UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-9810
OWENS & MINOR, INC.
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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
incorporation or organization) Identification No.)
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
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
The number of shares of Owens & Minor, Inc.'s common stock
outstanding as of May 11, 1998 was 32,519,532 shares.
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Consolidated Statements of Income - Three Months
Ended March 31, 1998 and 1997 3
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II. Other Information 17
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
March 31,
------------------------------------------
1998 1997
---------------- ----------------
Net sales $ 797,950 $ 749,623
Cost of goods sold 715,863 674,521
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Gross margin 82,087 75,102
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Selling, general and administrative expenses 60,942 56,437
Depreciation and amortization 4,468 4,205
Interest expense, net 3,613 3,947
Discount on accounts receivable securitization 1,609 1,866
---------------- ----------------
Total expenses 70,632 66,455
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Income before income taxes 11,455 8,647
Income tax provision 4,696 3,653
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Net income 6,759 4,994
Dividends on preferred stock 1,294 1,294
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Net income attributable to common stock $ 5,465 $ 3,700
================ ================
Net income per common share - basic $ 0.17 $ 0.12
================ ================
Net income per common share - diluted $ 0.17 $ 0.12
================ ================
Weighted average shares - basic 32,337 31,915
================ ================
Weighted average shares - diluted 32,506 31,961
================ ================
Cash dividends per common share $ 0.050 $ 0.045
================ ================
See accompanying notes to consolidated financial statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data) March 31, December 31,
1998 1997
---------------- ----------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 250 $ 583
Accounts and notes receivable, net
of allowance of $6,289 and $6,312 176,525 187,878
Merchandise inventories 307,396 285,529
Other current assets 28,957 25,274
---------------- ----------------
Total current assets 513,128 499,264
Property and equipment, net of accumulated
depreciation of $43,226 and $41,500 25,616 26,628
Goodwill, net of accumulated
amortization of $19,434 and $18,298 161,684 162,821
Other assets, net 24,787 23,850
================ ================
Total assets $ 725,215 $ 712,563
================ ================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 253,637 $ 224,072
Accrued payroll and related liabilities 6,300 7,840
Other accrued liabilities 43,441 33,563
---------------- ----------------
Total current liabilities 303,378 265,475
Long-term debt 150,000 182,550
Accrued pension and retirement plans 5,413 5,237
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Total liabilities 458,791 453,262
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Shareholders' equity
Preferred stock, par value $100 per share;
authorized - 10,000 shares
Series A; Participating Cumulative
Preferred Stock; none issued - -
Series B; Cumulative Preferred
Stock; 4.5%, convertible; issued
and outstanding - 1,150 shares 115,000 115,000
Common stock, par value $2 per share;
authorized - 200,000 shares; issued and
outstanding - 32,484 shares and 32,123 shares 64,968 64,426
Paid-in capital 10,740 8,005
Retained earnings 75,716 71,870
---------------- ----------------
Total shareholders' equity 266,424 259,301
================ ================
Total liabilities and shareholders' equity $ 725,215 $ 712,563
================ ================
See accompanying notes to consolidated financial statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands) Three Months Ended
(Unaudited) March 31,
-----------------------------------------
1998 1997
---------------- ----------------
Operating activities
Net income $ 6,759 $ 4,994
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation and amortization 4,468 4,205
Provision for LIFO reserve 2,617 1,300
Changes in operating assets and liabilities:
Accounts and notes receivable 11,269 (7,306)
Merchandise inventories (24,484) 12,247
Accounts payable 48,551 (4,514)
Net change in other current assets
and current liabilities 5,176 5,157
Other, net (1,039) 942
---------------- ----------------
Cash provided by operating activities 53,317 17,025
---------------- ----------------
Investing activities
Additions to property and equipment (1,098) (1,845)
Additions to computer software (815) (894)
Proceeds from sale of property and equipment 26 1,588
---------------- ----------------
Cash used for investing activities (1,887) (1,151)
---------------- ----------------
Financing activities
Reductions of long-term debt (32,550) (2,500)
Other short-term financing, net (18,986) (10,975)
Cash dividends paid (2,916) (2,735)
Proceeds from exercise of stock options 2,689 189
---------------- ----------------
Cash used for financing activities (51,763) (16,021)
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Net decrease in cash and cash equivalents (333) (147)
Cash and cash equivalents at beginning of year 583 743
================ ================
Cash and cash equivalents at end of period $ 250 $ 596
================ ================
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 (the Company) as of March 31, 1998 and the
consolidated results of operations and cash flows for the three month
periods ended March 31, 1998 and 1997.
