UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
The number of shares of Owens & Minor, Inc.'s common stock outstanding as
of April 30, 1999, was 32,684,682 shares.
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income - Three
Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
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,
----------------------------
1999 1998
------------- -------------
Net sales $ 741,084 $ 797,950
Cost of goods sold 662,355 715,863
---------- -----------
Gross margin 78,729 82,087
---------- -----------
Selling, general and administrative expenses 58,598 60,942
Depreciation and amortization 4,461 4,468
Interest expense, net 3,096 3,613
Discount on accounts receivable securitization 995 1,609
Distributions on mandatorily redeemable
preferred securities 1,774 -
---------- -----------
Total expenses 68,924 70,632
---------- -----------
Income before income taxes 9,805 11,455
Income tax provision 4,314 4,696
---------- -----------
Net income 5,491 6,759
Dividends on preferred stock - 1,294
---------- -----------
Net income attributable to common stock $ 5,491 $ 5,465
========== ===========
Net income per common share - basic $ 0.17 $ 0.17
========== ===========
Net income per common share - diluted $ 0.17 $ 0.17
========== ===========
Cash dividends per common share $ 0.05 $ 0.05
========== ===========
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,
1999 1998
---------------------------------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 730 $ 546
Accounts and notes receivable, net
of allowance of $6,393 and $6,273 231,742 213,765
Merchandise inventories 301,257 275,094
Other current assets 8,818 14,816
---------- ----------
Total current assets 542,547 504,221
Property and equipment, net of accumulated
depreciation of $48,001 and $45,812 25,543 25,608
Goodwill, net of accumulated
amortization of $23,980 and $22,843 157,139 158,276
Other assets, net 29,700 29,663
---------- ----------
Total assets $ 754,929 $ 717,768
=========== ==========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 241,793 $ 206,251
Accrued payroll and related liabilities 6,258 8,974
Other accrued liabilities 53,859 53,749
----------- ----------
Total current liabilities 301,910 268,974
Long-term debt 150,000 150,000
Accrued pension and retirement plans 5,809 5,668
----------- ----------
Total liabilities 457,719 424,642
----------- ----------
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trust, holding solely convertible
debentures of Owens & Minor, Inc. 132,000 132,000
----------- ----------
Shareholders' equity
Preferred stock, par value $100 per share;
authorized - 10,000 shares
Series A; Participating Cumulative
Preferred Stock; none issued - -
Common stock, par value $2 per share;
authorized - 200,000 shares; issued and
outstanding - 32,686 shares and 32,618
shares 65,372 65,236
Paid-in capital 12,371 12,280
Retained earnings 87,467 83,610
----------- ----------
Total shareholders' equity 165,210 161,126
----------- ----------
Total liabilities and shareholders' equity $ 754,929 $ 717,768
=========== ==========
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,
------------------------
1999 1998
---------- -----------
Operating activities
Net income $ 5,491 $ 6,759
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,461 4,468
Provision for LIFO reserve 610 2,617
Provision for losses on accounts and notes
receivable 240 84
Changes in operating assets and liabilities:
Accounts and notes receivable (18,217) 11,269
Merchandise inventories (26,773) (24,484)
Accounts payable 68,307 48,551
Net change in other current assets
and current liabilities 3,393 5,092
Other 428 (1,039)
---------- -----------
Cash provided by operating activities 37,940 53,317
---------- -----------
Investing activities
Additions to property and equipment (2,124) (1,098)
Additions to computer software (134) (815)
Other, net (1,179) 26
---------- -----------
Cash used for investing activities (3,437) (1,887)
---------- -----------
Financing activities
Reduction of long-term debt - (32,550)
Other short-term financing, net (32,765) (18,986)
Cash dividends paid (1,634) (2,916)
Proceeds from exercise of stock options 80 2,689
---------- -----------
Cash used for financing activities (34,319) (51,763)
---------- -----------
Net increase (decrease) in cash and cash equivalents 184 (333)
Cash and cash equivalents at beginning of year 546 583
--------- -----------
Cash and cash equivalents at end of period $ 730 $ 250
========== ===========
See accompanying notes to consolidated financial statements.
