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 June 30, 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 August 6, 1999, was 32,696,937 shares. 1
Owens & Minor, Inc. and Subsidiaries Index <TABLE> <CAPTION> Page <S> <C> Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 1999 and 1998 3 Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 13 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II. Other Information Item 1. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Shareholders 17 Item 6. Exhibits and Reports on Form 8-K 18 </TABLE> 2
Part I. Financial Information Item 1. Financial Statements Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> Net sales $ 772,360 $ 798,978 $ 1,513,444 $ 1,596,928 Cost of goods sold 692,013 716,445 1,354,368 1,432,308 ----------- ----------- ----------- ----------- Gross margin 80,347 82,533 159,076 164,620 ----------- ----------- ----------- ----------- Selling, general and administrative expenses 59,488 61,079 118,086 122,021 Depreciation and amortization 4,684 4,505 9,145 8,973 Interest expense, net 3,034 3,190 6,130 6,803 Discount on accounts receivable securitization 795 1,377 1,790 2,986 Distributions on mandatorily redeemable preferred securities 1,774 935 3,548 935 Nonrecurring restructuring expenses (1,000) 11,200 (1,000) 11,200 ----------- ----------- ----------- ----------- Total expenses 68,775 82,286 137,699 152,918 ----------- ----------- ----------- ----------- Income before income taxes 11,572 247 21,377 11,702 Income tax provision 5,092 102 9,406 4,798 ----------- ----------- ----------- ----------- Net income 6,480 145 11,971 6,904 Dividends on preferred stock - 604 - $ 1,898 ----------- ----------- ----------- ----------- Net income (loss) attributable to common stock $ 6,480 $ (459) $ 11,971 $ 5,006 =========== =========== =========== =========== Net income (loss) per common share-basic $ 0.20 $ (0.01) $ 0.37 $ 0.15 =========== =========== =========== =========== Net income (loss) per common share-diluted $ 0.19 $ (0.01) $ 0.36 $ 0.15 =========== =========== =========== =========== Cash dividends per common share $ 0.06 $ 0.05 $ 0.11 $ 0.10 =========== =========== =========== =========== </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) June 30, December 31, 1999 1998 ----------- ------------ Assets (Unaudited) <S> <C> Current assets Cash and cash equivalents $ 505 $ 546 Accounts and notes receivable, net of allowance of $6,601 and $6,273 229,132 213,765 Merchandise inventories 283,393 275,094 Other current assets 13,868 14,816 -------- -------- Total current assets 526,898 504,221 Property and equipment, net of accumulated depreciation of $49,785 and $45,812 26,408 25,608 Goodwill, net of accumulated amortization of $25,115 and $22,843 156,003 158,276 Other assets, net 30,960 29,663 -------- -------- Total assets $740,269 $717,768 ======== ======== Liabilities and shareholders' equity Current liabilities Accounts payable $230,776 $206,251 Accrued payroll and related liabilities 4,318 8,974 Other accrued liabilities 47,236 53,749 -------- -------- Total current liabilities 282,330 268,974 Long-term debt 150,000 150,000 Accrued pension and retirement plans 5,944 5,668 -------- -------- Total liabilities 438,274 424,642 -------- -------- 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 - 32,696 shares and 32,618 shares 65,392 65,236 Paid-in capital 12,618 12,280 Retained earnings 91,985 83,610 -------- -------- Total shareholders' equity 169,995 161,126 -------- -------- Total liabilities and shareholders' equity $740,269 $717,768 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 4
Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> (In thousands) Six Months Ended (Unaudited) June 30, --------------------------- 1999 1998 ----------- -------------- <S> <C> Operating activities Net income $ 11,971 $ 6,904 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 9,145 8,973 Nonrecurring restructuring provision (1,000) 11,200 Provision for LIFO reserve 1,200 2,497 Provision for losses on accounts and notes receivable 502 224 Changes in operating assets and liabilities: Accounts and notes receivable (15,869) (10,334) Merchandise inventories (9,499) (45,707) Accounts payable 59,231 73,919 Net change in other current assets and current liabilities (9,220) (4,696) Other 1,262 (339) --------- --------- Cash provided by operating activities 47,723 42,641 --------- --------- Investing activities Additions to property and equipment (5,355) (2,453) Additions to computer software (3,041) (2,961) Other, net (1,146) 38 --------- --------- Cash used for investing activities (9,542) (5,376) --------- --------- Financing activities Net proceeds from issuance of mandatorily redeemable preferred securities - 127,610 Repurchase of preferred stock - (115,000) Reduction of long-term debt - (32,550) Other financing, net (34,706) (14,386) Cash dividends paid (3,596) (6,010) Proceeds from exercise of stock options 80 3,117 --------- --------- Cash used for financing activities (38,222) (37,219) --------- --------- Net increase (decrease) in cash and cash equivalents (41) 46 Cash and cash equivalents at beginning of period 546 583 ========= ========= Cash and cash equivalents at end of period $ 505 $ 629 ========= ========= </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 June 30, 1999 and the consolidated results of operations