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 month periods ended March 31, 1998 and 1997
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.
6
4. 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
March 31,
------------------------------------
1998 1997
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Numerator:
Net income $ 6,759 $ 4,994
Preferred stock dividends 1,294 1,294
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Numerator for basic net income per common share - net income available
to common shareholders 5,465 3,700
Effect of dilutive securities - -
----------------------------------------------------------------------------------------------------------------
Numerator for diluted net income per common share - net income available
to common shareholders after assumed conversions $ 5,465 $ 3,700
----------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic net income per common share - weighted average
shares 32,337 31,915
Effect of dilutive securities:
Employee stock options 155 41
Other 14 5
----------------------------------------------------------------------------------------------------------------
Denominator for diluted net income per common share - adjusted weighted
average shares and assumed conversions 32,506 31,961
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Net income per common share - basic $ 0.17 $ 0.12
Net income per common share - diluted $ 0.17 $ 0.12
----------------------------------------------------------------------------------------------------------------
5. 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 Senior Subordinated 10-year Notes (Notes) (all of the wholly
owned subsidiaries of Owens & Minor, Inc. except for O&M Funding Corp.
(OMF)); and OMF, Owens & Minor, Inc.'s only non-guarantor subsidiary of the
Notes. Separate financial statements of the guarantor subsidiaries are not
presented because the guarantors are jointly, severally and unconditionally
liable under the guarantees and the Company believes the condensed
consolidating financial statements are more meaningful in understanding the
financial position of the guarantor subsidiaries.
7
Condensed Consolidating Financial Statements (1)
(In thousands)
For the three months ended Owens & Guarantor
March 31, 1998 Minor, Inc. Subsidiaries OMF Eliminations Consolidated
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Statements of Operations
Net sales $ - $ 797,950 $ - $ - $ 797,950
Cost of goods sold - 715,863 - - 715,863
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Gross margin - 82,087 - - 82,087
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Selling, general and administrative expenses - 60,880 62 - 60,942
Depreciation and amortization - 4,468 - - 4,468
Interest expense, net 4,443 (830) - - 3,613
Intercompany interest expense, net (3,883) 7,966 (2,900) (1,183) -
Discount on accounts receivable securitization - 12 1,597 - 1,609
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Total expenses 560 72,496 (1,241) (1,183) 70,632
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Income (loss) before income taxes (560) 9,591 1,241 1,183 11,455
Income tax provision (benefit) (227) 3,922 504 497 4,696
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Net income (loss) (333) 5,669 737 686 6,759
Dividends on preferred stock 1,294 - - - 1,294
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Net income (loss) attributable to common stock $ (1,627) $ 5,669 $ 737 $ 686 $ 5,465
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March 31, 1997
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Statements of Operations
Net sales $ - $ 749,623 $ - $ - $ 749,623
Cost of goods sold - 674,521 - - 674,521
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Gross margin - 75,102 - - 75,102
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Selling, general and administrative expenses - 56,417 20 - 56,437
Depreciation and amortization - 4,205 - - 4,205
Interest expense, net 4,671 (724) - - 3,947
Intercompany interest expense, net (4,138) 8,270 (3,012) (1,120) -
Discount on accounts receivable securitization - 2 1,864 - 1,866
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Total expenses 533 68,170 (1,128) (1,120) 66,455
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Income (loss) before income taxes (533) 6,932 1,128 1,120 8,647
Income tax provision (benefit) (219) 2,879 523 470 3,653
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Net income (loss) (314) 4,053 605 650 4,994
Dividends on preferred stock 1,294 - - - 1,294
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Net income (loss) attributable to common stock $ (1,608) $ 4,053 $ 605 $ 650 $ 3,700
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(1) Certain amounts in the 1997 condensed consolidating financial statements
have been reclassified to conform to the 1998 presentation.
