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, 2000 -------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number 1-9810 ---------------- 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 principal executive offices) (Zip Code) Post Office Box 27626, Richmond, Virginia 23261-7626 - -------------------------------------------------------------------------------- (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 28, 2000, was 32,835,392 shares. 1
Owens & Minor, Inc. and Subsidiaries Index <TABLE> <CAPTION> Page <S> <C> Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income - Three Months Ended March 31, 2000 and 1999 3 Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II. Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 </TABLE> 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) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------- 2000 1999 -------------- -------------- <S> <C> <C> Net sales $ 854,549 $ 741,084 Cost of goods sold 764,781 662,355 ----------- ----------- Gross margin 89,768 78,729 ----------- ----------- Selling, general and administrative expenses 65,233 58,598 Depreciation and amortization 5,161 4,461 Interest expense, net 3,305 3,096 Discount on accounts receivable securitization 1,859 995 Distributions on mandatorily redeemable preferred securities 1,774 1,774 ----------- ----------- Total expenses 77,332 68,924 ----------- ----------- Income before income taxes 12,436 9,805 Income tax provision 5,596 4,314 ----------- ----------- Net income $ 6,840 $ 5,491 =========== =========== Net income per common share-basic $ 0.21 $ 0.17 =========== =========== Net income per common share-diluted $ 0.20 $ 0.17 =========== =========== Cash dividends per common share $ 0.06 $ 0.05 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 3
Owens & Minor, Inc. and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> (In thousands, except per share data) March 31, December 31, 2000 1999 ----------- ------------ Assets (Unaudited) Current assets <S> <C> <C> Cash and cash equivalents $ 552 $ 669 Accounts and notes receivable, net of allowance of $6,496 and $6,479 207,813 226,927 Merchandise inventories 338,711 342,478 Other current assets 11,287 19,172 ---------- ----------- Total current assets 558,363 589,246 Property and equipment, net of accumulated depreciation of $54,756 and $52,516 24,804 25,877 Goodwill, net of accumulated amortization of $29,486 and $27,989 209,340 210,837 Other assets, net 41,538 39,040 ---------- ----------- Total assets $ 834,045 $ 865,000 ========== =========== Liabilities and shareholders' equity Current liabilities Accounts payable $ 288,875 $ 303,490 Accrued payroll and related liabilities 4,112 6,883 Other accrued liabilities 61,497 59,425 ---------- ----------- Total current liabilities 354,484 369,798 Long-term debt 151,333 174,553 Other liabilities 7,525 6,268 ---------- ----------- Total liabilities 513,342 550,619 ---------- ----------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. 132,000 132,000 ---------- ----------- Shareholders' equity Preferred stock, par value $100 per share; authorized - 10,000 shares Series A; Participating Cumulative Preferred Stock; none issued - - Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 32,824 shares and 32,711 shares 65,648 65,422 Paid-in capital 12,850 12,890 Retained earnings 108,939 104,069 Accumulated other comprehensive income 1,266 - ---------- ----------- Total shareholders' equity 188,703 182,381 ---------- ----------- Total liabilities and shareholders' equity $ 834,045 $ 865,000 ========== =========== </TABLE> See accompanying notes to consolidated financial statements. 4
Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> (In thousands) Three Months Ended (Unaudited) March 31, ------------------------------ 2000 1999 ----------- ----------- <S> <C> <C> Operating activities Net income $ 6,840 $ 5,491 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 5,161 4,461 Provision for LIFO reserve 1,200 610 Provision for losses on accounts and notes receivable 94 240 Changes in operating assets and liabilities: Accounts and notes receivable 19,020 (18,217) Merchandise inventories 2,567 (26,773) Accounts payable (1,793) 68,307 Net change in other current assets and current liabilities 6,566 3,393 Other, net 1,740 428 ---------- ---------- Cash provided by operating activities 41,395 37,940 ---------- ---------- Investing activities Additions to property and equipment (1,268) (2,124) Additions to computer software (2,872) (134) Other, net 20 (1,179) ---------- ---------- Cash used for investing activities (4,120) (3,437) ---------- ---------- Financing activities Reduction of debt (22,600) - Other financing, net (12,822) (32,765) Cash dividends paid (1,970) (1,634) Proceeds from exercise of stock options - 80 ---------- ---------- Cash used for financing activities (37,392) (34,319) ---------- ---------- Net increase (decrease) in cash and cash equivalents (117) 184 Cash and cash equivalents at beginning of period 669 546 ---------- ---------- Cash and cash equivalents at end of period $ 552 $ 730 ========== ========== </TABLE> 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, 2000 and the consolidated results of operations and cash flows for the three month periods ended March 31, 2000 and 1999. 