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, 2001 -------------- 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 26, 2001, was 33,376,663 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, 2001 and 2000 3 Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000 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, -------------------------------------- 2001 2000 --------------- -------------- <S> <C> <C> Net sales $ 924,508 $ 856,742 Cost of goods sold 825,625 764,781 --------------- -------------- Gross margin 98,883 91,961 --------------- -------------- Selling, general and administrative expenses 72,701 67,426 Depreciation and amortization 5,607 5,161 Interest expense, net 3,423 3,305 Discount on accounts receivable securitization 1,609 1,859 Distributions on mandatorily redeemable preferred securities 1,774 1,774 --------------- -------------- Total expenses 85,114 79,525 --------------- -------------- Income before income taxes 13,769 12,436 Income tax provision 6,058 5,596 --------------- -------------- Net income $ 7,711 $ 6,840 =============== ============== Net income per common share - basic $ 0.23 $ 0.21 =============== ============== Net income per common share - diluted $ 0.22 $ 0.20 =============== ============== Cash dividends per common share $ 0.0625 $ 0.0600 =============== ============== </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, 2001 2000 ----------- ------------- (unaudited) <S> <C> <C> Assets Current assets Cash and cash equivalents $ 949 $ 626 Accounts and notes receivable, net of allowance of $6,459 and $6,419 250,955 261,905 Merchandise inventories 335,785 315,570 Other current assets 14,148 16,190 ------------ ------------- Total current assets 601,837 594,291 Property and equipment, net of accumulated depreciation of $60,027 and $58,876 26,848 24,239 Goodwill, net of accumulated amortization of $35,474 and $33,977 203,352 204,849 Other assets, net 42,643 44,169 ------------ ------------- Total assets $ 874,680 $ 867,548 ============ ============= Liabilities and shareholders' equity Current liabilities Accounts payable $ 297,094 $ 291,507 Accrued payroll and related liabilities 4,244 9,940 Other accrued liabilities 61,843 59,207 ------------ ------------- Total current liabilities 363,181 360,654 Long-term debt 150,689 152,872 Other liabilities 9,604 9,250 ------------ ------------- Total liabilities 523,474 522,776 ------------ ------------- 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 - 33,293 shares and 33,180 shares 66,586 66,360 Paid-in capital 18,568 18,039 Retained earnings 134,632 129,001 Accumulated other comprehensive loss (580) (628) ------------ ------------- Total shareholders' equity 219,206 212,772 ------------ ------------- Total liabilities and shareholders' equity $ 874,680 $ 867,548 ============ ============= </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, --------------------------------- 2001 2000 --------- --------- <S> <C> <C> Operating activities Net income $ 7,711 $ 6,840 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 5,607 5,161 Provision for LIFO reserve 1,300 1,200 Provision for losses on accounts and notes receivable 248 94 Sales of accounts receivable, net 15,000 2,064 Changes in operating assets and liabilities: Accounts and notes receivable (4,298) 16,956 Merchandise inventories (21,515) 2,567 Accounts payable 11,187 (1,793) Net change in other current assets and current liabilities (1,690) 6,566 Other, net 923 1,740 --------- --------- Cash provided by operating activities 14,473 41,395 --------- --------- Investing activities Additions to property and equipment (5,013) (1,268) Additions to computer software (590) (2,872) Other, net 109 20 --------- --------- Cash used for investing activities (5,494) (4,120) --------- --------- Financing activities Reduction of debt (1,600) (22,600) Other financing, net (5,600) (12,822) Cash dividends paid (2,080) (1,970) Proceeds from exercise of stock options 624 - --------- --------- Cash used for financing activities (8,656) (37,392) --------- --------- Net increase (decrease) in cash and cash equivalents 323 (117) Cash and cash equivalents at beginning of period 626 669 --------- --------- Cash and cash equivalents at end of period $ 949 $ 552 ========= ========= </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, 2001 and the consolidated results of operations and cash flows for the three month periods ended March 31, 2001 and 2000. 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, 2001 and 2000 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. Reclassification of Shipping Fees In the fourth quarter of 2000, the company adopted the provisions of Emerging Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and Handling Fees and Costs. As a result, the company reclassified certain amounts billed to customers for shipping from selling, general and administrative (SG&A) expenses to net sales for all prior periods. As a result, net sales, gross margin, and SG&A expenses for the first quarter of 2000 have been increased by $2.2 million. 5. Acquisition In 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. 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 functions. An accrual was established to provide for certain costs of this plan. The following table sets forth the activity in the accrual since December 31, 2000: <TABLE> <CAPTION> (in thousands) Balance at Balance at December 31, March 31, 2000 Charges 2001 ----------------------------------------------------------------------------- <S> <C> <C> <C> Losses under lease commitments $1,285 $ 7 $1,278 Employee separations 83 19 64 Other 281 - 281 ----------------------------------------------------------------------------- Total $1,649 $26 $1,623 ============================================================================= </TABLE> 6
