UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _____________ Commission file number 1-9810 Owens & Minor, Inc. - --------------------------------------------------------------------------- (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 30, 1999, was 32,684,682 shares.
Owens & Minor, Inc. and Subsidiaries Index Page Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income - Three Months Ended March 31, 1999 and 1998 3 Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II. Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17
Part I. Financial Information Item 1. Financial Statements Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share data) (Unaudited) Three Months Ended March 31, ---------------------------- 1999 1998 ------------- ------------- Net sales $ 741,084 $ 797,950 Cost of goods sold 662,355 715,863 ---------- ----------- Gross margin 78,729 82,087 ---------- ----------- Selling, general and administrative expenses 58,598 60,942 Depreciation and amortization 4,461 4,468 Interest expense, net 3,096 3,613 Discount on accounts receivable securitization 995 1,609 Distributions on mandatorily redeemable preferred securities 1,774 - ---------- ----------- Total expenses 68,924 70,632 ---------- ----------- Income before income taxes 9,805 11,455 Income tax provision 4,314 4,696 ---------- ----------- Net income 5,491 6,759 Dividends on preferred stock - 1,294 ---------- ----------- Net income attributable to common stock $ 5,491 $ 5,465 ========== =========== Net income per common share - basic $ 0.17 $ 0.17 ========== =========== Net income per common share - diluted $ 0.17 $ 0.17 ========== =========== Cash dividends per common share $ 0.05 $ 0.05 ========== =========== See accompanying notes to consolidated financial statements. 3
Owens & Minor, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except per share data) March 31, December 31, 1999 1998 --------------------------------- Assets (Unaudited) Current assets Cash and cash equivalents $ 730 $ 546 Accounts and notes receivable, net of allowance of $6,393 and $6,273 231,742 213,765 Merchandise inventories 301,257 275,094 Other current assets 8,818 14,816 ---------- ---------- Total current assets 542,547 504,221 Property and equipment, net of accumulated depreciation of $48,001 and $45,812 25,543 25,608 Goodwill, net of accumulated amortization of $23,980 and $22,843 157,139 158,276 Other assets, net 29,700 29,663 ---------- ---------- Total assets $ 754,929 $ 717,768 =========== ========== Liabilities and shareholders' equity Current liabilities Accounts payable $ 241,793 $ 206,251 Accrued payroll and related liabilities 6,258 8,974 Other accrued liabilities 53,859 53,749 ----------- ---------- Total current liabilities 301,910 268,974 Long-term debt 150,000 150,000 Accrued pension and retirement plans 5,809 5,668 ----------- ---------- Total liabilities 457,719 424,642 ----------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. 132,000 132,000 ----------- ---------- Shareholders' equity Preferred stock, par value $100 per share; authorized - 10,000 shares Series A; Participating Cumulative Preferred Stock; none issued - - Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 32,686 shares and 32,618 shares 65,372 65,236 Paid-in capital 12,371 12,280 Retained earnings 87,467 83,610 ----------- ---------- Total shareholders' equity 165,210 161,126 ----------- ---------- Total liabilities and shareholders' equity $ 754,929 $ 717,768 =========== ========== See accompanying notes to consolidated financial statements. 4
Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Three Months Ended (Unaudited) March 31, ------------------------ 1999 1998 ---------- ----------- Operating activities Net income $ 5,491 $ 6,759 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 4,461 4,468 Provision for LIFO reserve 610 2,617 Provision for losses on accounts and notes receivable 240 84 Changes in operating assets and liabilities: Accounts and notes receivable (18,217) 11,269 Merchandise inventories (26,773) (24,484) Accounts payable 68,307 48,551 Net change in other current assets and current liabilities 3,393 5,092 Other 428 (1,039) ---------- ----------- Cash provided by operating activities 37,940 53,317 ---------- ----------- Investing activities Additions to property and equipment (2,124) (1,098) Additions to computer software (134) (815) Other, net (1,179) 26 ---------- ----------- Cash used for investing activities (3,437) (1,887) ---------- ----------- Financing activities Reduction of long-term debt - (32,550) Other short-term financing, net (32,765) (18,986) Cash dividends paid (1,634) (2,916) Proceeds from exercise of stock options 80 2,689 ---------- ----------- Cash used for financing activities (34,319) (51,763) ---------- ----------- Net increase (decrease) in cash and cash equivalents 184 (333) Cash and cash equivalents at beginning of year 546 583 --------- ----------- Cash and cash equivalents at end of period $ 730 $ 250 ========== =========== See accompanying notes to consolidated financial statements. 5
