the product from
3 to 5 years. Computer software costs are included in other assets, net, in
the Consolidated Balance Sheets.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing the net income
(loss) attributable to common stock by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. The
convertible preferred stock is considered a common stock equivalent; however, it
has been excluded from the number of weighted average shares due to the dilutive
effect of the preferred dividend. The assumed conversion of all convertible
debentures has not been included in the computation because the resulting
dilution is not material.
Derivative Financial Instruments
The Company enters into interest rate swap and cap agreements to manage
interest rate risk of variable rate debt and not for trading purposes.
The differences paid or received on the interest rate swaps and the
amortization of the cap fees are included in interest expense.
Reclassifications
Certain amounts in prior years' consolidated financial statements and related
notes have been reclassified to conform to the 1995 presentation.
Note 2 - Business Acquisitions and Divestitures
On May 10, 1994, the Company paid $40,200 and exchanged 1,150 shares of
4.5%, $100 par value, Series B Cumulative Preferred Stock for all the capital
stock of Stuart Medical, Inc. (Stuart), a distributor of medical/surgical
supplies. The Series B Cumulative Preferred Stock is convertible into
approximately 7,000 shares of common stock. The transaction was accounted for as
a purchase and, accordingly, the operating results of Stuart have been included
in the Company's consolidated operating results since May 1, 1994. The purchase
price exceeded the net assets acquired by approximately $159,000, which is being
amortized on a straight-line basis over 40 years.
The following unaudited pro forma results of operations for the years ended
December 31, 1994 and 1993 assume the Stuart acquisition occurred January 1,
1993. The amounts reflect adjustments, such as increased interest expense on
acquisition debt, amortization of the excess of purchase price over net assets
acquired, reversal of nonrecurring restructuring expenses and related income tax
effects.
Year ended December 31, 1994 1993
- --------------------------------------------------------------------------------
Net sales $2,718,000 $2,331,000
Net income $ 28,100 $ 24,200
Net income per common share $ .74 $ .62
- --------------------------------------------------------------------------------
The pro forma results are not necessarily indicative of what actually would
have occurred if the Stuart acquisition had been in effect for the entire years
presented. In addition, they are not intended to be a projection of future
results. As part of the Stuart acquisition, the Company initiated a plan to
close certain facilities and terminate certain employees of the former Stuart
operations. The costs of this plan were included as a liability assumed from the
acquisition and included in the allocation of the purchase price. During 1995,
the Company incurred substantially all of the costs of exiting the former Stuart
operations and charged approximately $6,500 against established acquisition
liabilities.
On October 1, 1994, the Company acquired substantially all the assets of
Emery Medical Supply, Inc. (Emery) of Denver, Colorado for cash. The acquisition
was accounted for as a purchase with the results of Emery included from the
acquisition date. Pro forma results of this acquisition, assuming it had been
made at the beginning of the year, would not be materially different from the
results reported.
In 1993, the Company issued shares of its common stock for all the
outstanding common stock of Lyons Physician Supply Company (Lyons) of
Youngstown, Ohio. This merger has been accounted for as a pooling of interests,
and the Company's 1993 consolidated financial statements include the activity of
Lyons as of January 1, 1993. Also in 1993, the Company acquired all the
outstanding common stock of A. Kuhlman & Co. (Kuhlman) of Detroit, Michigan. The
acquisition was accounted for as a purchase with the results of Kuhlman included
from the acquisition date. The cost of the acquisition was approximately $2,900
and exceeded the net assets acquired by approximately $1,700. Pro forma results
of this acquisition, assuming it had been made at the beginning of the year,
would not be materially different from the results reported.
The Company periodically re-evaluates the adequacy of its accruals
associated with the 1992 discontinued operations related to its wholesale drug
and specialty packaging segments. Accordingly, in 1993, the Company decreased
its loss provision for discontinued operations by $911, net of taxes, based on
settlement of previously established liabilities and changes in prior estimates
of expenses.
Note 3 - Nonrecurring Restructuring Expenses
During 1995 and 1994, the Company incurred $16,734 and $29,594,
respectively, of nonrecurring restructuring expenses related to two
restructuring plans. Under the first plan, the Company incurred $13,189 and
$29,594 in 1995 and 1994, respectively, of nonrecurring restructuring expenses
in connection with the Stuart acquisition and the Company's related decision to
contract out the management and operation of its mainframe computer system.