5
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which are comprised only of
normal recurring accruals and the use of estimates) necessary to present
fairly the consolidated financial position of Owens & Minor, Inc. and its
wholly-owned subsidiaries (O&M or the company) as of March 31, 1999 and the
consolidated results of operations and cash flows for the three month periods
ended March 31, 1999 and 1998.
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, 1999 and 1998 reflect the results of
such counts, to the extent that they are materially different from estimated
amounts. Management will continue a program of interim physical inventories
at selected distribution centers to the extent it deems appropriate to ensure
the accuracy of interim reporting and to minimize year-end adjustments.
4. Restructuring Reserve
As a result of the Columbia/HCA Healthcare Corporation contract termination
in the second quarter of 1998, the company recorded a nonrecurring
restructuring charge to downsize operations. The following table sets forth
the activity in the restructuring reserve during the three month period ended
March 31, 1999:
(In thousands)
Balance at Balance at
December 31, 1998 Charges March 31, 1999
-----------------------------------------------------------------------
Losses under lease commitments $ 3,621 $ 360 $ 3,261
Asset write-offs 3,463 29 3,434
Employee separations 1,649 261 1,388
Other 508 22 486
-----------------------------------------------------------------------
Total $ 9,241 $ 672 $ 8,569
=======================================================================
Approximately 20 employees were terminated in connection with the
restructuring plan during the three month period ended March 31, 1999.
6
5. 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,
--------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------
Numerator:
Net income $ 5,491 $ 6,759
Preferred stock dividends - 1,294
--------------------------------------------------------------------------
Numerator for basic net income per common
share - net income attributable to common
stock $ 5,491 5,465
Distributions on convertible mandatorily
redeemable preferred securities, net of
income taxes 993 -
--------------------------------------------------------------------------
Numerator for diluted net income per common
share - net income attributable to common
stock after assumed conversions $ 6,484 $ 5,465
--------------------------------------------------------------------------
Denominator:
Denominator for basic net income per
common share - weighted average shares 32,556 32,337
Effect of dilutive securities:
Conversion of mandatorily redeemable
preferred securities 6,400 -
Stock options and restricted stock 129 169
--------------------------------------------------------------------------
Denominator for diluted net income per
common share - adjusted weighted
average shares and assumed
conversions 39,085 32,506
--------------------------------------------------------------------------
Net income per common share - basic $ 0.17 $ 0.17
Net income per common share - diluted $ 0.17 $ 0.17
==========================================================================
6. Condensed Consolidating Financial Information
The following tables present condensed consolidating financial information
for: Owens & Minor, Inc.; on a combined basis, the guarantors of Owens &
Minor, Inc.'s 10 7/8% Senior Subordinated 10-year Notes (Notes); and the
non-guarantor subsidiaries of the Notes. Separate financial statements of the
guarantor subsidiaries are not presented because the guarantors are jointly,
severally and unconditionally liable under the guarantees and the company
believes the condensed consolidating financial information is more meaningful
in understanding the financial position, results of operations and cash flows
of the guarantor subsidiaries.