Owens & Minor, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Accounting Policies In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are comprised only of normal recurring accruals and the use of estimates) necessary to present fairly the consolidated financial position of Owens & Minor, Inc. and its wholly-owned subsidiaries (O&M or the company) as of March 31, 1999 and the consolidated results of operations and cash flows for the three month periods ended March 31, 1999 and 1998. 2. Interim Results of Operations The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. 3. Interim Gross Margin Reporting The company uses estimated gross margin rates to determine the cost of goods sold during interim periods. To improve the accuracy of its estimated gross margins for interim reporting purposes, the company takes physical inventory counts at selected distribution centers. Reported results of operations for the three month periods ended March 31, 1999 and 1998 reflect the results of such counts, to the extent that they are materially different from estimated amounts. Management will continue a program of interim physical inventories at selected distribution centers to the extent it deems appropriate to ensure the accuracy of interim reporting and to minimize year-end adjustments. 4. Restructuring Reserve As a result of the Columbia/HCA Healthcare Corporation contract termination in the second quarter of 1998, the company recorded a nonrecurring restructuring charge to downsize operations. The following table sets forth the activity in the restructuring reserve during the three month period ended March 31, 1999: (In thousands) Balance at Balance at December 31, 1998 Charges March 31, 1999 ----------------------------------------------------------------------- Losses under lease commitments $ 3,621 $ 360 $ 3,261 Asset write-offs 3,463 29 3,434 Employee separations 1,649 261 1,388 Other 508 22 486 ----------------------------------------------------------------------- Total $ 9,241 $ 672 $ 8,569 ======================================================================= Approximately 20 employees were terminated in connection with the restructuring plan during the three month period ended March 31, 1999. 6
5. Net Income per Common Share The following sets forth the computation of basic and diluted net income per common share: (In thousands, except per share data) Three Months Ended March 31, -------------------------------------------------------------------------- 1999 1998 -------------------------------------------------------------------------- Numerator: Net income $ 5,491 $ 6,759 Preferred stock dividends - 1,294 -------------------------------------------------------------------------- Numerator for basic net income per common share - net income attributable to common stock $ 5,491 5,465 Distributions on convertible mandatorily redeemable preferred securities, net of income taxes 993 - -------------------------------------------------------------------------- Numerator for diluted net income per common share - net income attributable to common stock after assumed conversions $ 6,484 $ 5,465 -------------------------------------------------------------------------- Denominator: Denominator for basic net income per common share - weighted average shares 32,556 32,337 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities 6,400 - Stock options and restricted stock 129 169 -------------------------------------------------------------------------- Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 39,085 32,506 -------------------------------------------------------------------------- Net income per common share - basic $ 0.17 $ 0.17 Net income per common share - diluted $ 0.17 $ 0.17 ========================================================================== 6. Condensed Consolidating Financial Information The following tables present condensed consolidating financial information for: Owens & Minor, Inc.; on a combined basis, the guarantors of Owens & Minor, Inc.'s 10 7/8% Senior Subordinated 10-year Notes (Notes); and the non-guarantor subsidiaries of the Notes. Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally and unconditionally liable under the guarantees and the company believes the condensed consolidating financial information is more meaningful in understanding the financial position, results of operations and cash flows of the guarantor subsidiaries. 7
<TABLE> <CAPTION> Condensed Consolidating Financial Information (In thousands) - ------------------------------------------------------------------------------------------------------------- Three months ended Owens & Guarantor Non-guarantor March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Statements of Operations Net sales $ - $ 741,084 $ - $ - $ 741,084 Cost of goods sold - 662,355 - - 662,355 - ------------------------------------------------------------------------------------------------------------- Gross margin - 78,729 - - 78,729 - ------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 5 58,501 92 - 58,598 Depreciation and amortization - 4,461 - - 4,461 Interest expense, net 4,149 (1,053) - - 3,096 Intercompany interest expense, net (1,696) 6,740 (3,924) (1,120) - Discount on accounts receivable securitization - 6 989 - 995 Distributions on mandatorily redeemable preferred securities - - 1,774 - 1,774 - ------------------------------------------------------------------------------------------------------------- Total