8
Condensed Consolidating Financial Statements (1)
(In thousands)
As of Owens & Guarantor
March 31, 1998 Minor, Inc. Subsidiaries OMF Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 205 $ 45 $ - $ - $ 250
Accounts and notes receivable, net - 81,354 95,171 - 176,525
Merchandise inventories - 307,396 - - 307,396
Intercompany advances, net 147,831 75,150 - (222,981) -
Other current assets - 28,957 - - 28,957
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Total current assets 148,036 492,902 95,171 (222,981) 513,128
Property and equipment, net - 25,616 - - 25,616
Goodwill, net - 161,684 - - 161,684
Intercompany investment in subsidiaries 299,858 15,001 - (314,859) -
Other assets, net 5,971 18,816 - - 24,787
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Total assets $ 453,865 $ 714,019 $ 95,171 $ (537,840) $ 725,215
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Liabilities and shareholders' equity
Current liabilities
Accounts payable $ - $ 253,637 $ - $ - $ 253,637
Accrued payroll and related liabilities - 6,300 - - 6,300
Intercompany advances, net - 147,831 75,836 (223,667) -
Other accrued liabilities 5,988 37,119 334 - 43,441
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Total current liabilities 5,988 444,887 76,170 (223,667) 303,378
Long-term debt 150,000 - - - 150,000
Accrued pension and retirement plans - 5,413 - - 5,413
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Total liabilities 155,988 450,300 76,170 (223,667) 458,791
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Shareholders' equity
Preferred stock 115,000 - - - 115,000
Common stock 64,968 - - - 64,968
Paid-in capital 10,740 299,858 15,001 (314,859) 10,740
Retained earnings (deficit) 107,169 (36,139) 4,000 686 75,716
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Total shareholders' equity 297,877 263,719 19,001 (314,173) 266,424
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Total liabilities and shareholders' equity $ 453,865 $ 714,019 $ 95,171 $ (537,840) $ 725,215
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(1) Certain amounts in the 1997 condensed consolidating financial statements
have been reclassified to conform to the 1998 presentation.
9
Condensed Consolidating Financial Statements (1)
(In thousands)
As of Owens & Guarantor
December 31, 1997 Minor, Inc. Subsidiaries OMF Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 505 $ 78 $ - $ - $ 583
Accounts and notes receivable, net - 100,336 87,542 - 187,878
Merchandise inventories - 285,529 - - 285,529
Intercompany advances, net 176,335 68,016 - (244,351) -
Other current assets - 25,274 - - 25,274
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Total current assets 176,840 479,233 87,542 (244,351) 499,264
Property and equipment, net - 26,628 - - 26,628
Goodwill, net - 162,821 - - 162,821
Intercompany investment in subsidiaries 299,858 15,001 - (314,859) -
Other assets, net 6,180 17,670 - - 23,850
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Total assets $ 482,878 $ 701,353 $ 87,542 $ (559,210) $ 712,563
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ - $ 224,072 $ - $ - $ 224,072
Accrued payroll and related liabilities - 7,840 - - 7,840
Intercompany advances, net - 176,335 68,759 (245,094) -
Other accrued liabilities 2,480 30,564 519 - 33,563
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Total current liabilities 2,480 438,811 69,278 (245,094) 265,475
Long-term debt 182,550 - - - 182,550
Accrued pension and retirement plans - 5,237 - - 5,237
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Total liabilities 185,030 444,048 69,278 (245,094) 453,262
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock 115,000 - - - 115,000
Common stock 64,426 - - - 64,426
Paid-in capital 8,005 299,858 15,001 (314,859) 8,005
Retained earnings (deficit) 110,417 (42,553) 3,263 743 71,870
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Total shareholders' equity 297,848 257,305 18,264 (314,116) 259,301
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 482,878 $ 701,353 $ 87,542 $ (559,210) $ 712,563
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(1) Certain amounts in the 1997 condensed consolidating financial statements
have been reclassified to conform to the 1998 presentation.