7
Condensed Consolidating Financial Information
(In thousands)
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Three months ended Owens & Guarantor Non-guarantor
March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ - $ 741,084 $ - $ - $ 741,084
Cost of goods sold - 662,355 - - 662,355
- -------------------------------------------------------------------------------------------------------------
Gross margin - 78,729 - - 78,729
- -------------------------------------------------------------------------------------------------------------
Selling, general and administrative
expenses 5 58,501 92 - 58,598
Depreciation and amortization - 4,461 - - 4,461
Interest expense, net 4,149 (1,053) - - 3,096
Intercompany interest expense, net (1,696) 6,740 (3,924) (1,120) -
Discount on accounts receivable
securitization - 6 989 - 995
Distributions on mandatorily
redeemable preferred securities - - 1,774 - 1,774
- -------------------------------------------------------------------------------------------------------------
Total expenses 2,458 68,655 (1,069) (1,120) 68,924
=============================================================================================================
Income (loss) before income taxes (2,458) 10,074 1,069 1,120 9,805
Income tax provision (benefit) (1,082) 4,441 462 493 4,314
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $(1,376) $ 5,633 $ 607 $ 627 $ 5,491
=============================================================================================================
Three months ended Owens & Guarantor Non-guarantor
March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ - $ 797,950 $ - $ - $ 797,950
Cost of goods sold - 715,863 - - 715,863
- -------------------------------------------------------------------------------------------------------------
Gross margin - 82,087 - - 82,087
- -------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------
Total expenses 560 72,496 (1,241) (1,183) 70,632
=============================================================================================================
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
- -------------------------------------------------------------------------------------------------------------
Net income (loss) (333) 5,669 737 686 6,759
Dividends on preferred stock 1,294 - - - 1,294
- -------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to
common stock $(1,627) $ 5,669 $ 737 $ 686 $ 5,465
=============================================================================================================
8
Condensed Consolidating Financial Information
(In thousands)
- -------------------------------------------------------------------------------------------------------------
Owens & Guarantor Non-guarantor
March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 505 $ 224 $ 1 $ - $ 730
Accounts and notes receivable, net - 87,058 144,684 - 231,742
Merchandise inventories - 301,257 - - 301,257
Intercompany advances, net 150,040 121,130 1,183 (272,353) -
Other current assets - 8,777 41 - 8,818
- -------------------------------------------------------------------------------------------------------------
Total current assets 150,545 518,446 145,909 (272,353) 542,547
Property and equipment, net - 25,543 - - 25,543
Goodwill, net - 157,139 - - 157,139
Intercompany investments 303,941 15,001 136,083 (455,025) -
Other assets, net 9,522 18,658 1,520 - 29,700
- -------------------------------------------------------------------------------------------------------------
Total assets $464,008 $734,787 $283,512 $(727,378) $754,929
=============================================================================================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ - 241,793 $ - $ - $241,793
Accrued payroll and related
liabilities - 6,258 - - 6,258
Intercompany advances, net - 148,305 124,675 (272,980) -
Other accrued liabilities 4,960 47,540 1,359 - 53,859
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 4,960 443,896 126,034 (272,980) 301,910
Long-term debt 150,000 - - - 150,000
Intercompany long-term debt 136,083 - - (136,083) -
Accrued pension and retirement plans - 5,809 - - 5,809
- -------------------------------------------------------------------------------------------------------------
Total liabilities 291,043 449,705 126,034 (409,063) 457,719
- -------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust, holding solely
convertible debentures of
Owens & Minor, Inc. - - 132,000 - 132,000
- -------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 65,372 - 4,083 (4,083) 65,372
Paid-in capital 12,371 299,858 15,001 (314,859) 12,371
Retained earnings (accumulated
deficit) 95,222 (14,776) 6,394 627 87,467
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 172,965 285,082 25,478 (318,315) 165,210
- -------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $464,008 $734,787 $283,512 $(727,378) $754,929
=============================================================================================================
9
Condensed Consolidating Financial Information
(In thousands)
- -------------------------------------------------------------------------------------------------------------
Owens & Guarantor Non-guarantor
December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 505 $ 40 $ 1 $ - $ 546
Accounts and notes receivable, net 100,148 113,617 - 213,765
Merchandise inventories - 275,094 - - 275,094
Intercompany advances, net 148,992 90,698 1,183 (240,873) -
Other current assets - 14,816 - - 14,816
- -------------------------------------------------------------------------------------------------------------
Total current assets 149,497 480,796 114,801 (240,873) 504,221
Property and equipment, net - 25,608 - - 25,608
Goodwill, net - 158,276 - - 158,276