expenses 2,458 68,655 (1,069) (1,120) 68,924 ============================================================================================================= Income (loss) before income taxes (2,458) 10,074 1,069 1,120 9,805 Income tax provision (benefit) (1,082) 4,441 462 493 4,314 - ------------------------------------------------------------------------------------------------------------- Net income (loss) $(1,376) $ 5,633 $ 607 $ 627 $ 5,491 ============================================================================================================= Three months ended Owens & Guarantor Non-guarantor March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------- Statements of Operations Net sales $ - $ 797,950 $ - $ - $ 797,950 Cost of goods sold - 715,863 - - 715,863 - ------------------------------------------------------------------------------------------------------------- Gross margin - 82,087 - - 82,087 - ------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses - 60,880 62 - 60,942 Depreciation and amortization - 4,468 - - 4,468 Interest expense, net 4,443 (830) - - 3,613 Intercompany interest expense, net (3,883) 7,966 (2,900) (1,183) - Discount on accounts receivable securitization - 12 1,597 - 1,609 - ------------------------------------------------------------------------------------------------------------- Total expenses 560 72,496 (1,241) (1,183) 70,632 ============================================================================================================= Income (loss) before income taxes (560) 9,591 1,241 1,183 11,455 Income tax provision (benefit) (227) 3,922 504 497 4,696 - ------------------------------------------------------------------------------------------------------------- Net income (loss) (333) 5,669 737 686 6,759 Dividends on preferred stock 1,294 - - - 1,294 - ------------------------------------------------------------------------------------------------------------- Net income (loss) attributable to common stock $(1,627) $ 5,669 $ 737 $ 686 $ 5,465 ============================================================================================================= </TABLE> 8
Condensed Consolidating Financial Information (In thousands) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- Owens & Guarantor Non-guarantor March 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 505 $ 224 $ 1 $ - $ 730 Accounts and notes receivable, net - 87,058 144,684 - 231,742 Merchandise inventories - 301,257 - - 301,257 Intercompany advances, net 150,040 121,130 1,183 (272,353) - Other current assets - 8,777 41 - 8,818 - ------------------------------------------------------------------------------------------------------------- Total current assets 150,545 518,446 145,909 (272,353) 542,547 Property and equipment, net - 25,543 - - 25,543 Goodwill, net - 157,139 - - 157,139 Intercompany investments 303,941 15,001 136,083 (455,025) - Other assets, net 9,522 18,658 1,520 - 29,700 - ------------------------------------------------------------------------------------------------------------- Total assets $464,008 $734,787 $283,512 $(727,378) $754,929 ============================================================================================================= Liabilities and shareholders' equity Current liabilities Accounts payable $ - 241,793 $ - $ - $241,793 Accrued payroll and related liabilities - 6,258 - - 6,258 Intercompany advances, net - 148,305 124,675 (272,980) - Other accrued liabilities 4,960 47,540 1,359 - 53,859 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 4,960 443,896 126,034 (272,980) 301,910 Long-term debt 150,000 - - - 150,000 Intercompany long-term debt 136,083 - - (136,083) - Accrued pension and retirement plans - 5,809 - - 5,809 - ------------------------------------------------------------------------------------------------------------- Total liabilities 291,043 449,705 126,034 (409,063) 457,719 - ------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. - - 132,000 - 132,000 - ------------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 65,372 - 4,083 (4,083) 65,372 Paid-in capital 12,371 299,858 15,001 (314,859) 12,371 Retained earnings (accumulated deficit) 95,222 (14,776) 6,394 627 87,467 - ------------------------------------------------------------------------------------------------------------- Total shareholders' equity 172,965 285,082 25,478 (318,315) 165,210 - ------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $464,008 $734,787 $283,512 $(727,378) $754,929 ============================================================================================================= </TABLE> 9