These expenses were comprised primarily of duplicate facility costs
(approximately $9,300 and $15,200 in 1995 and 1994, respectively) costs
associated with redesigning and implementing operating processes to increase
efficiencies within the combined company (approximately $3,900 and $7,100 in
1995 and 1994, respectively) and costs associated with the contracting out of
the Company`s mainframe computer operations (approximately $7,300 in 1994). The
nonrecurring expenses include non-cash asset write-downs of approximately $3,200
in 1994 and accrued liabilities of $1,418 and $2,100 at December 31, 1995 and
1994, respectively.
Under the second plan, which was implemented in December 1995, the Company
incurred $3,545 of nonrecurring restructuring expenses in connection with the
closing of two distribution centers and the downsizing of five distribution
centers. These expenses were comprised primarily of costs associated with a
reduction of employees (approximately $1,700), the write-down of non-cash assets
(approximately $900) and other related exit costs (approximately $900). At
December 31, 1995, the associated accrued liability balance was $2,631.
Note 4 - Merchandise Inventories
As of December 31, 1995, all of the Company's merchandise inventories were
valued on a last-in, first-out (LIFO) basis. If LIFO inventories had been valued
on a current cost, or first-in, first-out (FIFO) basis, they would have been
greater by $21,991, $18,291 and $17,620 in 1995, 1994 and 1993, respectively.
Note 5 - Property and Equipment
The Company's investment in property and equipment consists of the
following:
December 31, 1995 1994
- --------------------------------------------------------------------------------
Warehouse equipment $22,489 $17,375
Computer equipment 19,056 14,056
Office equipment and other 11,138 10,234
Land and buildings 9,891 13,589
Leasehold improvements 7,100 6,891
- --------------------------------------------------------------------------------
69,674 62,145
Less: Accumulated depreciation and amortization (30,625) (23,525)
- --------------------------------------------------------------------------------
Property and equipment, net $39,049 $38,620
- --------------------------------------------------------------------------------
Depreciation expense for property and equipment for 1995, 1994 and 1993 was
$8,523, $7,704 and $6,368, respectively.
Note 6 - Accounts Payable
Accounts payable balances were $241,048 and $296,878 as of December 31,
1995 and 1994, respectively, of which $192,742 and $209,849, respectively, were
trade accounts payable and $48,306 and $87,029, respectively, were drafts
payable.
Note 7 - Long-Term Debt and Refinancing
The Company's long-term debt consists of the following:
December 31, 1995 1994
- ----------------------------------------------------------------------------
Revolving credit notes under
Senior Credit Agreement $313,300 $235,300
0% Subordinated Note 10,008 9,067
Convertible Subordinated Debenture 3,333 3,333
Other 722 963
- ----------------------------------------------------------------------------
327,363 248,663
Current maturities (4,055) (236)
- ----------------------------------------------------------------------------
Long-term debt $323,308 $248,427
Concurrently with the Stuart acquisition in 1994, the Company entered into
a $350,000 Senior Credit Agreement with interest based on, at the Company's
discretion, the London Interbank Offering Rate (LIBOR) or the Prime Rate. The
proceeds were used to fund the $40,200 cash paid in the acquisition, repay
certain long-term indebtedness of Stuart and fund working capital requirements.
On February 28, 1995, the Senior Credit Agreement was amended to provide an
increase in principal amount up to $425,000. The proceeds from the increase were
used primarily to fund the Company's working capital and capital expenditure
needs. Under certain provisions of the Senior Credit Agreement, the Company is
required to maintain tangible net worth, liquidity and cash flow at specified
levels. The Senior Credit Agreement also limits the amount of indebtedness the
Company may incur. The Senior Credit Agreement expires in April 1999. In October
1995 and in the first quarter of 1996, the Company sought and obtained waivers
of non-compliance with, and amendments to, certain financial covenants included
in the Senior Credit Agreement.