Intercompany investments 303,941 15,001 136,083 (455,025) -
Other assets, net 9,784 19,879 - - 29,663
- -------------------------------------------------------------------------------------------------------------
Total assets $ 463,222 $ 699,560 $ 250,884 $ (695,898) $ 717,768
- -------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ - $ 206,251 $ - $ - $ 206,251
Accrued payroll and related
liabilities - 8,974 - - 8,974
Intercompany advances, net - 148,992 92,509 (241,501) -
Other accrued liabilities 1,394 50,994 1,361 - 53,749
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 1,394 415,211 93,870 (241,501) 268,974
Long-term debt 150,000 - - - 150,000
Intercompany long-term debt 136,083 - - (136,083) -
Accrued pension and retirement plans - 5,668 - - 5,668
- --------------------------------------------------------------------------------------------------------------
Total liabilities 287,477 420,879 93,870 (377,584) 424,642
- --------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust, holding solely
convertible debentures of
Owens & Minor, Inc. - - 132,000 - 132,000
- --------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 65,236 - 4,083 (4,083) 65,236
Paid-in capital 12,280 299,858 15,001 (314,859) 12,280
Retained earnings (accumulated
deficit) 98,229 (21,177) 5,930 628 83,610
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 175,745 278,681 25,014 (318,314) 161,126
- --------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 463,222 $ 699,560 $250,884 $ (695,898) $ 717,768
==============================================================================================================
10
Condensed Consolidating Financial Statements
(In thousands)
- -------------------------------------------------------------------------------------------------------------
For the three months ended Owens & Guarantor Non-guarantor
March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating activities
Net income (loss) $ (1,376) $ 5,633 $ 607 $ 627 $ 5,491
Adjustments to reconcile net income
(loss) to cash provided by
(used for) operating activities:
Depreciation and amortization - 4,461 - - 4,461
Provision for LIFO reserve - 610 - - 610
Provision for losses on accounts
and notes receivable - 184 56 - 240
Changes in operating assets and
liabilities:
Accounts and notes receivable - 12,906 (31,123) - (18,217)
Merchandise inventories - (26,773) - - (26,773)
Accounts payable - 68,307 - - 68,307
Net change in other current
assets and current liabilities 3,566 (172) (1) 3,393
Other, net 412 644 (1) (627) 428
- -------------------------------------------------------------------------------------------------------------
Cash provided by (used for)
operating activities 2,602 65,800 (30,462) - 37,940
- -------------------------------------------------------------------------------------------------------------
Investing activities
Additions to property and equipment - (2,124) - - (2,124)
Additions to computer software - (134) - - (134)
Other, net - 21 (1,200) - (1,179)
- -------------------------------------------------------------------------------------------------------------
Cash used for investing activities (2,237) (1,200) - - (3,437)
- -------------------------------------------------------------------------------------------------------------
Financing activities
Change in intercompany advances (1,048) (30,614) 31,662 - -
Other short-term financing, net - (32,765) - - (32,765)
Cash dividends paid (1,634) - - - (1,634)
Proceeds from exercise of stock
options 80 - - - 80
- -------------------------------------------------------------------------------------------------------------
Cash provided by (used for)
financing activities (2,602) (63,379) 31,662 - (34,319)
- -------------------------------------------------------------------------------------------------------------
Net increase in cash and cash - 184 - - 184
equivalents
Cash and cash equivalents at
beginning of year 505 40 1 - 546
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 505 $ 224 $ 1 $ - $ 730
=============================================================================================================
11
Condensed Consolidating Financial
Statements
(In thousands)
- -------------------------------------------------------------------------------------------------------------
For the three months ended Owens & Guarantor Non-guarantor
March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries 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
Provision for losses on accounts
and notes receivable 29 55 84
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 1,308 (241) - 5,092
Other, net 282 (634) (1) (686) (1,039)
- -------------------------------------------------------------------------------------------------------------
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)
Other, net - 26 - - 26
- -------------------------------------------------------------------------------------------------------------
Cash used for investing activities - (1,887) - - (1,887)
- -------------------------------------------------------------------------------------------------------------
Financing activities
Reduction 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)
Proceeds from 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
=============================================================================================================
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management discussion and analysis describes material changes in
the financial condition of Owens & Minor, Inc. and its wholly-owned subsidiaries
(O&M or the company) since December 31, 1998. 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 1998 Annual Report on Form 10-K
for the year ended December 31, 1998.