10
Condensed Consolidating Financial Statements (1)
(In thousands)
For the three months ended Owens & Guarantor
March 31, 1998 Minor, Inc. Subsidiaries OMF Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating activities
Net income (loss) $ (333) $ 5,669 $ 737 $ 686 $ 6,759
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 4,468 - - 4,468
Provision for LIFO reserve - 2,617 - - 2,617
Changes in operating assets and liabilities
Accounts and notes receivable - 18,953 (7,684) - 11,269
Merchandise inventories - (24,484) - - (24,484)
Accounts payable - 48,551 - - 48,551
Net change in other current assets
and current liabilities 4,025 1,337 (186) - 5,176
Other, net 282 (634) (1) (686) (1,039)
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Cash provided by (used for) operating activities 3,974 56,477 (7,134) - 53,317
- -------------------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to property and equipment - (1,098) - - (1,098)
Additions to computer software - (815) - - (815)
Proceeds from sale of property and equipment - 26 - - 26
- -------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities - (1,887) - - (1,887)
- -------------------------------------------------------------------------------------------------------------------------------
Financing activities
Reductions of long-term debt (32,550) - - - (32,550)
Change in intercompany advances 28,503 (35,637) 7,134 - -
Other short-term financing, net - (18,986) - - (18,986)
Cash dividends paid (2,916) - - - (2,916)
Exercise of stock options 2,689 - - - 2,689
- -------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (4,274) (54,623) 7,134 - (51,763)
- -------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (300) (33) - - (333)
Cash and cash equivalents at beginning of year 505 78 - - 583
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 205 $ 45 $ - $ - $ 250
- -------------------------------------------------------------------------------------------------------------------------------
(1) Certain amounts in the 1997 condensed consolidating financial statements
have been reclassified to conform to the 1998 presentation.
11
Condensed Consolidating Financial Statements (1)
(In thousands)
For the three months ended Owens & Guarantor
March 31, 1997 Minor, Inc. Subsidiaries OMF Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating activities
Net income (loss) $ (314) $ 4,053 $ 605 $ 650 $ 4,994
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 4,205 - - 4,205
Provision for LIFO reserve - 1,300 - - 1,300
Changes in operating assets and liabilities
Accounts and notes receivable - 13,231 (20,537) - (7,306)
Merchandise inventories - 12,247 - - 12,247
Accounts payable - (4,514) - - (4,514)
Net change in other current assets
and current liabilities 3,826 1,911 (580) - 5,157
Other, net 208 615 769 (650) 942
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities 3,720 33,048 (19,743) - 17,025
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to property and equipment - (1,845) - - (1,845)
Additions to computer software - (894) - - (894)
Proceeds from sale of property and equipment - 1,588 - - 1,588
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Cash used for investing activities - (1,151) - - (1,151)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Reductions of long-term debt (2,500) - - - (2,500)
Change in intercompany advances 1,326 (21,069) 19,743 - -
Other short-term financing, net - (10,975) - - (10,975)
Cash dividends paid (2,735) - - - (2,735)
Exercise of stock options 189 - - - 189
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (3,720) (32,044) 19,743 - (16,021)
- ------------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents - (147) - - (147)
Cash and cash equivalents at beginning of year 505 238 - - 743
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 505 $ 91 $ - $ - $ 596
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Certain amounts in the 1997 condensed consolidating financial statements
have been reclassified to conform to the 1998 presentation.
12
6. Subsequent Event
On May 13, 1998, the Company repurchased all of its outstanding Series B
Cumulative Preferred Stock at its par value. This repurchase was financed with
substantially all of the net proceeds of an offering of 2.4 million $2.6875 term
convertible securities (TECONS(SM)) by a statutory business trust, the common
securities of which are wholly owned by the Company. Each TECONS has a
liquidation value of $50 and is convertible into 2.4242 shares of the Company's
common stock. The TECONS are subject to mandatory redemption on April 30, 2013
and may be redeemed in whole or in part after May 1, 2001.