for the three and six month periods and cash flows for the six month periods ended June 30, 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 and six month periods ended June 30, 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 cancellation in the second quarter of 1998, the company recorded a nonrecurring restructuring charge to downsize operations. In the second quarter of 1999 the company re-evaluated its estimate of the remaining costs to be incurred in connection with the restructuring plan, and reduced the reserve by $1.0 million. The following table sets forth the activity in the restructuring reserve during the second quarter of 1999: <TABLE> <CAPTION> Balance at Balance at (In thousands) March 31, 1999 Charges Adjustments June 30, 1999 ----------------------------------------------------------------------------------------------------- <S> <C> Losses under lease commitments $ 3,261 $ 472 $ 203 $ 2,992 Asset write-offs 3,434 16 - 3,418 Employee separations 1,388 105 (1,203) 80 Other 486 4 - 482 ----------------------------------------------------------------------------------------------------- Total $ 8,569 $ 597 $ (1,000) $ 6,972 ===================================================================================================== </TABLE> Four employees were terminated in connection with the restructuring plan during the three month period ended June 30, 1999. 6
5. Net Income (Loss) per Common Share The following sets forth the computation of basic and diluted net income (loss) per common share: (In thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, -------------------------------- ---------------------------- 1999 1998 1999 1998 --------------- -------------- ---------------- ---------- <S> <C> Numerator: Net income $ 6,480 $ 145 $ 11,971 $ 6,904 Preferred stock dividends - 604 - 1,898 ----------------------------------------------------------------------------------------------------------------------------- Numerator for basic net income (loss) per common share - net income (loss) attributable to common stock 6,480 (459) 11,971 5,006 Distributions on convertible mandatorily redeemable preferred securities, net of income taxes 993 - 1,987 - ----------------------------------------------------------------------------------------------------------------------------- Numerator for diluted net income (loss) per common share - net income (loss) attributable to common stock after assumed conversions $ 7,473 (459) 13,958 5,006 ----------------------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic net income (loss) per common share - weighted average shares 32,572 32,546 32,564 32,442 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities 6,400 - 6,400 - Stock options and restricted stock 124 79 127 124 ----------------------------------------------------------------------------------------------------------------------------- Denominator for diluted net income (loss) per common share - adjusted weighted average shares and assumed conversions 39,096 32,625 39,091 32,566 ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) per common share - basic $ 0.20 $ (0.01) $ 0.37 $ 0.15 Net income (loss) per common share - diluted $ 0.19 $ (0.01) $ 0.36 $ 0.15 ============================================================================================================================= </TABLE> 6. Subsequent Event On July 30, 1999, the company acquired the net assets of Medix, Inc. (Medix), a distributor of medical/surgical supplies, for approximately $85 million in cash, which included assumed debt. Headquartered in Waunakee, Wisconsin, Medix's customers are primarily in the Midwest and include acute care hospitals, long-term care facilities and clinics. The acquisition will be accounted for as a purchase. Medix's net sales were $183.6 million for their fiscal year ended October 2, 1998. 7. 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
Condensed Consolidating Financial Information (In thousands) <TABLE> <CAPTION> Six months ended Owens & Guarantor Non-guarantor June 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> Statements of Operations Net sales $ - $ 1,513,444 $ - $ - $ 1,513,444 Cost of goods sold - 1,354,368 - - 1,354,368 - ----------------------------------------------------------------------------------------------------------------------------- Gross margin - 159,076 - - 159,076 - ----------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 5 117,774 307 - 118,086 Depreciation and amortization - 9,145 - - 9,145 Interest expense, net 8,286 (2,156) - - 6,130 Intercompany interest expense, net (3,427) 12,572 (8,071) (1,074) - Discount on accounts receivable securitization - 17 1,773 - 1,790 Distributions on mandatorily redeemable preferred securities - - 3,548 - 3,548 Nonrecurring restructuring expenses - (1,000) - - (1,000) - ----------------------------------------------------------------------------------------------------------------------------- Total expenses 4,864 136,352 (2,443) (1,074) 137,699 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (4,864) 22,724 2,443 1,074 21,377 Income tax provision (benefit) (2,141) 10,037 1,037 473 9,406 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (2,723) $ 12,687 $ 1,406 $ 601 $ 11,971 ============================================================================================================================= </TABLE> <TABLE> <CAPTION> Six