Financial Condition, Liquidity and Capital Resources
Liquidity. The company's liquidity improved during the first quarter of 1999.
Combined outstanding debt and off balance sheet accounts receivable
securitization borrowings were reduced by $10.0 million to $215.0 million at
March 31, 1999, from $225.0 million at December 31, 1998. The reduction was due
to the positive impact of cash flow from operations. The capitalization ratio at
March 31, 1999, including the Mandatorily Redeemable Preferred Securities
(Securities) as equity and excluding the effect of the accounts receivable
securitization, was 42.0% compared to 43.4% at December 31, 1998. This
improvement was primarily the result of the reduction in outstanding borrowings
under the off balance sheet accounts receivable securitization.
In May 1998, Owens & Minor, Inc. repurchased all of its outstanding Series B
Cumulative Preferred Stock, financing the repurchase with substantially all the
net proceeds of the $132.0 million of Securities issued by Owens & Minor Trust I
(Trust). These transactions reduced the company's overall cost of capital for
the first quarter of 1999 compared to the first quarter in 1998.
The company expects that its available financing will be sufficient to fund its
working capital needs and long-term strategic growth, although this cannot be
assured. At March 31, 1999, the company had $225.0 million of unused credit
under its revolving credit facility and approximately $67.4 million under its
receivables financing facility.
Working Capital Management. The company's working capital at March 31, 1999
increased by $30.9 million from March 31, 1998. The company's accounts
receivable days sales outstanding (excluding the impact of the off balance sheet
accounts receivable securitization) increased to 35.6 at March 31, 1999, from
33.0 at March 31, 1998, and inventory turnover decreased to 9.3 times in the
first quarter of 1999 from 9.8 times in the first quarter of 1998. These changes
were driven in part by the reduction in the sales base due to the loss of the
Columbia/HCA Healthcare Corporation (Columbia/HCA) contract, partially offset by
sales to Tenet BuyPower, a new customer, beginning in February 1999.
Capital Expenditures. Capital expenditures were approximately $2.3 million in
the first quarter of 1999, of which approximately $1.5 million was for computer
hardware and software, including $0.5 million for system upgrades to prepare for
Year 2000. 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.
13
Restructuring reserve. As a result of the Columbia/HCA contract termination in
the second quarter of 1998, the company recorded a nonrecurring restructuring
charge to downsize operations. In the first quarter of 1999, approximately $0.7
million was charged against this liability. At March 31, 1999, the restructuring
reserve had a balance of approximately $8.6 million.
Results of Operations
First quarter of 1999 compared with first quarter of 1998
Net sales. Net sales decreased 7.1% to $741.1 million in the first quarter of
1999 from $798.0 million in the first quarter of 1998. This decrease is
primarily due to the impact of the cancellation of the company's distribution
contract with Columbia/HCA. The decrease in sales was partially offset by both
increased penetration of existing accounts and new customer contracts. Sales for
the quarter included sales from Tenet BuyPower, the company's largest new
customer, beginning in February 1999.
Gross margin. Gross margin as a percentage of net sales increased to 10.6% in
the first quarter of 1999 from 10.3% in the first quarter of 1998. This
improvement reflects the company's continued emphasis on supply chain
initiatives with key suppliers as well as a lower sales base in 1999.
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses as a percentage of net sales increased to 7.9%
for the first quarter of 1999, compared to 7.6% for the first quarter of 1998.
The increase, as a percentage of net sales, was the result of a lower sales base
as the actual expense decreased $2.3 million to $58.6 million in the first
quarter of 1999 from $60.9 million in the first quarter of 1998. This reduction
was the result of cost-saving initiatives, including the reduction of
approximately 300 full-time equivalent (FTE) employees since March 31, 1998.
