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, 2002 -------------- 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 18, 2002, was 34,064,964 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, 2002 and 2001 3 Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2002 and 2001 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 (unaudited) Three Months Ended (in thousands, except per share data) March 31, ------------------- 2002 2001 -------- -------- Net sales $966,683 $924,508 Cost of goods sold 863,652 825,625 -------- -------- Gross margin 103,031 98,883 -------- -------- Selling, general and administrative expenses 75,724 72,701 Depreciation and amortization 3,981 4,110 Amortization of goodwill -- 1,497 Interest expense, net 2,928 3,423 Discount on accounts receivable securitization 439 1,609 Distributions on mandatorily redeemable preferred securities 1,774 1,774 -------- -------- Total expenses 84,846 85,114 -------- -------- Income before income taxes 18,185 13,769 Income tax provision 7,365 6,058 -------- -------- Net income $ 10,820 $ 7,711 ======== ======== Net income per common share - basic $ 0.32 $ 0.23 ======== ======== Net income per common share - diluted $ 0.29 $ 0.22 ======== ======== Cash dividends per common share $ 0.07 $ 0.0625 ======== ======== Excluding goodwill amortization and related tax benefit: Net income $ 10,820 $ 9,046 ======== ======== Net income per common share - basic $ 0.32 $ 0.27 ======== ======== Net income per common share - diluted $ 0.29 $ 0.25 ======== ======== See accompanying notes to consolidated financial statements. 3
Owens & Minor, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) <TABLE> <CAPTION> (in thousands, except per share data) March 31, December 31, 2002 2001 --------- ----------- <S> <C> <C> Assets Current assets Cash and cash equivalents $ 688 $ 953 Accounts and notes receivable, net of allowance of $5,732 and $5,296 324,215 264,235 Merchandise inventories 345,502 389,504 Other current assets 17,001 24,760 -------- -------- Total current assets 687,406 679,452 Property and equipment, net of accumulated depreciation of $67,602 and $65,594 24,536 25,257 Goodwill 198,324 198,324 Other assets, net 47,172 50,820 -------- -------- Total assets $957,438 $953,853 ======== ======== Liabilities and shareholders' equity Current liabilities Accounts payable $293,062 $286,656 Accrued payroll and related liabilities 5,002 12,669 Other accrued liabilities 64,077 68,349 -------- -------- Total current liabilities 362,141 367,674 Long-term debt 202,015 203,449 Other liabilities 14,823 14,487 -------- -------- Total liabilities 578,979 585,610 -------- -------- 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 - 34,059 shares and 33,885 shares 68,118 67,770 Paid-in capital 28,734 27,181 Retained earnings 151,292 142,854 Accumulated other comprehensive loss (1,685) (1,562) -------- -------- Total shareholders' equity 246,459 236,243 -------- -------- Total liabilities and shareholders' equity $957,438 $953,853 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 4
Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) <TABLE> <CAPTION> Three Months Ended (in thousands) March 31, -------------------- 2002 2001 -------- --------- <S> <C> <C> Operating activities Net income $ 10,820 $ 7,711 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 3,981 5,607 Provision for LIFO reserve 3,180 1,300 Provision for losses on accounts and notes receivable 479 248 Changes in operating assets and liabilities: Net increase (decrease) in receivables sold (30,000) 15,000 Accounts and notes receivable, excluding sales of receivables (30,459) (4,298) Merchandise inventories 40,822 (21,515) Accounts payable (6,594) 11,187 Net change in other current assets and current liabilities (4,180) (1,690) Other, net 1,843 923 -------- -------- Cash provided by (used for) operating activities (10,108) 14,473 -------- -------- Investing activities Additions to property and equipment (1,332) (5,013) Additions to computer software (837) (590) Other, net (15) 109 -------- -------- Cash used for investing activities (2,184) (5,494) -------- -------- Financing activities Reduction of debt -- (1,600) Cash dividends paid (2,382) (2,080) Proceeds from exercise of stock options 1,409 624 Other, net 13,000 (5,600) -------- -------- Cash provided by (used for) financing activities 12,027 (8,656) -------- -------- Net increase (decrease) in cash and cash equivalents (265) 323 Cash and cash equivalents at beginning of period 953 626 -------- -------- Cash and cash equivalents at end of period $ 688 $ 949 ======== ======== </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, 2002 and the consolidated results of operations and cash flows for the three month periods ended March 31, 2002 and 2001. 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. 