2. Interim Results of Operations The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. 3. Interim Gross Margin Reporting The company uses estimated gross margin rates to determine the cost of goods sold during interim periods. To improve the accuracy of its estimated gross margins for interim reporting purposes, the company takes physical inventory counts at selected distribution centers. Reported results of operations for the three month periods ended March 31, 2000 and 1999 reflect the results of such counts, to the extent that they are materially different from estimated amounts. Management will continue a program of interim physical inventories at selected distribution centers to the extent it deems appropriate to ensure the accuracy of interim reporting and to minimize year-end adjustments. 4. Investment In October 1999, in a private offering, the company purchased an equity investment in Neoforma.com, Inc. (Neoforma), a provider of business-to- business e-commerce services in the healthcare industry. In January 2000, Neoforma made an initial public offering, at which time the shares held by O&M were converted to common stock. The investment is classified as available-for-sale, in accordance with Statement of Financial Accounting Standards No.115, Accounting for Certain Investments in Debt and Equity Securities, and is included in other assets, net in the consolidated balance sheets at fair value, with unrealized gains and losses, net of tax, reported as accumulated other comprehensive income. At March 31, 2000, the estimated fair value (based on the quoted market price), gross unrealized gain and cost basis of this investment were $3.5 million, $2.3 million and $1.2 million. At December 31, 1999, the investment was stated at its cost basis of $1.2 million, as there was no market for the securities at that time. 5. Acquisition On July 30, 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical and surgical supplies. The acquisition has been accounted for by the purchase method and, accordingly, the operating results of Medix have been included in the company's consolidated financial statements since the date of acquisition. Assuming the acquisition had been made at January 1, 1999, consolidated net sales, on a pro forma basis, would have been approximately $791 million for the three months ended March 31, 1999. Consolidated net income and net income per share on a pro forma basis would not have been materially different from the results reported. In connection with the acquisition, management adopted a plan for integration of the businesses which includes closure of some Medix facilities and consolidation of certain administrative 6
functions. An accrual was established to provide for certain costs of this plan. The following table sets forth the activity in the accrual during the three months ended March 31, 2000: <TABLE> <CAPTION> (In thousands) Balance at Balance at December 31, 1999 Charges March 31, 2000 ------------------------------------- --------------------- ------------- ----------------- <S> <C> <C> <C> Losses under lease commitments $ 1,609 $ 107 $ 1,502 Employee separations 339 38 301 Other 685 32 653 ------------------------------------- --------------------- ------------- ----------------- Total $ 2,633 $ 177 $ 2,456 ------------------------------------- --------------------- ------------- ----------------- </TABLE> As of March 31, 2000, 16 employees had been terminated. The integration of the Medix business is expected to be substantially complete by mid-2000. 6. Restructuring Reserve As a result of the Columbia/HCA Healthcare Corporation contract cancellation in the second quarter of 1998, the company recorded a nonrecurring restructuring charge to downsize operations. The following table sets forth the activity in the restructuring reserve during the three months ended March 31, 2000: <TABLE> <CAPTION> (In thousands) Balance at Balance at December 31, 1999 Charges March 31, 2000 ------------------------------------- --------------------- ------------- ----------------- <S> <C> <C> <C> Losses under lease commitments $ 2,304 $ 327 $ 1,977 Asset write-offs 3,316 175 3,141 Employee separations 13 7 6 Other 477 1 476 ------------------------------------- --------------------- ------------- ----------------- Total $ 6,110 $ 510 $ 5,600 ------------------------------------- --------------------- ------------- ----------------- </TABLE> 7. Net Income per Common Share The following sets forth the computation of basic and diluted net income per common share: <TABLE> <CAPTION> (In thousands, except per share data) Three Months Ended March 31, ---------------------------------------- 2000 1999 ----------------- ---------------- <S> <C> <C> Numerator: Numerator for basic net income per common share - net income $ 6,840 $ 5,491 Distributions on convertible mandatorily redeemable preferred securities, net of income taxes 