These cost savings were partially offset by increased information technology
spending, including $1.0 million of expenses to address Y2K computer issues,
compared with $0.8 million in the first quarter of 1998.
Depreciation and amortization. Depreciation and amortization for the first
quarter of 1999 was comparable to the first quarter of 1998.
Interest expense, net, and discount on accounts receivable securitization.
Interest expense, net, and discount on accounts receivable securitization
decreased to $4.1 million in the first quarter of 1999 from $5.2 million in the
first quarter of 1998. This reduction has been a result of the lower level of
the combined outstanding debt and the off balance sheet accounts receivable
securitization for the first quarter in 1999 compared to the same period in
1998. The company expects to continue to manage these costs by continuing its
working capital reduction initiatives and management of interest rates, although
the future results of these initiatives cannot be assured.
Distributions on mandatorily redeemable preferred securities and dividends on
preferred stock. In May 1998, the Trust issued $132.0 million of the Securities.
O&M applied substantially all of the net proceeds to repurchase all of its
outstanding Series B Cumulative Preferred Stock. As of March 31, 1999, the
company had accrued $1.2 million of distributions related to these Securities.
Income taxes. The company had an income tax provision of $4.3 million in the
first quarter of 1999 compared with $4.7 million in the first quarter of 1998.
The effective tax rate was 44.0%, compared to 41.0% for the same period in 1998
as lower income before taxes increased the impact of nondeductible expenses.
14
Net income. Net income decreased to $5.5 million in the first quarter of 1999
from $6.8 million in the first quarter of 1998, principally as the result of the
issuance of the Securities during second quarter 1998. Net income attributable
to common stock of approximately $5.5 million in the first quarter of 1999 was
unchanged from the first quarter of 1998. The positive impact of the reduction
in SG&A expenses, lower interest expense, net, and discount on accounts
receivable securitization and the elimination of preferred dividends was offset
by lower sales and the related lower gross margin dollars as well as
distributions on the Securities. Although the company continues to pursue
initiatives to improve profitability, the future impact on net income cannot be
assured.
Readiness for Year 2000
The Year 2000 (Y2K) issue is the result of computer programs being written using
two-digit, rather than four-digit, year dates. O&M's computer hardware, software
and devices with embedded technology that are time-sensitive may recognize a
date code using "00" as the year 1900 rather than the year 2000. This situation
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in other normal business activities. The
company has divided its Y2K efforts into three main areas:
o computer hardware and software;
o other systems and equipment, such as telephone equipment, scanning
equipment and alarm systems; and
o suppliers and customers.
Computer Hardware and Software. In 1997, O&M completed its assessment of its
computer hardware and software, and developed a strategy of remediation. This
strategy includes retirement of outdated software and replacement or repair of
the remaining software and hardware. The company began repair and replacement
efforts in 1997, and expects they will be substantially complete by mid-1999,
prior to any currently anticipated impact on its computer hardware and software.
Testing of repairs is expected to be substantially complete in the third quarter
of 1999, but will continue through the end of the year. O&M estimates that, as
of March 31, 1999, it had completed approximately 98% of the repair, 60% of
replacement, and 40% of the testing that it believes will be necessary to fully
address potential Y2K issues relating to its computer hardware and software.
Other Systems and Equipment. The company has completed an inventory and
assessment of non-computer related systems and equipment at its operating
divisions and a similar inventory and assessment at its corporate offices. O&M
believes that the impact on operations of potential noncompliance for these
systems and equipment would be minimal. The company is continuing its program of
replacement and repair of non-compliant systems and equipment, and expects this
effort to be complete by late 1999.
Suppliers and Customers. O&M has contacted its significant suppliers to
determine the extent to which the company is vulnerable to the suppliers'
failure to remediate their Y2K compliance issues. Of the suppliers representing
approximately 90% of O&M's sales, 89% have responded, and, of those responding,
94% have indicated that they have either remedied their Y2K compliance issues,
or plan to do so before the end of 1999. The company will be conducting tests
with selected suppliers beginning in the second quarter of 1999.