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. Goodwill On January 1, 2002, the company adopted the provisions of Statement of Financial Accounting Standards No. (SFAS) 142, Goodwill and Other Intangible Assets. The provisions of SFAS 142 state that goodwill should not be amortized but should be tested for impairment upon adoption of the standard, and at least annually, at the reporting unit level. As a result, the company no longer records goodwill amortization expense. During the first quarter of 2002, the company completed the transitional impairment test and determined that goodwill was not impaired as of January 1, 2002. The provisions of SFAS 142 also require the company to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. At implementation, the company had no separately identifiable intangible assets from purchase business combinations that are recorded either separately or within goodwill. 6
The following table presents the company's net income for the three month periods ended March 31, 2002 and 2001, adjusted to exclude goodwill amortization expense and related tax benefits: (in thousands) Three Months Ended March 31, ------------------ 2002 2001 ------- ------ Net income $10,820 $7,711 Goodwill amortization expense, net of tax benefit -- 1,335 ------- ------ Net income excluding goodwill amortization expense $10,820 $9,046 ======= ====== 5. Acquisition In 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical and surgical supplies. The acquisition was accounted for by the purchase method. In connection with the acquisition, management adopted a plan for integration of the businesses that included 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, 2001: (in thousands) Balance at Balance at December 31, March 31, 2001 Charges 2002 --------------------------------------------------------------------------- Losses under lease commitments $737 $119 $618 Other 65 8 57 --------------------------------------------------------------------------- Total $802 $127 $675 --------------------------------------------------------------------------- The integration of the Medix business was completed in 2001. However, the company continues to make payments under lease commitments and other obligations. 6. Restructuring Reserve As a result of the cancellation of a significant customer contract in 1998, the company recorded a restructuring charge to downsize operations. The following table sets forth the activity in the restructuring reserve since December 31, 2001: (in thousands) Balance at Balance at December 31, March 31, 2001 Charges 2002 --------------------------------------------------------------------------- Losses under lease commitments $ 921 $ 35 $ 886 Asset write-offs 849 230 619 --------------------------------------------------------------------------- Total $1,770 $265 $1,505 --------------------------------------------------------------------------- 7. Off Balance Sheet Receivables Financing Facility Under the terms of its off balance sheet receivables financing facility (Receivables Financing Facility), O&M Funding is entitled to sell, without recourse, certain of the company's trade receivables and to receive up to $225.0 million from a group of unrelated third party purchasers. At March 31, 2002 and December 31, 2001, net accounts receivable of $40.0 million and $70.0 million had been sold under the agreement and, as a result, have been excluded from the consolidated balance sheets. 7
8. Comprehensive Income The company's comprehensive income for the three months ended March 31, 2002 and 2001 is shown in the table below. Other comprehensive income for the periods presented below is comprised of changes in unrealized gain or loss on investment, net of income tax. (in thousands) Three Months Ended March 31, ------------------ 2002 2001 ------- ------ Net income $10,820 $7,711 Other comprehensive income - change in unrealized gain (loss) on investment, net of tax (123) 48 ------- ------ Comprehensive income $10,697 $7,759 ======= ====== 9. 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, ------------------ 2002 2001 ------- ------- <S> <C> <C> Numerator: Numerator for basic net income per common share - net income $10,820 $ 7,711 Distributions on convertible mandatorily redeemable preferred securities, net of income taxes 1,064 993 ---------------------------------------------------------------------------------------------------- Numerator for diluted net income per common share - net income attributable To common stock after assumed conversions $11,884 $ 8,704 ---------------------------------------------------------------------------------------------------- Denominator: Denominator for basic net income per common share - weighted average shares 33,708 32,989 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities 6,400 6,400 Stock options 377 273 Restricted stock 267 251 ---------------------------------------------------------------------------------------------------- Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 40,752 39,913 ---------------------------------------------------------------------------------------------------- Net income per common share - basic $ 0.32 $ 0.23 Net income per common share - diluted $ 0.29 $ 0.22 ---------------------------------------------------------------------------------------------------- </TABLE> 10. Recently Adopted Accounting Pronouncement On January 1, 2002, the company adopted the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The provisions of SFAS 144 modify the accounting treatment for impairments of long-lived assets and discontinued operations. The adoption of this standard did not have a material effect on the company's results of operations or financial condition. 8
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. <TABLE> <CAPTION> (in thousands) For the three months ended Owens & Guarantor Non-guarantor March 31, 2002 Minor, Inc. Subsidiaries Subsidiaries Consolidated - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Statements of Operations Net sales $ -- $966,683 $ -- $966,683 Cost of goods sold -- 863,652 -- 863,652 - ------------------------------------------------------------------------------------------------------------- Gross margin -- 103,031 -- 103,031 - ------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses -- 75,323 401 75,724 Depreciation and amortization -- 3,981 -- 3,981 Interest expense, net 3,667 (739) -- 2,928 Intercompany interest expense, net (5,208) 8,602 (3,394) -- Discount on accounts receivable securitization -- 3 436 439 Distributions on mandatorily redeemable preferred securities -- -- 1,774 1,774 - ------------------------------------------------------------------------------------------------------------- Total expenses (1,541) 87,170 (783) 84,846 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 1,541 15,861 783 18,185 Income tax provision 655 6,377 333 7,365 - ------------------------------------------------------------------------------------------------------------- Net income $ 886 $ 9,484 $ 450 $ 10,820 ============================================================================================================= </TABLE> <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 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 -- 4,110 -- 4,110 Amortization of goodwill -- 1,497 -- 1,497 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> 9
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> ================================================================================================================================= Owens & Guarantor Non-guarantor March 31, 2002 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 622 $ 65 $ 1 $ -- $ 688 Accounts and notes receivable, net -- 9,667 314,548 -- 324,215 Merchandise inventories -- 345,502 -- -- 345,502 Intercompany advances, net 169,899 111,933 (281,832) -- -- Other current assets 5 16,996 -- -- 17,001 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets 170,526 484,163 32,717 -- 687,406 Property and equipment, net -- 24,536 -- -- 24,536 Goodwill, net -- 198,324 -- -- 198,324 Intercompany investments 342,499 36,202 136,083 (514,784) -- Other assets, net 11,755 34,417 1,000 -- 47,172 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $524,780 $777,642 $ 169,800 $(514,784) $ 957,438 ================================================================================================================================= Liabilities and shareholders' equity Current liabilities Accounts payable $ -- $293,062 $ -- $ -- $ 293,062 Accrued payroll and related liabilities -- 5,002 -- -- 5,002 Other accrued liabilities 2,640 62,151 (714) -- 64,077 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 2,640 360,215 (714) -- 362,141 Long-term debt 202,015 -- -- -- 202,015 Intercompany long-term debt 136,082 143,891 -- (279,973) -- Other liabilities (755) 15,605 (27) -- 14,823 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 339,982 519,711 (741) (279,973) 578,979 - --------------------------------------------------------------------------------------------------------------------------------- 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 68,118 -- 5,583 (5,583) 68,118 Paid-in capital 28,734 213,227 16,001 (229,228) 28,734 Retained earnings 87,783 46,552 16,957 -- 151,292 Accumulated other comprehensive loss 163 (1,848) -- -- (1,685) - --------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 184,798 257,931 38,541 (234,811) 246,459 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $524,780 $777,642 $ 169,800 $(514,784) $ 957,438 ================================================================================================================================= </TABLE> 10