13
Item 2. Owens & Minor, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following management discussion and analysis describes material changes in
the Company's financial condition since December 31, 1997. 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 1997
Annual Report to Shareholders and Annual Report on Form 10-K for the year ended
December 31, 1997.
Results of Operations
First quarter of 1998 compared with first quarter of 1997
Net sales. Net sales increased 6.4% to $798.0 million in the first quarter of
1998 from $749.6 million in the first quarter of 1997. The increase in sales was
a result of several new customer contracts signed after the first quarter 1997
and increased penetration of existing accounts. The Company continues to focus
on profitable sales growth and increased profitability.
Gross margin. Gross margin as a percentage of net sales increased to 10.3% in
the first quarter of 1998 from 10.0% in the first quarter of 1997. The
improvement has been a result of the Company's supply chain initiatives with key
suppliers. This improvement was offset by the LIFO (last-in, first-out)
provision increase to $2.6 million in the first quarter of 1998 as compared to
$1.3 million in the first quarter of 1997. The increase was due primarily to
larger price increases from certain manufacturers and higher inventory levels.
The Company will continue to focus on improving margin levels through continued
emphasis on its supply chain initiatives.
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses as a percentage of net sales increased to 7.6% in
the first quarter of 1998 from 7.5% in the first quarter of 1997. The increase
resulted from higher personnel costs in addition to approximately $0.8 million
of expense incurred in connection with the Company's initiatives to enable
computer processing in the Year 2000 and beyond. In the first quarter of 1998,
the Company improved the management of delivery and occupancy costs and
continued to use information technology to control costs through more extensive
use of EDI in transactions with both customers and suppliers. The positive
results of these and other SG&A expense initiatives will continue to be
partially offset with additional expenses associated with the preparation of the
Company's systems for the Year 2000.
Depreciation and amortization. Depreciation and amortization increased by 6.3%
in the first quarter of 1998 compared to the first quarter of 1997. This
increase was due primarily to the Company's continued investment in information
technology, including capital spending for systems upgrades of $0.5 million
associated with Year 2000 issues. The Company anticipates similar increases in
depreciation and amortization for the remainder of 1998 associated with
additional capital investment in information technology.
14
Interest expense, net and discount on accounts receivable securitization
(financing costs). Financing costs decreased to $5.2 million in the first
quarter of 1998 from $5.8 million in the first quarter of 1997, net of finance
charge income of $0.8 million and $1.0 million in the first quarter of 1998 and
1997, respectively. The decline in financing costs has been a result of the
Company's ability to reduce outstanding financing and lower effective interest
rates. The lower effective interest rate is the result of the Company's
renegotiation in September 1997 of the terms of its revolving credit facility
which resulted in more favorable pricing of the debt. The Company reduced
outstanding financing by approximately $32.6 million in the first quarter of
1998. This reduction is due to the improvement in cash flow from operations as a
result of the Company's improved profitability. The Company will continue to
take action to reduce financing costs by continuing its working capital
reduction initiatives and management of interest rates, although the future
results of these initiatives cannot be assured.
Income taxes. The Company had an income tax provision of $4.7 million in the
first quarter of 1998 compared with $3.7 million in the first quarter of 1997
and an effective tax rate of 41.0%, compared to 42.2% for the same period in
1997. The decline in the effective tax rate is due primarily to increased income
before taxes reducing the impact of nondeductible goodwill amortization.
Net income. Net income increased $1.8 million in the first quarter of 1998
compared to the first quarter of 1997. The increase was primarily due to the
improvements previously discussed in gross margin and financing costs. Although
the trend has been favorable and the Company continues to pursue these and other
initiatives, the future impact on net income cannot be assured.