During 1995 and 1994, the Company entered into interest rate swap and cap
agreements to reduce the potential impact of increases in interest rates under
the Senior Credit Agreement. Under the swap agreements, the Company pays the
counterparties a fixed interest rate, ranging from 6.35%-7.72%, and the
counterparties pay the Company interest at a variable rate based on either the
three-month or the six-month LIBOR. The differences paid or received on the
interest rate swaps and the amortization of the cap fees are included in
interest expense. The total notional amount of the interest rate swaps was
$105,000 at December 31, 1995 and $55,000 at December 31, 1994, and the term of
the agreements ranged from two to three years. Under the interest rate cap
agreements, the Company receives from the counterparties amounts by which the
three-month LIBOR exceeds 6.5% based on the notional amounts of the cap
agreements which totaled $20,000 at December 31, 1995 and 1994. The term of
these agreements is two years. The Company is exposed to certain losses in the
event of nonperformance by the counterparties to these agreements. However, the
Company's exposure is not material and nonperformance is not anticipated. Based
on estimates of the prices obtained from a dealer at which the interest rate
swap and cap agreements could be settled, the Company had unrealized losses of
approximately $2,984 and $48, respectively, as of December 31, 1995, and
unrealized gains of approximately $1,547 and $266, respectively, as of December
31, 1994.
On May 31, 1989, the Company issued an $11,500, 0% Subordinated Note and a
$3,500, 6.5% Convertible Subordinated Debenture to partially finance the
acquisition of National Healthcare and Hospital Supply Corporation. The 0%
Subordinated Note due May 31, 1997 was discounted for financial reporting
purposes at an effective rate of 10.4% to $5,215 on the date of issuance. In
1994, the 6.5% Convertible Subordinated Debenture was exchanged for a $3,333,
9.1% Convertible Subordinated Debenture due May 1996 which is convertible into
approximately 867 common shares. The Company can redeem all or any portion of
the convertible debenture without penalty.
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, except for the convertible debenture
which is valued at book value because the conversion price was substantially
below the current market price, the fair value of long-term debt, including
current maturities, was approximately $327,977 as of December 31, 1995.
On December 28, 1995, the Company entered into a Receivables Financing
Facility (Receivables Financing) pursuant to which a subsidiary of the Company
is entitled to receive up to $75,000 from an unrelated third party purchaser at
a cost of funds at commercial paper rates plus a charge for administrative and
credit support services. As of December 31, 1995, the Company had received
approximately $59,300 under the Receivables Financing, the proceeds of which
were used to reduce amounts outstanding under the Senior Credit Agreement. Prior
to the Company's obtaining waivers in the first quarter of 1996 related to the
Company's non-compliance with certain Senior Credit Agreement covenants, such
non-compliance could have prevented further use by the Company of the
Receivables Financing and certain interest rate swap and cap agreements.
Net interest expense includes finance charge income of $3,800, $2,000 and
$1,400 in 1995, 1994, and 1993 respectively. Finance charge income represents
payments from customers for past due balances on their accounts. Cash payments
for interest during 1995, 1994 and 1993 were $28,955, $9,831 and $2,341,
respectively.
Maturities of long-term debt for the five years subsequent to 1995 are:
1996 - $4,055; 1997 - $10,008; 1998 - $0; 1999 - $313,300; and 2000 - $0.
Note 8 - Retirement Plans
Pension and Retirement Plan
The Company has a noncontributory pension plan covering substantially all
employees. Employees become participants in the plan after one year of service
and attainment of age 21. Pension benefits are based on years of service and
average compensation. The amount funded for this plan is not less than the
minimum required under federal law nor more than the amount deductible for
federal income tax purposes. Plan assets consist primarily of equity securities,
including 34 shares as of December 31, 1995 of the Company's common stock, and
U.S. Government securities.
The Company also has a noncontributory, unfunded retirement plan for
certain officers and other key employees. Benefits are based on a percentage of
the employees' compensation. The Company maintains life insurance policies on
plan participants to act as a financing source for the plan.