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> ================================================================================================================================= Owens & Guarantor Non-guarantor December 31, 2001 Minor,Inc. Subsidiaries Subsidiaries Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 445 $ 1 $ -- $ 953 Accounts and notes receivable, net -- -- 264,235 -- 264,235 Merchandise inventories -- 389,504 -- -- 389,504 Intercompany advances, net 173,802 58,161 (231,963) -- -- Other current assets 17 24,743 -- -- 24,760 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets 174,326 472,853 32,273 -- 679,452 Property and equipment, net -- 25,257 -- -- 25,257 Goodwill, net -- 198,324 -- -- 198,324 Intercompany investments 342,497 15,001 136,083 (493,581) -- Other assets, net 13,708 36,110 1,002 -- 50,820 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $530,531 $747,545 $ 169,358 $(493,581) $953,853 ================================================================================================================================= Liabilities and shareholders' equity Current liabilities Accounts payable $ -- $286,656 $ -- $ -- $286,656 Accrued payroll and related liabilities -- 12,669 -- -- 12,669 Other accrued liabilities 7,238 61,800 (689) -- 68,349 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 7,238 361,125 (689) -- 367,674 Long-term debt 203,449 -- -- -- 203,449 Intercompany long-term debt 136,083 143,890 -- (279,973) -- Other liabilities (755) 15,270 (28) -- 14,487 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 346,015 520,285 (717) (279,973) 585,610 - --------------------------------------------------------------------------------------------------------------------------------- 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 67,770 40,879 5,583 (46,462) 67,770 Paid-in capital 27,181 151,145 16,001 (167,146) 27,181 Retained earnings 89,279 37,084 16,491 -- 142,854 Accumulated other comprehensive loss 286 (1,848) -- -- (1,562) - --------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 184,516 227,260 38,075 (213,608) 236,243 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $530,531 $747,545 $ 169,358 $(493,581) $953,853 ================================================================================================================================= </TABLE> 11
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> ==================================================================================================================== For the three months ended Owens & Guarantor Non-guarantor March 31, 2002 Minor, Inc. Subsidiaries Subsidiaries Consolidated - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Statements of Cash Flows Operating activities Net income $ 886 $ 9,484 $ 450 $ 10,820 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization -- 3,981 -- 3,981 Provision for LIFO reserve -- 3,180 -- 3,180 Provision for losses on accounts and notes receivable -- 86 393 479 Changes in operating assets and liabilities: Net decrease in receivables sold -- -- (30,000) (30,000) Accounts and notes receivable, excluding sales of receivables -- (9,753) (20,706) (30,459) Merchandise inventories -- 40,822 -- 40,822 Accounts payable -- (6,594) -- (6,594) Net change in other current assets and current liabilities (4,586) 427 (21) (4,180) Other, net 885 955 3 1,843 - -------------------------------------------------------------------------------------------------------------------- Cash provided by (used for) operating activities (2,815) 42,588 (49,881) (10,108) - -------------------------------------------------------------------------------------------------------------------- Investing activities Additions to property and equipment -- (1,332) -- (1,332) Additions to computer software -- (837) -- (837) Other, net -- (15) -- (15) - -------------------------------------------------------------------------------------------------------------------- Cash used for investing activities -- (2,184) -- (2,184) - -------------------------------------------------------------------------------------------------------------------- Financing activities Change in intercompany advances 3,903 (53,784) 49,881 -- Cash dividends paid (2,382) -- -- (2,382) Proceeds from exercise of stock options 1,409 -- -- 1,409 Other, net -- 13,000 -- 13,000 - -------------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities 2,930 (40,784) 49,881 12,027 - -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 115 (380) -- (265) Cash and cash equivalents at beginning of period 507 445 1 953 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 622 $ 65 $ 1 $ 688 ==================================================================================================================== </TABLE> 12