As of March 31, 2001, approximately 40 employees had been terminated. No employees were terminated under the plan in the first quarter of 2001. The integration of the Medix business is expected to be completed by late 2001. 6. Restructuring Reserve As a result of the cancellation of a significant customer contract in 1998, the company recorded a nonrecurring restructuring charge to downsize operations. The following table sets forth the activity in the restructuring reserve since December 31, 2000: <TABLE> <CAPTION> (in thousands) Balance at Balance at December 31, March 31, 2000 Charges 2001 ------------------------------------------------------------------------------------- <S> <C> <C> <C> Losses under lease commitments $2,718 $117 $2,601 Asset write-offs 821 - 821 ------------------------------------------------------------------------------------- Total $3,539 $117 $3,422 ===================================================================================== </TABLE> 7. Off Balance Sheet Receivables Financing Facility Under the terms of its Receivables Financing Facility, O&M Funding is entitled to transfer, without recourse, certain of the company's trade receivables and receive up to $225.0 million from a group of unrelated third party purchasers. At March 31, 2001 and December 31, 2000, net accounts receivable of $95.0 million and $80.0 million had been sold under the agreement and, as a result, have been excluded from the consolidated balance sheet. 8. Derivative Financial Instruments On January 1, 2001, the company adopted the provisions of Statement of Financial Accounting Standards No. (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting treatment for changes in the fair value of a derivative depends upon the intended use of the derivative and the resulting designation. The company enters into interest rate swaps as part of its interest rate risk management strategy. The purpose of these swaps is to maintain the company's desired mix of fixed to floating rate financing, and to minimize interest expense related to fixed rate financing. The company's interest rate swap agreements as of March 31, 2001 included $100.0 million notional amounts that effectively converted a portion of the company's fixed rate financing instruments to variable rates. These swaps are designated as fair value hedges of a portion of the company's 10.875% Senior Subordinated 10-year Notes (Notes), and are assumed to have no ineffectiveness under the provisions of SFAS 133. The adoption of this Standard did not have a material impact on the company's results of operations or financial position. 7
9. Comprehensive Income The company's comprehensive income for the three months ended March 31, 2001 and 2000 is shown in the table below. Other comprehensive income is comprised of changes in unrealized gain or loss on investment, net of income tax. <TABLE> <CAPTION> (in thousands) Three Months Ended March 31, ------------------------------------------- 2001 2000 ----------------- ---------------- <S> <C> <C> Net income $7,711 $6,840 Other comprehensive income - change in unrealized gain (loss) on investment, net of tax 48 1,266 ----------------- ---------------- Comprehensive income $7,759 $8,106 ================= ================ </TABLE> 10. 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, -------------------------------------------- 2001 2000 ------------------- ----------------- <S> <C> <C> Numerator: Numerator for basic net income per common share - net income $ 7,711 $ 6,840 Distributions on convertible mandatorily redeemable preferred securities, net of income taxes 993 976 - ------------------------------------------------------------------------------------------------------------------------------ Numerator for diluted net income per common share - net income attributable to common stock after assumed conversions $ 8,704 $ 7,816 - ------------------------------------------------------------------------------------------------------------------------------ Denominator: Denominator for basic net income per common share - weighted average shares 32,989 32,585 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities 6,400 6,400 Stock options and restricted stock 524 234 - ------------------------------------------------------------------------------------------------------------------------------ Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 39,913 39,219 - ------------------------------------------------------------------------------------------------------------------------------ Net income per common share - basic $ 0.23 $ 0.21 Net income per common share - diluted $ 0.22 $ 0.20 ============================================================================================================================== </TABLE> 11. 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 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