Condensed Consolidating Financial Information (In thousands) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- Owens & Guarantor Non-guarantor December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 505 $ 40 $ 1 $ - $ 546 Accounts and notes receivable, net 100,148 113,617 - 213,765 Merchandise inventories - 275,094 - - 275,094 Intercompany advances, net 148,992 90,698 1,183 (240,873) - Other current assets - 14,816 - - 14,816 - ------------------------------------------------------------------------------------------------------------- Total current assets 149,497 480,796 114,801 (240,873) 504,221 Property and equipment, net - 25,608 - - 25,608 Goodwill, net - 158,276 - - 158,276 Intercompany investments 303,941 15,001 136,083 (455,025) - Other assets, net 9,784 19,879 - - 29,663 - ------------------------------------------------------------------------------------------------------------- Total assets $ 463,222 $ 699,560 $ 250,884 $ (695,898) $ 717,768 - ------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 206,251 $ - $ - $ 206,251 Accrued payroll and related liabilities - 8,974 - - 8,974 Intercompany advances, net - 148,992 92,509 (241,501) - Other accrued liabilities 1,394 50,994 1,361 - 53,749 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 1,394 415,211 93,870 (241,501) 268,974 Long-term debt 150,000 - - - 150,000 Intercompany long-term debt 136,083 - - (136,083) - Accrued pension and retirement plans - 5,668 - - 5,668 - -------------------------------------------------------------------------------------------------------------- Total liabilities 287,477 420,879 93,870 (377,584) 424,642 - -------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. - - 132,000 - 132,000 - -------------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 65,236 - 4,083 (4,083) 65,236 Paid-in capital 12,280 299,858 15,001 (314,859) 12,280 Retained earnings (accumulated deficit) 98,229 (21,177) 5,930 628 83,610 - -------------------------------------------------------------------------------------------------------------- Total shareholders' equity 175,745 278,681 25,014 (318,314) 161,126 - -------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 463,222 $ 699,560 $250,884 $ (695,898) $ 717,768 ============================================================================================================== </TABLE> 10
Condensed Consolidating Financial Statements (In thousands) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- 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) $ 5,633 $ 607 $ 627 $ 5,491 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization - 4,461 - - 4,461 Provision for LIFO reserve - 610 - - 610 Provision for losses on accounts and notes receivable - 184 56 - 240 Changes in operating assets and liabilities: Accounts and notes receivable - 12,906 (31,123) - (18,217) Merchandise inventories - (26,773) - - (26,773) Accounts payable - 68,307 - - 68,307 Net change in other current assets and current liabilities 3,566 (172) (1) 3,393 Other, net 412 644 (1) (627) 428 - ------------------------------------------------------------------------------------------------------------- Cash provided by (used for) operating activities 2,602 65,800 (30,462) - 37,940 - ------------------------------------------------------------------------------------------------------------- Investing activities Additions to property and equipment - (2,124) - - (2,124) Additions to computer software - (134) - - (134) Other, net - 21 (1,200) - (1,179) - ------------------------------------------------------------------------------------------------------------- Cash used for investing activities (2,237) (1,200) - - (3,437) - ------------------------------------------------------------------------------------------------------------- Financing activities Change in intercompany advances (1,048) (30,614) 31,662 - - Other short-term financing, net - (32,765) - - (32,765) Cash dividends paid (1,634) - - - (1,634) Proceeds from exercise of stock options 80 - - - 80 - ------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities (2,602) (63,379) 31,662 - (34,319) - ------------------------------------------------------------------------------------------------------------- Net increase in cash and cash - 184 - - 184 equivalents Cash and cash equivalents at beginning of year 505 40 1 - 546 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 505 $ 224 $ 1 $ - $ 730 ============================================================================================================= </TABLE> 11
<TABLE> <CAPTION> Condensed Consolidating Financial Statements (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) $ (333) $ 5,669 $ 737 $ 686 $ 6,759 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization - 4,468 - - 4,468 Provision for LIFO reserve - 2,617 - - 2,617 Provision for losses on accounts and notes receivable 29 55 84 Changes in operating assets and liabilities: Accounts and notes receivable - 18,953 (7,684) - 11,269 Merchandise inventories - (24,484) - - (24,484) Accounts payable - 48,551 - - 48,551 Net change in other current assets and current liabilities 4,025 1,308 (241) - 5,092 Other, net 282 (634) (1) (686) (1,039) - ------------------------------------------------------------------------------------------------------------- Cash provided by (used for) operating activities 3,974 56,477 (7,134) - 53,317 - ------------------------------------------------------------------------------------------------------------- Investing activities Additions to property and equipment - (1,098) - - (1,098) Additions to computer software - (815) - - (815) Other, net - 26 - - 26 - ------------------------------------------------------------------------------------------------------------- Cash used for investing activities - (1,887) - - (1,887) - ------------------------------------------------------------------------------------------------------------- Financing activities Reduction of long-term debt (32,550) - - - (32,550) Change in intercompany advances 28,503 (35,637) 7,134 - - Other short-term financing, net - (18,986) - - (18,986) Cash dividends paid (2,916) - - - (2,916) Proceeds from exercise of stock options 2,689 - - - 2,689 - ------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities (4,274) (54,623) 7,134 - (51,763) - ------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (300) (33) - - (333) Cash and cash equivalents at beginning of year 505 78 - - 583 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 205 $ 45 $ - $ - $ 250 ============================================================================================================= </TABLE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management discussion and analysis describes material changes in the financial condition of Owens & Minor, Inc. and its wholly-owned subsidiaries (O&M or the company) since December 31, 1998. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto and management's discussion and analysis of financial condition and results of operations included in the company's 1998 Annual Report on Form 10-K for the year ended December 31, 1998. Financial Condition, Liquidity and Capital Resources Liquidity. The company's liquidity improved during the first quarter of 1999. Combined outstanding debt and off balance sheet accounts receivable securitization borrowings were reduced by $10.0 million to $215.0 million at March 31, 1999, from $225.0 million at December 31, 1998. The reduction was due to the positive impact of cash flow from operations. The capitalization ratio at March 31, 1999, including the Mandatorily Redeemable Preferred Securities (Securities) as equity and excluding the effect of the accounts receivable securitization, was 42.0% compared to 43.4% at December 31, 1998. This improvement was primarily the result of the reduction in outstanding borrowings under the off balance sheet accounts receivable securitization. In May 1998, Owens & Minor, Inc. repurchased all of its outstanding Series B Cumulative Preferred Stock, financing the repurchase with substantially all the net proceeds of the $132.0 million of Securities issued by Owens & Minor Trust I (Trust). These transactions reduced the company's overall cost of capital for the first quarter of 1999 compared to the first quarter in 1998. The company expects that its available financing will be sufficient to fund its working capital needs and long-term strategic growth, although this cannot be assured. At March 31, 1999, the company had $225.0 million of unused credit under its revolving credit facility and approximately $67.4 million under its receivables financing facility. Working Capital Management. The company's working capital at March 31, 1999 increased by $30.9 million from March 31, 1998. The company's accounts receivable days sales outstanding (excluding the impact of the off balance sheet accounts receivable securitization) increased to 35.6 at March 31, 1999, from 33.0 at March 31, 1998, and inventory turnover decreased to 9.3 times in the first quarter of 1999 from 9.8 times in the first quarter of 1998. These changes were driven in part by the reduction in the sales base due to the loss of the Columbia/HCA Healthcare Corporation (Columbia/HCA) contract, partially offset by sales to Tenet BuyPower, a new customer, beginning in February 1999. Capital Expenditures. Capital expenditures were approximately $2.3 million in the first quarter of 1999, of which approximately $1.5 million was for computer hardware and software, including $0.5 million for system upgrades to prepare for Year 2000. The company expects to continue to invest in technology, including system upgrades, as the most cost-effective method of reducing operating expenses. These capital expenditures are expected to be funded through cash flow from operations. 13
Restructuring reserve. As a result of the Columbia/HCA contract termination in the second quarter of 1998, the company recorded a nonrecurring restructuring charge to downsize operations. In the first quarter of 1999, approximately $0.7 million was charged against this liability. At March 31, 1999, the restructuring reserve had a balance of approximately $8.6 million. Results of Operations First quarter of 1999 compared with first quarter of 1998 Net sales. Net sales decreased 7.1% to $741.1 million in the first quarter of 1999 from $798.0 million in the first quarter of 1998. This decrease is primarily due to the impact of the cancellation of the company's distribution contract with Columbia/HCA. The decrease in sales was partially offset by both increased penetration of existing accounts and new customer contracts. Sales for the quarter included sales from Tenet BuyPower, the company's largest new customer, beginning in February 1999. Gross margin. Gross margin as a percentage of net sales increased to 10.6% in the first quarter of 1999 from 10.3% in the first quarter of 1998. This improvement reflects the company's continued emphasis on supply chain initiatives with key suppliers as well as a lower sales base in 1999. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses as a percentage of net sales increased to 7.9% for the first quarter of 1999, compared to 7.6% for the first quarter of 1998. The increase, as a percentage of net sales, was the result of a lower sales base as the actual expense decreased $2.3 million to $58.6 million in the first quarter of 1999 from $60.9 million in the first quarter of 1998. This reduction was the result of cost-saving initiatives, including the reduction of approximately 300 full-time equivalent (FTE) employees since March 31, 1998. These cost savings were partially offset by increased information technology spending, including $1.0 million of expenses to address Y2K computer issues, compared with $0.8 million in the first quarter of 1998. Depreciation and amortization. Depreciation and amortization for the first quarter of 1999 was comparable to the first quarter of 1998. Interest expense, net, and discount on accounts receivable securitization. Interest expense, net, and discount on accounts receivable securitization decreased to $4.1 million in the first quarter of 1999 from $5.2 million in the first quarter of 1998. This reduction has been a result of the lower level of the combined outstanding debt and the off balance sheet accounts receivable securitization for the first quarter in 1999 compared to the same period in 1998. The company expects to continue to manage these costs by continuing its working capital reduction initiatives and management of interest rates, although the future results of these initiatives cannot be assured. Distributions on mandatorily redeemable preferred securities and dividends on preferred stock. In May 1998, the Trust issued $132.0 million of the Securities. O&M applied substantially all of the net proceeds to repurchase all of its outstanding Series B Cumulative Preferred Stock. As of March 31, 1999, the company had accrued $1.2 million of distributions related to these Securities. Income taxes. The company had an income tax provision of $4.3 million in the first quarter of 1999 compared with $4.7 million in the first quarter of 1998. The effective tax rate was 44.0%, compared to 41.0% for the same period in 1998 as lower income before taxes increased the impact of nondeductible expenses. 14
Net income. Net income decreased to $5.5 million in the first quarter of 1999 from $6.8 million in the first quarter of 1998, principally as the result of the issuance of the Securities during second quarter 1998. Net income attributable to common stock of approximately $5.5 million in the first quarter of 1999 was unchanged from the first quarter of 1998. The positive impact of the reduction in SG&A expenses, lower interest expense, net, and discount on accounts receivable securitization and the elimination of preferred dividends was offset by lower sales and the related lower gross margin dollars as well as distributions on the Securities. Although the company continues to pursue initiatives to improve profitability, the future impact on net income cannot be assured. Readiness for Year 2000 The Year 2000 (Y2K) issue is the result of computer programs being written using two-digit, rather than four-digit, year dates. O&M's computer hardware, software and devices with embedded technology that are time-sensitive may recognize a date code using "00" as the year 1900 rather than the year 2000. This situation could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in other normal business activities. The company has divided its Y2K efforts into three main areas: o computer hardware and software; o other systems and equipment, such as telephone equipment, scanning equipment and alarm systems; and o suppliers and customers. Computer Hardware and Software. In 1997, O&M completed its assessment of its computer hardware and software, and developed a strategy of remediation. This strategy includes retirement of outdated software and replacement or repair of the remaining software and hardware. The company began repair and replacement efforts in 1997, and expects they will be substantially complete by mid-1999, prior to any currently anticipated impact on its computer hardware and software. Testing of repairs is expected to be substantially complete in the third quarter of 1999, but will continue through the end of the year. O&M estimates that, as of March 31, 1999, it had completed approximately 98% of the repair, 60% of replacement, and 40% of the testing that it believes will be necessary to fully address potential Y2K issues relating to its computer hardware and software. Other Systems and Equipment. The company has completed an inventory and assessment of non-computer related systems and equipment at its operating divisions and a similar inventory and assessment at its corporate offices. O&M believes that the impact on operations of potential noncompliance for these systems and equipment would be minimal. The company is continuing its program of replacement and repair of non-compliant systems and equipment, and expects this effort to be complete by late 1999. Suppliers and Customers. O&M has contacted its significant suppliers to determine the extent to which the company is vulnerable to the suppliers' failure to remediate their Y2K compliance issues. Of the suppliers representing approximately 90% of O&M's sales, 89% have responded, and, of those responding, 94% have indicated that they have either remedied their Y2K compliance issues, or plan to do so before the end of 1999. The company will be conducting tests with selected suppliers beginning in the second quarter of 1999. 15