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 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 Changes in operating assets and liabilities: Net increase in receivables sold -- -- 15,000 15,000 Accounts and notes receivable, excluding sales of receivables -- 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 -- Cash dividends paid (2,080) -- -- (2,080) Proceeds from exercise of stock options 624 -- -- 624 Other, net -- (5,600) -- (5,600) - -------------------------------------------------------------------------------------------------------------------- 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> 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, 2001. 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 2001 Annual Report on Form 10-K for the year ended December 31, 2001. Results of Operations First quarter of 2002 compared with first quarter of 2001 Overview. In the first quarter of 2002, the company earned net income of $10.8 million, or $0.29 per diluted common share, compared with $7.7 million, or $0.22 per diluted common share in the first quarter of 2001. On January 1, 2002, the company adopted the provisions of SFAS 142, under which the company no longer records goodwill amortization expense. Excluding goodwill amortization and related tax benefits, net income increased by 20% from $9.0 million in the first quarter of 2001 and net income per diluted common share increased by 16% from $0.25 in the first quarter of 2001. Net sales. Net sales increased 5% to $966.7 million in the first quarter of 2002 from $924.5 million in the first quarter of 2001. Net sales increased by 6% on a per-day basis, as the first quarter of 2002 had one less sales day compared to the first quarter of 2001. This increase in sales resulted primarily from further penetration of existing accounts and new business. Gross margin. Gross margin for the first quarter of 2002 was 10.7% of net sales, consistent with the first quarter of 2001. Customer margins increased slightly from last year, but these increases were offset by reduced supplier initiatives. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses for the first quarter of 2002 were 7.8% of net sales, improved from 7.9% of net sales in the first quarter of 2001, largely as a result of lower personnel and warehouse costs relative to the sales base, as the company has completed significant customer transitions that took place in 2001. Interest expense, net, and discount on accounts receivable securitization (financing costs). Net financing costs totaled $3.4 million for the first quarter of 2002, compared with $5.0 million in the first quarter of 2001. Excluding collections of customer finance charges, financing costs for the first quarter were $4.1 million, a decrease of $2.1 million from the first quarter of 2001. The decrease in financing costs was primarily driven by lower effective interest rates resulting from both the refinancing of the company's long-term debt and from decreases in short-term interest rates. The company expects to continue to manage its financing costs by managing working capital levels. Future financing costs will be affected primarily by changes in short-term interest rates, as well as working capital requirements. Income taxes. The income tax provision was $7.4 million in the first quarter of 2002 compared with $6.1 million in the same period in 2001. The effective tax rate was 40.5%, compared to 44.0% for the same period in 2001. This rate decrease results primarily from the elimination of goodwill amortization, much 14
of which was not tax-deductible. Excluding the effects of goodwill amortization, the effective rate was 40.7% for the first quarter of 2001. Financial Condition, Liquidity and Capital Resources Liquidity. Combined outstanding debt and off balance sheet accounts receivable securitization decreased by $31.4 million to $242.0 million at March 31, 2002, from $273.4 million at December 31, 2001. This decrease was primarily a result of reduced sales of accounts receivable. The company required less financing due to lower inventory levels as the company has completed many of the customer transitions that began in 2001. Excluding sales of accounts receivable under the Receivables Financing Facility, $19.9 million of cash was provided by operating activities in the first three months of 2002, compared with $0.5 million used for operating activities in the first quarter of 2001. This increase in operating cash flow was the result of the inventory reductions mentioned above. Effective April 30, 2002, the company replaced its revolving credit facility with a new agreement expiring in April 2005. The credit limit of the new facility is $150.0 million, and the interest rate is based on, at the company's discretion, LIBOR, the Federal Funds Rate or the Prime Rate. Under the new facility, the company is charged a commitment fee of between 0.30% and 0.40% on the unused portion of the facility, and a utilization fee of 0.25% will be charged if borrowings exceed $75.0 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 