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> For the three months ended Owens & Guarantor Non-guarantor March 31, 2001 Minor, Inc. Subsidiaries Subsidiaries Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Statements of Operations Net sales $ - $ 924,508 $ - $ 924,508 Cost of goods sold - 825,625 - 825,625 - ----------------------------------------------------------------------------------------------------------------------------------- Gross margin - 98,883 - 98,883 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses - 72,444 257 72,701 Depreciation and amortization - 5,607 - 5,607 Interest expense, net 4,383 (960) - 3,423 Intercompany interest expense, net (1,826) 7,432 (5,606) - Discount on accounts receivable securitization - 3 1,606 1,609 Distributions on mandatorily redeemable preferred securities - - 1,774 1,774 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,557 84,526 (1,969) 85,114 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (2,557) 14,357 1,969 13,769 Income tax provision (benefit) (1,125) 6,302 881 6,058 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,432) $ 8,055 $ 1,088 $ 7,711 ==================================================================================================================================== </TABLE> <TABLE> <CAPTION> For the three months ended Owens & Guarantor Non-guarantor March 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Statements of Operations Net sales $ - $ 856,742 $ - $ 856,742 Cost of goods sold - 764,781 - 764,781 - ----------------------------------------------------------------------------------------------------------------------------------- Gross margin - 91,961 - 91,961 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses - 67,141 285 67,426 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 securities - - 1,774 1,774 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,412 78,237 (1,124) 79,525 =================================================================================================================================== 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> 9
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> ==================================================================================================================================== Owens & Guarantor Non-guarantor March 31, 2001 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 441 $ 1 $ - $ 949 Accounts and notes receivable, net - 11,885 239,070 - 250,955 Merchandise inventories - 335,785 - - 335,785 Intercompany advances, net 129,167 80,027 (209,194) - - Other current assets 4 14,144 - - 14,148 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 129,678 442,282 29,877 - 601,837 Property and equipment, net - 26,845 3 - 26,848 Goodwill, net - 203,352 - - 203,352 Intercompany investments 305,441 15,001 136,083 (456,525) - Other assets, net 8,543 33,969 131 - 42,643 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 443,662 $ 721,449 $ 166,094 $ (456,525) $ 874,680 ==================================================================================================================================== Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 297,094 $ - $ - $ 297,094 Accrued payroll and related liabilities - 4,244 - - 4,244 Other accrued liabilities 5,367 57,008 (532) - 61,843 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 5,367 358,346 (532) - 363,181 Long-term debt 150,689 - - - 150,689 Intercompany long-term debt 136,083 - - (136,083) - Other liabilities (930) 10,536 (2) - 9,604 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 291,209 368,882 (534) (136,083) 523,474 - ------------------------------------------------------------------------------------------------------------------------------------ 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 66,586 40,879 5,583 (46,462) 66,586 Paid-in capital 18,568 258,979 15,001 (273,980) 18,568 Retained earnings 67,879 52,709 14,044 - 134,632 Accumulated other comprehensive loss (580) - - - (580) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 152,453 352,567 34,628 (320,442) 219,206 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 443,662 $ 721,449 $ 166,094 $ (456,525) $ 874,680 ==================================================================================================================================== </TABLE> 10