976 993 -------------------------------------------------------------------------------------------------------------------------- Numerator for diluted net income per common share - net income attributable to common stock after assumed conversions $ 7,816 $ 6,484 -------------------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic net income per common share - weighted average shares 32,585 32,556 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities 6,400 6,400 Stock options and restricted stock 234 129 -------------------------------------------------------------------------------------------------------------------------- Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 39,219 39,085 -------------------------------------------------------------------------------------------------------------------------- Net income per common share - basic $ 0.21 $ 0.17 Net income per common share - diluted $ 0.20 $ 0.17 -------------------------------------------------------------------------------------------------------------------------- </TABLE> 7
8. 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. 8
<TABLE> <CAPTION> Condensed Consolidating Financial Information (In thousands) For the three months ended Owens & Guarantor Non-guarantor March 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Statements of Operations <S> <C> <C> <C> <C> <C> Net sales $ - $ 854,549 $ - $ - $ 854,549 Cost of goods sold - 764,781 - - 764,781 - ----------------------------------------------------------------------------------------------------------------------------------- Gross margin - 89,768 - - 89,768 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses - 64,948 285 - 65,233 Depreciation and amortization - 5,161 - - 5,161 Interest expense, net 4,576 (1,271) - - 3,305 Intercompany interest expense, net (2,164) 7,199 (5,035) - - Discount on accounts receivable securitization - 7 1,852 - 1,859 Distributions on mandatorily redeemable preferred - - 1,774 - 1,774 securities - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,412 76,044 (1,124) - 77,332 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (2,412) 13,724 1,124 - 12,436 Income tax provision (benefit) (1,061) 5,995 662 - 5,596 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,351) $ 7,729 $ 462 $ - $ 6,840 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> For the three months ended Owens & Guarantor Non-guarantor March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Statements of Operations <S> <C> <C> <C> <C> <C> 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) 5,657 (3,961) - - Discount on accounts receivable securitization - 6 989 - 995 Distributions on mandatorily redeemable preferred - - 1,774 - 1,774 securities - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,458 67,572 (1,106) - 68,924 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (2,458) 11,157 1,106 - 9,805 Income tax provision (benefit) (1,082) 4,897 499 - 4,314 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,376) $ 6,260 $ 607 $ - $ 5,491 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> 9
Condensed Consolidating Financial Information (In thousands) <TABLE> <CAPTION> Owens & Guarantor Non-guarantor March 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 44 $ 1 $ - $ 552 Accounts and notes receivable, net - 81,436 126,377 - 207,813 Merchandise inventories - 338,661 50 - 338,711 Intercompany advances, net 134,982 - - (134,982) - Other current assets - 11,287 - - 11,287 - ----------------------------------------------------------------------------------------------------------------------------------- Total current assets 135,489 431,428 126,428 (134,982) 558,363 Property and equipment, net - 24,800 4 - 24,804 Goodwill, net - 209,340 - - 209,340 Intercompany investments 305,441 15,001 136,083 (456,525) - Other assets, net 11,905 28,798 835 - 41,538 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 452,835 $ 709,367 $ 263,350 $ (591,507) $ 834,045 =================================================================================================================================== Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 288,845 $ 30 $ - $ 288,875 Accrued payroll and related liabilities - 4,112 - - 4,112 Intercompany advances, net - 35,674 99,308 (134,982) - Other accrued liabilities 5,105 54,787 1,605 - 61,497 - ----------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 5,105 383,418 100,943 (134,982) 354,484 Long-term debt 150,000 1,333 - - 151,333 Intercompany long-term debt 136,083 - - (136,083) - Other liabilities - 7,525 - - 7,525 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 291,188 392,276 100,943 (271,065) 513,342 - ----------------------------------------------------------------------------------------------------------------------------------- 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 65,648 40,879 5,583 (46,462) 65,648 Paid-in capital 12,850 258,979 15,001 (273,980) 12,850 Retained earnings 81,883 17,233 9,823 - 108,939 Accumulated other comprehensive income 1,266 - - - 1,266 - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 161,647 317,091 30,407 (320,442) 188,703 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 452,835 $ 709,367 $ 263,350 $ (591,507) $ 834,045 =================================================================================================================================== </TABLE> 10