ratio, and restrict the ability of the company to materially alter the character of the business through consolidation, merger, or purchase or sale of assets. Effective April 30, 2002, the company replaced its receivables securitization facility with a new agreement expiring in April 2005. Under the terms of the new facility, O&M Funding is entitled to sell, without recourse, up to $225.0 million of its trade receivables to a group of unrelated third party purchasers at a cost of funds equal to commercial paper rates, the prime rate, or LIBOR (plus a charge for administrative and credit support services). The terms of the new agreement require the company to maintain certain levels of net worth, current ratio, leverage ratio and fixed charge coverage ratio, and restrict the company's ability to materially alter the character of the business through consolidation, merger, or purchase or sale of assets. 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, 2002, the company had $211.3 million of unused credit under its revolving credit facility and the ability to sell an additional $185.0 million of accounts receivable under its Receivables Financing Facility. Working Capital Management. The company's working capital increased by $13.5 million from December 31, 2001 to $325.3 million at March 31, 2002. The increase in working capital resulted from increased accounts receivable, as the company sold fewer receivables under its Receivables Financing Facility, partially offset by a decrease in inventory. Capital Expenditures. Capital expenditures were $2.2 million in the first quarter of 2002, compared to $5.6 million in the first quarter of 2001. Excluding the purchase of land for the company's future headquarters, capital expenditures in the first quarter of 2001 were $2.3 million. The company spent $1.4 million to purchase computer hardware and software, compared to $1.5 million in the first quarter of 2001. The company expects capital expenditures to continue at about the same level through the end of the year. 15
Recent Accounting Pronouncements In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. The provisions of SFAS 143 address financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The company will be required to adopt the provisions of this standard beginning on January 1, 2003. Management believes that adoption of this standard will not have a material effect on the company's results of operations or financial condition. 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. 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, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to, general economic and business conditions; dependence on sales to certain customers; dependence on suppliers; competition; changing trends in customer profiles; the ability of the company to meet customer demand for additional value added services; the ability to convert customers to CostTrack; the availability of supplier incentives; the ability to capitalize on buying opportunities; the ability to manage operating expenses; the ability of the company to manage financing costs and interest rate risk; the risk that a decline in business volume or profitability could result in an impairment of goodwill; the ability to timely or adequately respond to technological advances in the medical supply industry; the ability to successfully identify; manage or integrate possible future acquisitions; outcome of outstanding litigation; and changes in government regulations. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future results, or otherwise. 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, 2001. 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, 2001. Through March 31, 2002, 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 30, 2002 by and among Owens & Minor, Inc., as Borrower, Certain of its Subsidiaries, as Guarantors, the banks identified herein, Wachovia Bank, National Association and SunTrust Bank, as Syndication Agents, Lehman Brothers Inc. and The Bank of New York, as Documentation Agents, and Bank of America, N.A., as Administrative Agent 10.1 Receivables Purchase Agreement dated as of April 30, 2002 among O&M Funding Corp., Owens & Minor Medical, Inc., Blue Ridge Asset Funding Corporation, Wachovia Bank, National Association, Blue Keel Funding, L.L.C., Fleet Bank, N.A., and Fleet Securities, Inc. 10.2 Receivables Sale Agreement dated as of April 30, 2002 among Owens & Minor, Inc., Owens & Minor Distribution, Inc., Owens & Minor Medical, Inc. and O&M Funding Corp. (b) Reports on Form 8-K None. 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 10, 2002 ---------------------------------------------- Jeffrey Kaczka Senior Vice President Chief Financial Officer Date May 10, 2002 ---------------------------------------------- Olwen B. Cape Vice President & Controller Chief Accounting Officer 18