The company has also contacted its largest customers to determine their level of Y2K readiness. Many customers have not yet responded to these inquiries or have not responded with sufficient detail for O&M to determine whether they will be Y2K compliant on a timely basis. The company is continuing its efforts to ascertain the readiness of its customers, but since this readiness cannot be assured, O&M is in the process of developing contingency plans to address the most likely risks of non-compliance. The company estimates the cost of its Y2K remediation efforts will total approximately $9.7 million of operating expenses and $6.7 million of capital expenditures. These expenditures will be funded from operating cash flows. Through March 31, 1999, O&M had incurred approximately $6.7 million of expenses and $4.3 million of capital spending related to its Y2K efforts, of which $1.0 million and $0.5 million were incurred in the first quarter of 1999. For the remainder of 1999, the company expects to incur approximately $3.0 million of expenses and $2.4 million of capital spending. Other information technology efforts have not been significantly delayed by Y2K initiatives. O&M is working on, but has not yet completed, an analysis of the operational problems that would be reasonably likely to result from the failure by the company and certain third parties to complete efforts necessary to achieve Y2K compliance on a timely basis. The company is currently determining its most reasonably likely worst-case scenario and will be developing contingency plans to address this scenario. O&M plans to complete its analysis and contingency planning by late 1999. O&M believes the Y2K issue will not pose significant operational problems for the company. However, if all Y2K issues are not properly identified or if assessment, remediation and testing are not completed on a timely basis, there can be no assurance that the Y2K issue will not have a material adverse impact on the company's results of operations or adversely affect its relationships with customers, suppliers or others. Additionally, there can be no assurance that Y2K non-compliance by other entities will not have a material adverse impact on the company's systems or results of operations. The costs of O&M's Y2K efforts and the dates on which the company believes it will complete these efforts are based upon management's current estimates. These estimates used numerous assumptions regarding future events, including the continued availability of certain resources, third party remediation plans and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Risks The company is subject to risks associated with changes in the medical industry, including continued efforts to control costs, which place pressure on operating margin, and changes in the way medical and surgical services are delivered to patients. Forward-looking Statements Certain statements in this discussion constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, including, but not limited to, general economic and business conditions, competition, changing trends in customer profiles, outcome of outstanding litigation, readiness for Year 2000 and changes in government regulations. Although O&M believes its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its 16
business and operations, there can be no assurance that actual results, performance or achievements of the company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The company believes there has been no material change in its exposure to market risk from that discussed in Item 7A in the company's Annual Report on Form 10-K for the year ended December 31, 1998. Part II. Other Information Item 1. Legal Proceedings Certain legal proceedings pending against the company are described in the company's Annual Report on Form 10-K for the year ended December 31, 1998. Through March 31, 1999, there have been no material developments in any legal proceedings reported in such Annual Report. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 3 (ii) Amended and Restated Bylaws of Owens & Minor, Inc. 27 Financial Data Schedule (b) Reports on Form 8-K The company filed a Current Report on Form 8-K dated March 11, 1999, Items 5 and 7, with respect to the issuance of a press release relating to the death of Ann Greer Rector, Senior Vice President and Chief Financial Officer of the company. 17
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Owens & Minor, Inc. ------------------------------ (Registrant) Date May 6, 1999 /s/ Richard F. Bozard -------------- ------------------------------ Richard F. Bozard Vice President & Treasurer Acting Chief Financial Officer Date May 6, 1999 /s/ Olwen B. Cape --------------- ------------------------------ Olwen B. Cape Vice President & Controller Chief Accounting Officer
Exhibits Filed with SEC Exhibit # - --------- 3 (ii) Amended and Restated Bylaws of Owens & Minor, Inc. 27 Financial Data Schedule