Condensed Consolidating Financial Information (In thousands) <TABLE> <CAPTION> ================================================================================================================================== Owens & Guarantor Non-guarantor December 31, 1999 Minor, Inc Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 158 $ 4 $ - $ 669 Accounts and notes receivable, net - 112,088 114,839 - 226,927 Merchandise inventories - 342,478 - - 342,478 Intercompany advances, net 157,711 - - (157,711) - Other current assets - 19,172 - - 19,172 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets 158,218 473,896 114,843 (157,711) 589,246 Property and equipment, net - 25,877 - - 25,877 Goodwill, net - 210,837 - - 210,837 Intercompany investments 305,441 15,001 136,083 (456,525) - Other assets, net 9,894 27,933 1,213 - 39,040 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 473,553 $ 753,544 $ 252,139 $ (614,236) $ 865,000 - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 303,490 $ - $ - $ 303,490 Accrued payroll and related liabilities - 6,883 - - 6,883 Intercompany advances, net - 69,220 88,491 (157,711) - Other accrued liabilities 1,354 56,368 1,703 - 59,425 - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,354 435,961 90,194 (157,711) 369,798 Long-term debt 172,600 1,953 - - 174,553 Intercompany long-term debt 136,083 - - (136,083) - Other liabilities - 6,268 - - 6,278 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 310,037 444,182 90,194 (293,794) 550,619 - ---------------------------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. - - 132,000 - 132,000 - ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 65,422 40,879 5,583 (46,462) 65,422 Paid-in capital 12,890 258,979 15,001 (273,980) 12,890 Retained earnings 85,204 9,504 9,361 - 104,069 - ---------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 163,516 309,362 29,945 (320,442) 182,381 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 473,553 $ 753,544 $ 252,139 $ (614,236) $ 865,000 ================================================================================================================================== </TABLE> 11
<TABLE> <CAPTION> Condensed Consolidating Financial Information (In thousands) =================================================================================================================================== For the three months ended Owens & Guarantor Non-guarantor March 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Statements of Cash Flows Operating activities Net income (loss) $ (1,351) $ 7,729 $ 462 $ - $ 6,840 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization - 5,161 - - 5,161 Provision for LIFO reserve - 1,200 - - 1,200 Provision for losses on accounts and notes receivable - 210 (116) - 94 Changes in operating assets and liabilities: Accounts and notes receivable - 30,442 (11,422) - 19,020 Merchandise inventories - 2,617 (50) - 2,567 Accounts payable - (1,823) 30 - (1,793) Net change in other current assets and current liabilities 3,750 2,536 280 - 6,566 Other, net 477 1,263 - - 1,740 - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided by (used for) operating activities 2,876 49,335 (10,816) - 41,395 - ----------------------------------------------------------------------------------------------------------------------------------- Investing activities Additions to property and equipment - (1,264) (4) - (1,268) Additions to computer software - (2,872) - - (2,872) Other, net - 20 - - 20 - ----------------------------------------------------------------------------------------------------------------------------------- Cash used for investing activities - (4,116) (4) - (4,120) - ----------------------------------------------------------------------------------------------------------------------------------- Financing activities Reduction of debt (22,600) - - - (22,600) Change in intercompany advances 21,694 (32,511) 10,817 - - Other financing, net - (12,822) - - (12,822) Cash dividends paid (1,970) - - - (1,970) - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities (2,876) (45,333) 10,817 - (37,392) - ----------------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents - (114) (3) - (117) Cash and cash equivalents at beginning of period 507 158 4 - 669 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 507 $ 44 $ 1 $ - $ 552 =================================================================================================================================== </TABLE> 12