Financial Condition, Liquidity and Capital Resources
Liquidity. The Company's liquidity improved during the first quarter of 1998
compared to the first quarter of 1997. Outstanding financing (excluding the
impact of the off balance sheet accounts receivable securitization) was reduced
by $32.6 million to $260.0 million at March 31, 1998 from $292.6 million at
December 31, 1997. The capitalization ratio (excluding the impact of the off
balance sheet accounts receivable securitization) decreased to 49.4% at March
31, 1998 from 53.0% at December 31, 1997. The improvement was the result of
lower borrowing levels as well as increased earnings.
On May 13, 1998, the Company repurchased all of its outstanding Series B
Cumulative Preferred Stock, financing the repurchase with the issuance, by a
statutory business trust, of term convertible securities with a liquidation
value of $120.0 million. Management believes that these transactions will result
in lower overall financing costs, as well as improved liquidity.
The Company expects that its available financing will be sufficient to fund its
working capital needs and long-term strategic growth plans, although this cannot
be assured. At March 31, 1998, the Company had approximately $225.0 million of
unused credit under its revolving credit facility and $21.1 million available
under its accounts receivable financing facility.
Working Capital Management. During the first quarter of 1998, the Company's
working capital increased compared to the first quarter of 1997 as a result of
higher sales levels. The Company's accounts receivable days sales outstanding
(excluding the impact of the off balance sheet accounts receivable
securitization) increased to 33.0 in the first quarter of 1998 from 32.3 in the
first quarter of 1997 and from 32.8 in the fourth quarter of 1997. Inventory
turnover decreased slightly to 9.8 in the first quarter of 1998 from 10.1 in the
fourth quarter of 1997.
15
Capital Expenditures. Capital expenditures were approximately $1.9 million in
the first quarter of 1998, of which approximately $1.5 million was for computer
systems, including $0.5 million for system upgrades for the Year 2000
initiative. The Company expects to continue to invest in technology, including
system upgrades, as the most cost effective method of reducing operating
expenses. These capital expenditures are expected to be funded through cash flow
from operations.
Recent Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 amends the disclosure
requirements of SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. This Statement
standardizes the disclosure requirements of SFAS No. 87 and SFAS No. 106 and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. This statement is effective for fiscal years beginning
after December 15, 1997. Management believes the effect on the Company of
adoption of this standard will be limited to changes in financial statement
presentation and disclosure.
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires that certain costs
related to the development or purchase of internal-use software be capitalized
and amortized over the estimated useful life of the software. The SOP also
requires that costs related to the preliminary stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. This statement is effective for
fiscal years beginning after December 15, 1998. The Company has adopted this
standard effective January 1, 1998. Adoption of this standard did not have a
material impact on the Company's financial condition or results of operations
for the first quarter of 1998.
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, outcomes of outstanding litigation, and changes in
government regulations. Although the Company believes that its expectations with
respect to the forward-looking statements are based upon reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results, performance or achievements of the Company
will not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Readiness for Year 2000
The Company continues to work closely with both customers and suppliers to
ensure that they are continuing with the development of plans to address the
Year 2000 issue. As of March 31, 1998, the Company continues to implement its
strategy for remediation which is expected to be completed in the first quarter
of 1999. During the first quarter of 1998, the Company incurred $0.8 million of
expenses and $0.5 million of capital expenditures related to this strategy.
16
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, 1997.
Through March 31, 1998, there have been no material developments in any legal
proceedings reported in such Annual Report.
Item 4. Submission of Matters to a Vote of Shareholders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Item 601 Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are
listed in the Exhibit Index immediately preceding the exhibits filed
herewith and such listing is incorporated herein by reference.
(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.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Owens & Minor, Inc.
----------------------------
(Registrant)
Date May 14, 1998 /s/ Ann Greer Rector
--------------- ------------------------
Ann Greer Rector
Senior Vice President &
Chief Financial Officer
Date May 14, 1998 /s/ Olwen B. Cape
--------------- ---------------------
Olwen B. Cape
Vice President & Controller
Chief Accounting Officer
Exhibit Filed with SEC
Exhibit #
27 Financial Data Schedule