The following table sets forth the plans' financial status and the amounts
recognized in the Company's Consolidated Balance Sheets:
Pension Plan Retirement Plan
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligations
Vested $(15,092) $(12,302) $(1,256) $(1,195)
Non-vested (1,580) (939) (1,384) (1,018)
- ---------------------------------------------------------------------------------------------------------------------------
Total accumulated benefit obligations (16,672) (13,241) (2,640) (2,213)
Additional amounts related to projected salary increases (2,298) (1,446) (1,937) (1,366)
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligations for service rendered to date (18,970) (14,687) (4,577) (3,579)
Plan assets at fair market value 14,741 12,696 - -
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets under projected benefit obligations (4,229) (1,991) (4,577) (3,579)
Unrecognized net loss from past experience 1,793 1,058 1,702 1,108
Unrecognized prior service cost (benefit) 334 407 (20) (22)
Unrecognized net (asset) obligation being recognized
over 11 and 17 years, respectively (107) (214) 287 328
Adjustment required to recognize minimum liability
under SFAS 87 - - (31) (49)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued pension liability $ (2,209) $ (740) $(2,639) $(2,214)
The components of net periodic pension cost for both plans are as follows:
Year ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Service cost-benefits earned during the year $1,865 $1,314 $1,146
Interest cost on projected benefit obligations 1,425 1,232 1,056
Actual (return) loss on plan assets (2,521) 436 (1,450)
Net amortization and deferral 1,470 (1,462) 453
- --------------------------------------------------------------------------------
Net periodic pension cost $2,239 $1,520 $1,205
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were assumed to be 7.5% and 5.5% for 1995,
respectively, and 8.0% and 5.5% for 1994, respectively. The expected long-term
rate of return on plan assets was 8.5% for both 1995 and 1994.
Other Retirement Benefits
Substantially all employees of the Company may become eligible for certain
medical benefits if they remain employed until retirement age and fulfill other
eligibility requirements specified by the plan. The plan is unfunded and is
contributory with retiree contributions adjusted annually.
The following table sets forth the plan's financial status and the amount
recognized in the Company's Consolidated Balance Sheets:
December 31, 1995 1994
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ (329) $ (246)
Fully eligible active plan participants (837) (590)
Other active plan participants (919) (1,391)
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation (2,085) (2,227)
Unrecognized net (gain) loss from past experience (52) 262
- -------------------------------------------------------------------------------
Accrued postretirement benefit liability $(2,137) $(1,965)
- -------------------------------------------------------------------------------
The components of net periodic postretirement benefit cost are as follows:
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Service cost-benefits earned during the year $275 $206 $142
Interest cost on accumulated postretirement
benefit obligation 152 160 122
Net amortization (120) 6 -
- -------------------------------------------------------------------------------
Net periodic postretirement benefit cost $307 $372 $264
- -------------------------------------------------------------------------------
For measurement purposes, a 12.0% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for 1995; the rate was assumed
to decrease gradually to 6.0% for the year 2001 and remain at that level
thereafter. The healthcare cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed healthcare cost
trend rate by 1 percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $139 and the
aggregate of the service cost and interest cost components of net periodic
postretirement benefit cost for the year then ended by $42. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% for 1995 and 8.0% for 1994.
The Company maintains a voluntary Savings and Protection Plan covering
substantially all full-time employees who have completed six months of service
and have attained age 18. The Company matches a certain percentage of each
employee's contribution. The Company incurred approximately $1,100 and $700 in
1995 and 1994, respectively, of expenses related to this plan.
Note 9 - Shareholders' Equity
On May 10, 1994, the Company issued 1,150 shares of Series B preferred
stock as part of the Stuart acquisition. Each share of preferred stock has an
annual dividend of $4.50, payable quarterly, has voting rights on items
submitted to a vote of the holders of common stock, is convertible into
approximately 6.1 shares of common stock at the shareholders' option and is
redeemable by the Company after April 1997 at a price of $100.