15
The company has also contacted its largest customers to determine their level of
Y2K readiness. Many customers have not yet responded to these inquiries or have
not responded with sufficient detail for O&M to determine whether they will be
Y2K compliant on a timely basis. The company is continuing its efforts to
ascertain the readiness of its customers, but since this readiness cannot be
assured, O&M is in the process of developing contingency plans to address the
most likely risks of non-compliance.
The company estimates the cost of its Y2K remediation efforts will total
approximately $9.7 million of operating expenses and $6.7 million of capital
expenditures. These expenditures will be funded from operating cash flows.
Through March 31, 1999, O&M had incurred approximately $6.7 million of expenses
and $4.3 million of capital spending related to its Y2K efforts, of which $1.0
million and $0.5 million were incurred in the first quarter of 1999. For the
remainder of 1999, the company expects to incur approximately $3.0 million of
expenses and $2.4 million of capital spending. Other information technology
efforts have not been significantly delayed by Y2K initiatives.
O&M is working on, but has not yet completed, an analysis of the operational
problems that would be reasonably likely to result from the failure by the
company and certain third parties to complete efforts necessary to achieve Y2K
compliance on a timely basis. The company is currently determining its most
reasonably likely worst-case scenario and will be developing contingency plans
to address this scenario. O&M plans to complete its analysis and contingency
planning by late 1999.
O&M believes the Y2K issue will not pose significant operational problems for
the company. However, if all Y2K issues are not properly identified or if
assessment, remediation and testing are not completed on a timely basis, there
can be no assurance that the Y2K issue will not have a material adverse impact
on the company's results of operations or adversely affect its relationships
with customers, suppliers or others. Additionally, there can be no assurance
that Y2K non-compliance by other entities will not have a material adverse
impact on the company's systems or results of operations.
The costs of O&M's Y2K efforts and the dates on which the company believes it
will complete these efforts are based upon management's current estimates. These
estimates used numerous assumptions regarding future events, including the
continued availability of certain resources, third party remediation plans and
other factors. There can be no assurance that these estimates will prove to be
accurate, and actual results could differ materially from those currently
anticipated.
Risks
The company is subject to risks associated with changes in the medical industry,
including continued efforts to control costs, which place pressure on operating
margin, and changes in the way medical and surgical services are delivered to
patients.
Forward-looking Statements
Certain statements in this discussion constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, including, but not
limited to, general economic and business conditions, competition, changing
trends in customer profiles, outcome of outstanding litigation, readiness for
Year 2000 and changes in government regulations. Although O&M believes its
expectations with respect to the forward-looking statements are based upon
reasonable assumptions within the bounds of its knowledge of its
16
business and operations, there can be no assurance that actual results,
performance or achievements of the company will not differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company believes there has been no material change in its exposure to market
risk from that discussed in Item 7A in the company's Annual Report on Form 10-K
for the year ended December 31, 1998.
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, 1998.
Through March 31, 1999, there have been no material developments in any legal
proceedings reported in such Annual Report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3 (ii) Amended and Restated Bylaws of Owens & Minor, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
The company filed a Current Report on Form 8-K dated March 11, 1999,
Items 5 and 7, with respect to the issuance of a press release
relating to the death of Ann Greer Rector, Senior Vice President and
Chief Financial Officer of the company.
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 6, 1999 /s/ Richard F. Bozard
-------------- ------------------------------
Richard F. Bozard
Vice President & Treasurer
Acting Chief Financial Officer
Date May 6, 1999 /s/ Olwen B. Cape
--------------- ------------------------------
Olwen B. Cape
Vice President & Controller
Chief Accounting Officer
Exhibits Filed with SEC
Exhibit #
- ---------
3 (ii) Amended and Restated Bylaws of Owens & Minor, Inc.
27 Financial Data Schedule