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 September 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to Commission file number 1-9810 OWENS & MINOR, INC. (Exact name of Registrant as specified in its charter) Virginia 54-1701843 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4800 Cox Road, Glen Allen, Virginia 23060 (Address of principalexecutive offices) (Zip Code) Registrant's telephone number, including area code (804) 747-9794 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of the company's common stock outstanding as of November 3, 1995 was 30,859,120 shares. Owens & Minor, Inc. and Subsidiaries Index Part I. Financial Information Consolidated Balance Sheets - September 30, 1995 and December 31, 1994 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 1995 and 1994 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1995 and 1994 Notes to Consolidated Financial Statements Management's Discussion and Analysis of Results of Operations and Financial Condition Part II. Other Information Part I. Financial Information Item 1. Financial Statements Owens & Minor, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except per share data) <TABLE> <S> <C> <C> Septebmer 30, December 31, 1995 1994 Assets Current assets Cash and cash equivalents $ 221 $ 513 Accounts and notes receivable, net 325,018 290,240 Merchandise inventories 336,140 323,851 Other current assets 32,072 26,222 Total current assets 693,451 640,826 Property and equipment, net 41,417 38,620 Excess of purchase price over net assets acquired, net 172,739 175,956 Other assets 20,148 13,158 Total assets $ 927,755 $ 868,560 Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 3,534 $ 236 Accounts payable 255,376 296,878 Accrued payroll and related liabilities 7,660 11,294 Other accrued liabilities 39,775 50,630 Total current liabilities 306,345 359,038 Long-term debt 368,156 248,427 Other liabilities 6,566 4,919 Total liabilities 681,067 612,384 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 1/2%, convertible; issued - 1,150 shares 115,000 115,000 Common stock, par value $2 per share; authorized - 200,000 shares; issued - 30,843 shares in 1995 and 30,764 in 1994 61,686 61,528 Paid-in capital 1,905 1,207 Retained earnings 68,097 78,441 Total shareholders' equity 246,688 256,176 Total liabilities and shareholders' equity $ 927,755 $ 868,560 </TABLE> See Notes to Consolidated Financial Statements. Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share data) <TABLE> <S> <C> <C> Three Months Ended Nine Months Ended September 30, September 30, </TABLE> <TABLE> <S> <C> <C> <C> <C> 1995 1994 1995 1994 Net sales $739,021 $693,004 $2,229,834 $1,665,561 Cost of sales 679,655 626,770 2,027,059 1,503,392 Gross margin 59,366 66,234 202,775 162,169 Selling, general and 57,229 46,797 164,864 116,882 administrative expenses Depreciation and amortization 3,833 3,757 11,062 9,356 Interest expense, net 7,128 3,575 18,249 5,603 Nonrecurring restructuring 4,656 9,037 11,431 27,654 expenses Total expenses 72,846 63,166 205,606 159,495 Income (loss) before income (13,480) 3,068 (2,831) 2,674 taxes Income tax provision (benefit) (4,879) 1,582 (531) 1,557 Net income (loss) (8,601) 1,486 (2,300) 1,117 Dividends on preferred stock 1,293 1,293 3,881 2,020 Net income (loss) attributable $ (9,894) $ 193 $ (6,181) $ (903) to common stock Net income (loss) per common $ (0.32) $ 0.01 $ (0.20) $ (0.03) share Cash dividends per common share $ 0.045 $ 0.045 $ 0.135 $ 0.125 Weighted average common shares and common share equivalents 30,839 31,191 30,804 30,981 </TABLE> See Notes to Consolidated Financial Statements. Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows Nine Months Ended (In thousands) September 30, <TABLE> <S> <C> <C> 1995 1994 Operating Activities Net income (loss) $ (2,300) $ 1,117 Noncash charges to income (loss) Depreciation and amortization 11,062 9,356 Provision for losses on accounts and notes receivable 476 837 Provision for LIFO reserve 2,912 640 Other, net 1,619 798 Cash provided by net income (loss) and noncash 13,769 12,748 charges Change in operating assets and liabilities Accounts and notes receivable (35,254) (123,924) Merchandise inventories (15,201) (85,322) Accounts payable (14,464) 21,794 Net change in other current assets and current liabilities (18,732) 37,645 Other, net (2,421) 82 Cash used for operating activities (72,303) (136,977) Investing Activities Business acquisitions, net of cash acquired - (38,622) Additions to property and equipment (9,890) (2,559) Additions to computer software (5,721) (702) Other, net 105 38 Cash used for investing activities (15,506) (41,845) Financing Activities Additions to long-term debt 122,435 214,192 Reductions of long-term debt (180) (74,967) Other short-term financing, net (27,038) 42,079 Cash dividends paid (8,044) (4,986) Exercise of options 344 800 Cash provided by financing activities 87,517 177,118 Net decrease in cash and cash equivalents (292) (1,704) Cash and cash equivalents at beginning of year 513 2,048 Cash and cash equivalents at end of period $ 221 $ 344 </TABLE> See Notes to Consolidated Financial Statements. Owens & Minor, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Accounting Policies In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are comprised only of normal recurring accruals and the use of estimates) necessary to present fairly the consolidated financial position of Owens & Minor, Inc. and subsidiaries (the company) as of September 30, 1995 and the results of operations for the three and nine month periods and cash flows for the nine month periods ended September 30, 1995 and 1994. Certain 1994 amounts have been reclassified to conform with the 1995 presentation. 