The changes in common stock, paid-in capital and retained earnings are
shown as follows:
Common
Shares Common Paid-in Retained
Outstanding Stock Capital Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1992 19,596 $39,191 $8,007 $69,461 $116,659
Common stock issued for incentive plan 31 62 387 - 449
Proceeds from exercised stock options,
including tax benefits realized of $495 119 239 1,256 - 1,495
Net income - - - 20,134 20,134
Common stock cash dividends ($.14 per share) - - - (4,222) (4,222)
Acquisition related payout 63 126 797 - 923
Pooling of interests with Lyons Physician
Supply Co. 476 951 (1,189) 1,743 1,505
- ---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 20,285 40,569 9,258 87,116 136,943
Stock split (three-for-two) 10,203 20,407 (12,343) (8,064) -
Common stock issued for incentive plan 24 48 515 - 563
Proceeds from exercised stock options,
including tax benefits realized of $761 189 379 1,665 - 2,044
Net income - - - 7,919 7,919
Common stock cash dividends ($.17 per share) - - - (5,221) (5,221)
Preferred stock cash dividends ($4.50 per share) - - - (3,309) (3,309)
Acquisition related payout 63 125 2,112 - 2,237
- ---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 30,764 61,528 1,207 78,441 141,176
Common stock issued for incentive plan 34 68 416 - 484
Proceeds from exercised stock options,
including tax benefits realized of $117 64 128 521 - 649
Net loss - - - (11,308) (11,308)
Common stock cash dividends ($.18 per share) - - - (5,555) (5,555)
Preferred stock cash dividends ($4.50 per share) - - - (5,175) (5,175)
- ---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 30,862 $61,724 $2,144 $56,403 $120,271
A 3-for-2 stock split was distributed on June 8, 1994 to shareholders of
record as of May 24, 1994.
The Company has a shareholder rights agreement under which 8/27ths of a
Right is attendant to each outstanding share of common stock of the Company.
Each full Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Participating Cumulative Preferred
Stock (the Series A Preferred Stock), at an exercise price of $75 (the
Purchase Price). The Rights will become exercisable, if not earlier redeemed,
only if a person or group acquires 20% or more of the outstanding shares of the
common stock or announces a tender offer, the consummation of which would
result in ownership by a person or group of 20% or more of such outstanding
shares. Each holder of a Right, upon the occurrence of certain events, will
become entitled to receive, upon exercise and payment of the Purchase Price,
Series A Preferred Stock (or in certain circumstances, cash, property or other
securities of the Company or a potential acquirer) having a value equal to
twice the amount of the Purchase Price. The Rights will expire on April 30,
2004, if not earlier redeemed.
Note 10 - Stock Option Plans
Under the terms of the Company's stock option plans, 3,168 shares of common
stock have been reserved for future issuance at December 31, 1995. Options may
be designated as either Incentive Stock Options (ISOs) or non-qualified stock
options. Options granted under the plans have an exercise price equal to the
fair market value of the stock on the date of grant and can be exercised up to
ten years from date of grant. As of December 31, 1995, there were 1,745
non-qualified and no ISOs issued and outstanding under the plans.
The changes in shares under outstanding options for each of the years in
the three-year period ended December 31, 1995 are as follows:
Shares Grant Price
- -----------------------------------------------------------------------------
Year ended December 31, 1995
Outstanding at beginning of year 1,742 $ 3.55-16.50
Granted 221 12.50-13.56
Exercised (64) 3.55- 9.33
Expired/cancelled (154) 8.33-16.50
- -----------------------------------------------------------------------------
Outstanding at end of year 1,745 $ 5.59-16.50
Exercisable 978
Shares available for additional grants 1,423
Year ended December 31, 1994
Outstanding at beginning of year 1,031 $ 3.55- 9.83
Granted 953 14.92-16.50
Exercised (227) 3.55- 9.83
Expired/cancelled (15) 8.33-15.42
- -----------------------------------------------------------------------------
Outstanding at end of year 1,742 $ 3.55-16.50
Exercisable 545
Shares available for additional grants 1,605
Year ended December 31, 1993
Outstanding at beginning of year 855 $ 3.53- 9.33
Granted 425 8.59- 9.83
Exercised (181) 3.53- 9.33
Expired/cancelled (68) 3.55- 9.33
- -----------------------------------------------------------------------------
Outstanding at end of year 1,031 $ 3.55- 9.83
Exercisable 443
Shares available for additional grants 2,545
Stock Appreciation Rights (SARs) may be granted in conjunction with any
option granted under the plans, and to the extent either is exercised, the other
is cancelled. SARs are payable in cash, common stock or a combination of both,
equal to the appreciation of the underlying shares from the date of grant to
date of exercise, and may be exercised from one up to ten years from date of
grant. As of December 31, 1995, there were no SARs issued and outstanding.