<TABLE> <CAPTION> Condensed Consolidating Financial Information (In thousands) =================================================================================================================================== For the three months ended Owens & Guarantor Non-guarantor March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Statements of Cash Flows Operating activities Net income (loss) $ (1,376) $ 6,260 $ 607 $ - $ 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 17 (1) - 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 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 equivalents - 184 - - 184 Cash and cash equivalents at beginning of period 505 40 1 - 546 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 505 $ 224 $ 1 $ - $ 730 =================================================================================================================================== </TABLE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management discussion and analysis describes material changes in the financial condition of Owens & Minor, Inc. and its wholly-owned subsidiaries (O&M or the company) since December 31, 1999. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto and management's discussion and analysis of financial condition and results of operations included in the company's 1999 Annual Report on Form 10-K for the year ended December 31, 1999. Financial Condition, Liquidity and Capital Resources Liquidity. The company's liquidity improved during the first quarter of 2000. Combined outstanding debt and off balance sheet accounts receivable securitization borrowings were reduced by $20.5 million to $260.3 million at March 31, 2000, from $280.8 million at December 31, 1999. The reduction was due to the positive impact of cash flow from operations. 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, 2000, the company had $225.0 million of unused credit under its revolving credit facility and approximately $42.3 million under its receivables financing facility. Effective April 24, 2000, the company replaced its revolving credit facility with a new agreement expiring in April 2003. The credit limit of the new facility is $225.0 million, unchanged from the previous facility, and the interest is based on LIBOR or the Prime Rate, at the company's discretion. Under the new facility, the company is charged a commitment fee of between 0.20% and 0.275% on the unused portion of the facility, and a utilization fee of 0.25% will be charged if borrowings exceed $112.5 million. The terms of the new agreement limit the amount of indebtedness that the company may incur, require the company to maintain certain levels of net worth, current ratio, leverage ratio and fixed charge coverage, and restrict the ability of the company to materially alter the character of the business through consolidation, merger or purchase or sale of assets. Working Capital Management. The company's working capital decreased by $15.6 million from December 31, 1999 to $203.9 million at March 31, 2000, primarily due to collections of accounts receivable. Accounts receivable, excluding the impact of the company's accounts receivable securitization facility, decreased by $17.0 million to $315.5 million at March 31, 2000. Capital Expenditures. Capital expenditures were approximately $4.1 million in the first three months of 2000, of which approximately $3.6 million was for computer hardware and software. The company expects to continue supporting strategic initiatives and improving operational efficiency through investments in technology including system upgrades. These capital expenditures are expected to be funded through cash flow from operations. Results of Operations First quarter of 2000 compared with first quarter of 1999 Net sales. Net sales increased 15.3% to $854.5 million in the first quarter of 2000 from $741.1 million in the first quarter of 1999. Excluding the sales generated by Medix, net sales increased 9.0%. Most of this increase resulted from increased penetration of existing accounts, most significantly Tenet BuyPower, whose distribution contract began in February 1999 and therefore contributed to only two months' sales in the first quarter of 1999. 14
Gross margin. Gross margin as a percentage of net sales decreased slightly to 10.5% in the first quarter of 2000 compared with 10.6% for the first quarter of 1999. The decrease was a result of a lower sales base in the first quarter of 1999. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses as a percentage of net sales decreased to 7.6% of net sales for the first quarter of 2000, compared to 7.9% for the first quarter of 1999. The decrease as a percentage of sales was the result of the higher sales base in the first quarter of 2000 and the elimination of the need for Year 2000 remediation efforts. Expenses in the first quarter of 1999 included spending of $1.0 million on Year 2000 initiatives. Depreciation and amortization. Depreciation and amortization expense for the quarter increased by approximately 15.7% from 1999, due, in part, to goodwill amortization of approximately $0.4 million resulting from the Medix acquisition. In addition, depreciation expense increased as a result of higher capital spending associated with information technology initiatives. O&M anticipates similar increases in depreciation throughout the rest of 2000. Interest expense, net, and discount on accounts receivable securitization (financing costs). Financing costs totaled $5.2 million in the first quarter of 2000, compared with $4.1 million in the first quarter of 1999. The increase in financing costs is due to an increase in debt (including amounts financed under the company's off balance sheet accounts receivable securitization facility) of approximately $45.3 million since the first quarter of 1999. The increase in debt resulted from the Medix acquisition, partially offset by positive cash flows from operations. The company expects to continue to manage its financing costs by continuing its working capital reduction initiatives and management of interest rate risks, although the future results of these initiatives cannot be assured. Income taxes. The income tax provision was $5.6 million in the first quarter of 2000 compared with $4.3 million in the same period in 1999. The effective tax rate was 45.0%, compared to 44.0% for the same period in 1999. This rate increase results primarily from increases in certain nondeductible expenses. Net income. Net income increased to $6.8 million in the first quarter of 2000 from $5.5 million in the first quarter of 1999. The increase is primarily due to the increase in sales and success in controlling operating expenses. New Health Exchange In April 2000, the company announced an agreement in principle with four other leading healthcare distributors to form an Internet-based company that would be an independent, commercially neutral healthcare product information exchange focused on streamlining the healthcare supply chain. The companies involved expect to complete a definitive joint-venture agreement by the end of July and begin implementation of the exchange by the end of the year. The founding members expect the new exchange to require investments totaling more than $100 million. The amount to be invested by O&M has not been determined at this time. Recent Accounting Pronouncements. In September 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. In May 1999, the FASB delayed the effective date of this standard by one year. The company will be required to adopt the provisions of this standard beginning on January 1, 2001. Management believes the effect of the adoption of this standard will be 15
limited to financial statement presentation and disclosure and will not have a material effect on the company's financial condition or results of operations. Risks The company is subject to risks associated with changes in the medical industry, including continued efforts to control costs, which place pressure on operating margin, and changes in the way medical and surgical services are delivered to patients. The loss of one of the company's larger customers could have a significant effect on its business. However, management believes that the company's competitive position in the marketplace and its ability to control costs would enable it to continue profitable operations and attract new customers in the event of such a loss. Forward-looking Statements Certain statements in this discussion constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, including, but not limited to, general economic and business conditions, competition, changing trends in customer profiles, outcome of outstanding litigation and changes in government regulations. Although O&M believes its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The company believes there has been no material change in its exposure to market risk from that discussed in Item 7A in the company's Annual Report on Form 10-K for the year ended December 31, 1999. 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, 1999. Through March 31, 2000, there have been no material developments in any legal proceedings reported in such Annual Report. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 4 Credit Agreement dated as of April 24, 2000 by and among Owens & Minor, Inc., as Borrower, Certain of its Subsidiaries, as Guarantors, the banks identified herein, First Union National Bank and SunTrust Bank, as Syndication Agents, Bank One, N.A., as Managing Agent, The Bank of Nova Scotia, as Co-Agent, and Bank of America, N.A., as Administrative Agent 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the company during the quarter for which this Quarterly Report is filed. 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 11, 2000 /s/ Richard F. Bozard ---------------------- ------------------------------------- Richard F. Bozard Vice President & Treasurer Acting Chief Financial Officer Date May 11, 2000 /s/ Olwen B. Cape ---------------------- ------------------------------------- Olwen B. Cape Vice President & Controller Chief Accounting Officer
Exhibits Filed with SEC ----------------------- Exhibit # - --------- 4 Credit Agreement dated as of April 24, 2000 by and among Owens & Minor, Inc., as Borrower, Certain of its Subsidiaries, as Guarantors, the banks identified herein, First Union National Bank and SunTrust Bank, as Syndication Agents, Bank One, N.A., as Managing Agent, The Bank of Nova Scotia, as Co-Agent, and Bank of America, N.A., as Administrative Agent.