<TABLE> <CAPTION> Condensed Consolidating Financial Information (in thousands) ==================================================================================================================================== Owens & Guarantor Non-guarantor December 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 118 $ 1 $ - $ 626 Accounts and notes receivable, net - 24,224 237,681 - 261,905 Merchandise inventories - 315,570 - - 315,570 Intercompany advances, net 129,447 79,645 (209,092) - - Other current assets 17 16,173 - - 16,190 - ----------------------------------------------------------------------------------------------------------------------------------- Total current assets 129,971 435,730 28,590 - 594,291 Property and equipment, net - 24,236 3 - 24,239 Goodwill, net - 204,849 - - 204,849 Intercompany investments 305,441 15,001 136,083 (456,525) - Other assets, net 8,735 35,157 277 - 44,169 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 444,147 $ 714,973 $ 164,953 $ (456,525) $ 867,548 =================================================================================================================================== Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 291,507 $ - $ - $ 291,507 Accrued payroll and related liabilities - 9,940 - - 9,940 Other accrued liabilities 1,632 58,159 (584) - 59,207 - ----------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,632 359,606 (584) - 360,654 Long-term debt 152,200 672 - - 152,872 Intercompany long-term debt 136,083 - - (136,083) - Other liabilities (930) 10,183 (3) - 9,250 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 288,985 370,461 (587) (136,083) 522,776 - ----------------------------------------------------------------------------------------------------------------------------------- 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 66,360 40,879 5,583 (46,462) 66,360 Paid-in capital 18,039 258,979 15,001 (273,980) 18,039 Retained earnings 71,391 44,654 12,956 - 129,001 Accumulated other comprehensive loss (628) - - - (628) - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 155,162 344,512 33,540 (320,442) 212,772 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 444,147 $ 714,973 $ 164,953 $ (456,525) $ 867,548 =================================================================================================================================== </TABLE> 11
Condensed Consolidating Financial Information <TABLE> <CAPTION> (in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ For the three months ended Owens & Guarantor Non-guarantor March 31, 2001 Minor, Inc. Subsidiaries Subsidiaries Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Statements of Cash Flows Operating activities Net income (loss) $ (1,432) $ 8,055 $ 1,088 $ 7,711 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization - 5,607 - 5,607 Provision for LIFO reserve - 1,300 - 1,300 Provision for losses on accounts and notes receivable - 465 (217) 248 Sales of accounts receivable, net - - 15,000 15,000 Changes in operating assets and liabilities: Accounts and notes receivable - 11,874 (16,172) (4,298) Merchandise inventories - (21,515) - (21,515) Accounts payable - 11,187 - 11,187 Net change in other current assets and current liabilities 3,746 (5,608) 172 (1,690) Other, net 462 434 27 923 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) operating activities 2,776 11,799 (102) 14,473 - ------------------------------------------------------------------------------------------------------------------------------------ Investing activities Additions to property and equipment - (5,013) - (5,013) Additions to computer software - (590) - (590) Other, net - 109 - 109 - ------------------------------------------------------------------------------------------------------------------------------------ Cash used for investing activities - (5,494) - (5,494) - ------------------------------------------------------------------------------------------------------------------------------------ Financing activities Reduction of debt (1,600) - - (1,600) Change in intercompany advances 280 (382) 102 - Other financing, net - (5,600) - (5,600) Cash dividends paid (2,080) - - (2,080) Proceeds from exercise of stock options 624 - - 624 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) financing activities (2,776) (5,982) 102 (8,656) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents - 323 - 323 Cash and cash equivalents at beginning of period 507 118 1 626 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 507 $ 441 $ 1 $ 949 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> 12
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> ==================================================================================================================================== For the three months ended Owens & Guarantor Non-guarantor March 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S> <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 Sales of accounts receivable, net - - 2,064 2,064 Changes in operating assets and liabilities: Accounts and notes receivable - 30,442 (13,486) 16,956 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> 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, 2000. 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 2000 Annual Report on Form 10-K for the year ended December 31, 2000. Financial Condition, Liquidity and Capital Resources Liquidity. Combined outstanding debt and off balance sheet accounts receivable securitization increased by $13.5 million to $247.0 million at March 31, 2001, from $233.5 million at December 31, 2000. This increase was primarily a result of increased inventory levels to support current sales volume. Excluding sales of accounts receivable and their subsequent collections under the receivables financing facility, $0.5 million of cash was used for operating activities in the first three months of 2001, compared with $39.3 million provided by operating activities in the first quarter of 2000. This decrease in operating cash flow resulted primarily from increased purchases of inventory necessary to support current sales volume. 