Note 11 - Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, as of January 1, 1993. The cumulative effect of
this change in accounting for income taxes was a favorable adjustment of $706
and is reported separately in the Consolidated Statement of Operations for the
year ended December 31, 1993.
The income tax provision (benefit) for continuing operations consists of
the following:
Year ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
Current tax provision (benefit)
Federal $(13,009) $ 6,663 $10,405
State (172) 1,635 2,123
- ----------------------------------------------------------------------------------------------------------------------
Total current provision (benefit) (13,181) 8,298 12,528
Deferred tax provision (benefit)
Federal 7,731 (1,816) (555)
State 350 (404) (73)
- ----------------------------------------------------------------------------------------------------------------------
Total deferred provision (benefit) 8,081 (2,220) (628)
Income tax provision (benefit) $ (5,100) $ 6,078 $11,900
- ----------------------------------------------------------------------------------------------------------------------
A reconciliation of the federal statutory rate to the Company's effective
income tax rate for continuing operations follows:
Year ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Federal statutory rate (34.0%) 35.0% 35.0%
Increases (reductions) in the rate resulting from:
State income taxes, net of federal income tax impact (3.3) 4.6 4.4
Nondeductible goodwill amortization 9.5 2.8 .5
Nontaxable income (4.5) - -
Other, net 1.2 1.0 (.8)
- ---------------------------------------------------------------------------------------------------------------------------
Effective rate (31.1%) 43.4% 39.1%
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
Year Ended December 31, 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 2,794 $ 2,115
Accrued liabilities not currently deductible 6,802 10,912
Employee benefit plans 3,916 4,195
Merchandise inventories 1,836 1,190
Nonrecurring restructuring expenses 1,898 5,011
Property and equipment 318 -
Tax loss carryforward (net of valuation allowance of $650) 1,051 -
Other 612 3,606
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 19,227 27,029
Deferred tax liabilities:
Property and equipment - 48
Leased assets - 165
Other 1,589 1,097
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 1,589 1,310
Net deferred tax asset (included in other current assets and other assets, net) $17,638 $25,719
As of December 31, 1994, the Company had not recognized a valuation
allowance for its gross deferred tax asset. At December 31, 1995, management
determined, based on the Company's carryback and carryforward availability and
other factors, that it is appropriate to recognize a $650 valuation allowance
for state net operating losses. At December 31, 1995, the Company had net
operating losses for federal income tax purposes of $21,009, some of which are
available to offset federal taxable income as reported for tax years 1994, 1993
and 1992, and the remainder of which will be available to offset federal taxable
income for future tax years until such losses expire in 2010. Based on the level
of historical taxable income and projections of future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of these
deductible differences, net of existing valuation allowances at December 31,
1995.
Cash payments for income taxes, including taxes on discontinued operations,
for 1995, 1994 and 1993 were $6,058, $8,164 and $12,153, respectively.
Note 12 - Commitments and Contingencies
The Company has a commitment through September 1998 to outsource the
management and operation of its mainframe computer. This committment is
cancellable at any time on 180 days prior notice and a minimum payment of
$11,515. The Company also has entered into noncancelable agreements to lease
certain office and warehouse facilities with remaining terms ranging from one to
twelve years. Certain leases include renewal options, generally for five-year
increments. At December 31, 1995, future minimum annual payments under
noncancelable agreements with original terms in excess of one year are as
follows:
Total
- ------------------------------------------------------------------
1996 $15,909
1997 14,381
1998 13,287
1999 10,520
2000 7,655
Later years 19,388
- ------------------------------------------------------------------
Total minimum payments $81,140
- ------------------------------------------------------------------
Minimum lease payments have not been reduced by minimum sublease rentals
aggregating $1,817 due in the future under noncancelable subleases.
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$26,991, $21,264 and $12,857, respectively.
The Company sold transportation equipment with a net book value of
approximately $407 in a sale/leaseback transaction in 1994. The gain realized
in the sale transaction totaling $1,328 has been deferred and is being
credited to income as a rent expense adjustment over the lease terms.