2. Interim Results of Operations The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. 3. Interim Gross Margin Reporting In general, the company uses estimated gross margin rates to determine the cost of sales during interim periods. To improve the accuracy of its estimated gross margins for interim reporting purposes, the company takes physical inventories at selected distribution centers, and reported results of operations for the quarter reflect the results of such inventories, if materially different. Management will continue a program of interim physical inventories at selected distribution centers to the extent it deems appropriate to ensure the accuracy of interim reporting and to minimize year-end adjustments. 4. Nonrecurring Restructuring Expenses During the third quarter and the first nine months of 1995, the company incurred $4.7 million and $11.4 million, respectively, of nonrecurring restructuring expenses. During the third quarter and the first nine months of 1994, the company incurred $9.0 million and $27.7 million, respectively, of nonrecurring restructuring expenses. These expenses were related to the company's restructuring plan developed in connection with the company's May 1994 combination with Stuart Medical, Inc. and its related decision to contract out the management and operation of its mainframe computer system. All facility and system consolidations are expected to be completed during 1995 with total 1995 restructuring expenses forecast to approximate $14 million. At September 30, 1995, accrued restructuring expenses were $1.8 million. 5. Subsequent Events On October 20, 1995, the company amended its $425 million Credit Facility. The amendment modifies certain financial covenants of the existing agreement and, under certain conditions, increases the pricing of the agreement. Item 2. Owens & Minor, Inc. and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Net Sales During the third quarter of 1995, net sales increased 6.6% to $739.0 million from $693.0 million in the third quarter of 1994. For the first nine months of 1995, net sales increased 33.9% to $2.2 billion from $1.7 billion in the first nine months of 1994. Assuming the Stuart Medical, Inc. (Stuart) combination had occurred January 1, 1994, the increase would have been approximately 5.0% for the third quarter and 10.4% for the first nine months. The overall increase from 1994 is due to the additional sales volume from contracts entered into in 1993 and 1994 with large healthcare providers such as Columbia/HCA Healthcare Corp., the Department of Defense and Premier Health Alliance, and the price increases from manufacturers which are normally passed on to the customer. During 1995, members of VHA were given the opportunity to choose one of four medical/surgical supply distributors as their authorized distribution agent (ADA). In addition to Owens & Minor, the distribution choices were Shared Service Systems of Nebraska, the Burrows Company and newly-added Baxter distribution. Under terms of an agreement reached between VHA and Baxter manufacturing, all ADAs are authorized to distribute a select group of Baxter self-manufactured products to VHA healthcare organizations. With the completion of the selection process, the company maintained over 85% of its previous VHA volume. The loss of volume has been partially offset by the gain in distributing Baxter's self- manufactured products to VHA hospitals and by increasing market share within VHA facilities as a result of the expanded volume commitment of non-traditional products by these accounts. Non-traditional products, in this case, are products that have historically been sold directly to hospitals by manufacturers, but are now beginning to come through distribution, or products that have been sold through other channels of distribution that are being consolidated through one distributor. As a result of its recent announcement regarding price increases, the company anticipates losing some customers. However, the company expects to offset this with contracts recently awarded, further penetration of existing accounts, as well as prospects for new business. Gross Margin Gross margin as a percentage of net sales declined to 8.0% in the third quarter of 1995 from 9.6% in the third quarter of 1994. Gross margin also declined to 9.1% for the first nine months of 1995 from 9.7% in the first nine months of 1994. The decrease was a result of the increase in sales from lower margin/high volume contracts and the recording of reserves for inventory and sales credits during the third quarter. To address this issue, the company has initiated several plans to offset the margin declines, including an across-the-board price increase and specific actions focused on low margin/low return contracts. Although the price increase is currently in the process of being implemented, groups representing the majority of the company's sales have tentatively agreed to the price increase. Because these agreements are in their preliminary stages, their financial impact cannot be assured. However, the company anticipates an improved gross margin as a result of these actions. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses as a percentage of net sales increased from 6.8% in the third quarter of 1994 to 7.7% in the third quarter of 1995. SG&A expenses also increased from 7.0% for the first nine months of 1994 to 7.4% in the first nine months of 1995. The increase in SG&A expenses was primarily a result of increased personnel costs caused by system conversions, facility relocations and new contracts providing for enhanced service levels and services not previously provided by the company. The company expects to reduce personnel levels once physical inventories are completed. Depreciation and Amortization Depreciation and amortization increased by 2.0% in the third quarter of 1995 compared to the third quarter of 1994 and 18.2% for the first nine months of 1995 compared to the first nine months of 1994. These increases are due primarily to the company's continued investment in improved technology and the amortization of goodwill and depreciation associated with the Stuart transaction. Interest Expense, Net Interest expense, net of interest income, increased from $3.6 million in the third quarter of 1994 to $7.1 million in the third quarter of 1995 and from $5.6 million for the first nine months of 1994 to $18.2 million in the first nine months of 1995. Interest expense has increased significantly due to a combination of higher interest rates and an increase in debt to finance excess inventory levels, the Stuart combination and the company's related restructuring plan and technology initiatives. On October 20, 1995, the company amended its $425 million Credit Facility. The amendment modifies certain financial covenants of the existing agreement and, under certain conditions, increases the pricing of the agreement. To reduce interest expense, the company has several initiatives to reduce excess inventory levels. Inventory levels are expected to decline as the company's new client/server based forecasting system is implemented over the next several months and as the company reduces excess inventory generated from warehouse consolidations and relocations and the start-up of new business. Income Taxes During the third quarter, the company's effective income tax rate changed from an expense of 40.8% of pretax income through the first six months of 1995 to a benefit of 18.8% through the first nine months of 1995. This change is due to the company's lower earnings level increasing the impact of certain nondeductible expenses such as goodwill amortization. Nonrecurring Restructuring Expenses During the third quarter of 1995 and the first nine months of 1995, the company incurred $4.7 million and $11.4 million, respectively, of nonrecurring restructuring expenses related to the company's restructuring plan developed in connection with the company's May 1994 combination with Stuart and its related decision to contract out the management and operation of its mainframe computer system. The restructuring expenses incurred during the third quarter of 1995 relate primarily to duplicate facilities, duplicate systems costs and expenses related to contracting out the computer system. All consolidations are expected to be completed during 1995, with total 1995 restructuring expenses forecast to approximate $14 million. Net Income (Loss) During the third quarter of 1995, the company incurred a net loss of $8.6 million compared to net income of $1.5 million in 1994. During the first nine months of 1995, the company incurred a net loss of $2.3 million compared to net income of $1.1 million in 1994. Excluding the nonrecurring expenses and the related tax benefit, the company recorded a net loss of approximately $5.8 million or $.23 per common share for the third quarter and net income of $4.6 million or $.02 per common share for the first nine months. As previously discussed, the losses were due to the combination of a decline in gross margin, an increase in SG&A expenses and an increase in interest expense. Although the initiatives previously discussed are anticipated to improve the earnings of the company, their impact cannot be assured. Financial Condition With the decrease in gross margin percentages and increases in SG&A expenses and interest expense percentages as discussed, return on common equity decreased. With the company's increase in debt to finance excess inventory levels, the Stuart combination and related restructuring plan, the current ratio and capitalization ratio have increased and inventory turnover has decreased. With the completion of the consolidation of Stuart in September, the company will be able to redirect its focus to reducing inventory levels, expenses, and debt, and, in conjunction with its customers and manufacturer partnerships, increasing margins. <TABLE> <S> <C> <C> <C> Nine Months Twelve Months Nine Months September 30, 1995 December 31, 1994 September 30, 1994 Return on Common 5.7% 16.2% 15.6% Equity* Current Ratio 2.3 1.8 1.9 Inventory Turnover 8.2 8.8 8.2 Accounts Receivable 36.5 35.9 35.6 Days Sales Capitalization Ratio 59.9% 49.2% 49.4% </TABLE> * Excludes impact of nonrecurring restructuring expenses and related tax benefit. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (4) Second Amendment to Credit Agreement dated as of October 20, 1995 by and among the Company, as borrower, certain of the company's subsidiaries, as guarantors, NationsBank, N.A., as Agent, Chemical Bank and Crestar Bank, as Co-Agents, and the Banks identified therein. (27) Financial Data Schedule (b) Reports on Form 8-K The company filed a Current Report on Form 8-K dated September 15, 1995, Items 5 and 7, with respect to the issuance of a press release relating to preliminary third quarter and fiscal year 1995 earnings. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OWENS & MINOR, INC. (Registrant) Date November 10, 1995 /s/ Glenn J. Dozier Glenn J. Dozier Senior Vice President, Finance, Chief Financial Officer Date November 10, 1995 /s/ Ann G. Rector Ann G. Rector Vice President, Controller Exhibit Index Exhibit # Description 4 Second Amendment to Credit Agreement dated as of October 20, 1995 by and among the Company, as borrower, certain of the company's subsidiaries, as guarantors, NationsBank, N.A., as Agent, Chemical Bank and Crestar Bank, as Co-Agents, and the Banks identified therein. 27 Financial Data Schedule