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, 2001, the company had $224.4 million of unused credit under its revolving credit facility and the ability to sell an additional $130.0 million of accounts receivable under its receivables financing facility. Working Capital Management. The company's working capital increased by $5.0 million from December 31, 2000 to $238.7 million at March 31, 2001, primarily due to increased inventory levels. Capital Expenditures. Capital expenditures were $5.6 million in the first three months of 2001, including $3.3 million for the purchase of land to be used for the company's future headquarters. The company spent $1.5 million to purchase computer hardware and software. The company expects to continue supporting strategic initiatives and improving operational efficiency through investments in technology, including system upgrades and the development of electronic commerce. These capital expenditures are expected to be funded through cash flow from operations. Results of Operations First quarter of 2001 compared with first quarter of 2000 Net sales. Net sales increased 8% to $924.5 million in the first quarter of 2001 from $856.7 million in the first quarter of 2000. This increase resulted primarily from further penetration of existing accounts. Gross margin. Gross margin for the first quarter of 2001 was 10.7% of net sales, consistent with the first quarter of 2000. Customer margins decreased slightly from last year. These decreases, however, were offset by favorable vendor initiatives. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses for the first quarter of 2001 were 7.9% of net sales, consistent with the first quarter of 2000. 14
Depreciation and amortization. Depreciation and amortization expense for the quarter increased to $5.6 million, or 9% from the first quarter of 2000. Excluding goodwill amortization of $1.5 million in both periods, depreciation and amortization increased 12% primarily as a result of continued investments in computer software. Interest expense, net, and discount on accounts receivable securitization (financing costs). Net financing costs totaled $5.0 million for the first quarter of 2001, compared with $5.2 million in the first quarter of 2000. Excluding collections of customer finance charges, financing costs for the first quarter decreased $0.2 million from the first quarter of 2000. While market interest rates were slightly higher in the first quarter of 2001, average outstanding financing decreased from the same period of 2000. 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 $6.1 million in the first quarter of 2001 compared with $5.6 million in the same period in 2000. The effective tax rate was 44.0%, compared to 45.0% for the same period in 2000. This rate decrease results primarily from decreases in certain nondeductible expenses. Net income. Net income increased to $7.7 million in the first quarter of 2001 from $6.8 million in the first quarter of 2000. The increase is primarily due to the increase in sales while controlling operating and financing costs. Recent Accounting Pronouncements In September 2000, the Financial Accounting Standards Board issued SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS 125 of the same title. SFAS 140 revises the standards for securitizations and other transfers of financial assets and expands the disclosure requirements for such transactions, while carrying over many of the provisions of SFAS 125 without change. The provisions of SFAS 140 are effective for transfers of financial assets and extinguishments of liabilities occurring after March 31, 2001, and are to be applied prospectively. Management expects that the pronouncement will not require a change in the company's accounting treatment of sales of accounts receivable under its Receivables Financing Facility, or have any material effect on the company's consolidated financial position, results of operations, or cash flows. The company adopted the disclosure requirements of SFAS 140 in 2000. 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. 15
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, 2000. 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, 2000. Through March 31, 2001, 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 None. (b) Reports on Form 8-K The company filed a Current Report on Form 8-K dated March 20, 2001, under Items 5 and 7, with respect to the appointment of Jeffrey Kaczka as Senior Vice President, 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 7, 2001 /s/ Jeffrey Kaczka ----------------- ____________________________ Jeffrey Kaczka Senior Vice President Chief Financial Officer Date May 7, 2001 /s/ Olwen B. Cape ----------------- ____________________________ Olwen B. Cape Vice President & Controller Chief Accounting Officer 18