The Company has limited concentrations of credit risk with respect to
financial instruments. Temporary cash investments are placed with high credit
quality institutions and concentrations within accounts and notes receivable are
limited due to their geographic dispersion. No single customer accounted for 10%
or more of the Company's net sales during 1995. Sales under contract to member
hospitals of VHA Inc., totaled $1,180,000 or approximately 40% of the Company's
net sales in 1995. As members of a national healthcare network, VHA Inc.
hospitals have incentive to purchase from their primary selected distributor;
however, they operate independently and are free to negotiate directly with
distributors and manufacturers.
Note 13 - Quarterly Financial Data (Unaudited)
The following table presents the summarized quarterly financial data for
1995 and 1994:
1995
- ------------------------------------------------------------------------------------------------------
QUARTER 1ST 2ND 3RD 4TH
- ------------------------------------------------------------------------------------------------------
Net sales $747,095 $743,718 $739,021 $746,652
Gross margin 72,908 70,501 59,366 65,043
Net income (loss) 4,613 1,688 (8,601) (9,008)
Net income (loss) per common share $ .11 $ .01 $ (.32) $ (.33)
1994
- ------------------------------------------------------------------------------------------------------
Quarter 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------
Net sales $390,794 $581,763 $693,004 $730,242
Gross margin 39,126 56,809 66,234 70,175
Net income (loss) 4,756 (5,125) 1,486 6,802
Net income (loss) per common share $ .15 $ (.19) $ .01 $ .18
- ------------------------------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors and Shareholders
Owens & Minor, Inc.:
We have audited the accompanying consolidated balance sheets of Owens &
Minor, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations and cash flows for each of the years in
the three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Owens &
Minor, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Richmond, Virginia
February 2, 1996 except as to Note 7,
which is as of March 1, 1996
Report of Management
The management of Owens & Minor, Inc. is responsible for the preparation,
integrity and objectivity of the consolidated financial statements and related
information presented in this annual report. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles applied on a consistent basis and include when necessary, the best
estimates and judgments of management.
The Company maintains a system of internal controls that provide reasonable
assurance that its assets are safeguarded against loss or unauthorized use, that
transactions are properly recorded and that financial records provide a reliable
basis for the preparation of the consolidated financial statements.
The Audit Committee of the Board of Directors, composed entirely of
directors who are not current employees of Owens & Minor, Inc., meets
periodically and privately with the Company's independent auditors and internal
auditors, as well as with Company management, to review accounting, auditing,
internal control and financial reporting matters. The independent auditors and
internal auditors have direct access to the Audit Committee with and without
management present to discuss the results of their activities.
/s/ G. GILMER MINOR, III
G. Gilmer Minor, III
Chairman, President and Chief Executive Officer
/s/ GLENN J. DOZIER /s/ ANN GREER RECTOR
Glenn J. Dozier Ann Greer Rector
Senior Vice President, Finance, Vice President and Controller
and Chief Financial Officer
STOCK MARKET AND DIVIDEND INFORMATION
Owens & Minor, Inc.'s common stock trades on the New York Stock Exchange
under the symbol OMI. The following table indicates the range of high and low
sales prices per share of the Company's common shares as reported on the New
York Stock Exchange and the quarterly cash dividends paid by the Company:
YEAR 1995
QUARTER 1ST 2ND 3RD 4TH
Market Price
High $14.88 $14.13 $14.75 $13.38
Low $12.25 $11.63 $12.13 $11.63
Dividends per share $ .045 $ .045 $ .045 $ .045
Year 1994
Quarter 1st 2nd 3rd 4th
Market Price
High $18.13 $17.13 $16.75 $16.75
Low $14.63 $14.13 $13.25 $13.63
Dividends per share $ .035 $ .045 $ .045 $ .045
Year 1993
Quarter 1st 2nd 3rd 4th
Market Price
High $11.59 $14.00 $15.50 $15.59
Low $ 8.42 $ 8.42 $12.17 $12.00
Dividends per share $ .035 $ .035 $ .035 $ .035
At December 31, 1995, there were approximately 14,000 common shareholders.