months ended Owens & Guarantor Non-guarantor June 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> Statements of Operations Net sales $ - $ 1,596,928 $ - $ - $ 1,596,928 Cost of goods sold - 1,432,308 - - 1,432,308 - ----------------------------------------------------------------------------------------------------------------------------- Gross margin - 164,620 - - 164,620 - ----------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 5 121,889 127 - 122,021 Depreciation and amortization - 8,973 - - 8,973 Interest expense, net 8,595 (1,792) - - 6,803 Intercompany interest expense, net (6,705) 14,145 (6,352) (1,088) - Discount on accounts receivable securitization - 40 2,946 - 2,986 Distribution on mandatorily redeemable preferred securities - - 935 - 935 Nonrecurring restructuring expenses - 11,200 - - 11,200 - ----------------------------------------------------------------------------------------------------------------------------- Total expenses 1,895 154,455 (2,344) (1,088) 152,918 ============================================================================================================================= Income (loss) before income taxes (1,895) 10,165 2,344 1,088 11,702 Income tax provision (benefit) (767) 4,156 952 457 4,798 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) (1,128) 6,009 1,392 631 6,904 Dividends on preferred stock 1,898 - - - 1,898 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) attributable to common stock $ (3,026) $ 6,009 $ 1,392 $ 631 $ 5,006 ============================================================================================================================= </TABLE> 8
Condensed Consolidating Financial Information (In thousands) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------ Owens & Guarantor Non-guarantor June 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 504 - $ 1 $ - $ 505 Accounts and notes receivable, net - 91,558 137,574 - 229,132 Merchandise inventories - 283,393 - - 283,393 Intercompany advances, net 143,635 113,256 1,183 (258,074) - Other current assets - 13,827 41 - 13,868 - ------------------------------------------------------------------------------------------------------------------------------ Total current assets 144,139 502,034 138,799 (258,074) 526,898 Property and equipment, net - 26,408 - - 26,408 Goodwill, net - 156,003 - - 156,003 Intercompany investments 303,941 15,001 136,083 (455,025) - Other assets, net 9,235 20,329 1,396 - 30,960 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 457,315 $ 719,775 $ 276,278 $(713,099) $ 740,269 ============================================================================================================================== Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 230,776 $ - $ - $ 230,776 Accrued payroll and related liabilities - 4,318 - - 4,318 Intercompany advances, net - 141,985 116,690 (258,675) - Other accrued liabilities 1,314 44,575 1,347 - 47,236 - ------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 1,314 421,654 118,037 (258,675) 282,330 - ------------------------------------------------------------------------------------------------------------------------------ Long-term debt 150,000 - - - 150,000 Intercompany long-term debt 136,083 - - (136,083) - Accrued pension and retirement plans - 5,944 - - 5,944 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 287,397 427,598 118,037 (394,758) 438,274 - ------------------------------------------------------------------------------------------------------------------------------ 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 65,392 - 4,083 (4,083) 65,392 Paid-in capital 12,618 299,858 15,001 (314,859) 12,618 Retained earnings (accumulated deficit) 91,908 (7,681) 7,157 601 91,985 - ------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 169,918 292,177 26,241 (318,341) 169,995 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 457,315 $ 719,775 $ 276,278 $(713,099) $ 740,269 ============================================================================================================================== </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> 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 six months ended Owens & Guarantor Non-guarantor June 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> Statements of Cash Flows Operating activities Net income (loss) $ (2,723) $ 12,687 $ 1,406 $ 601 $ 11,971 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization - 9,145 - - 9,145 Nonrecurring restructuring provision - (1,000) - - (1,000) Provision for LIFO reserve - 1,200 - - 1,200 Provision for losses on accounts and notes receivable - 328 174 - 502 Changes in operating assets and liabilities: Accounts and notes receivable - 8,262 (24,131) - (15,869) Merchandise inventories - (9,499) - - (9,499) Accounts payable - 59,231 - - 59,231 Net change in other current assets and current liabilities (83) (9,124) (13) - (9,220) Other, net 967 797 99 (601) 1,262 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) operating activities (1,839) 72,027 (22,465) - 47,723 - ------------------------------------------------------------------------------------------------------------------------------------ Investing activities Additions to property and equipment - (5,355) - - (5,355) Additions to computer software - (3,041) - - (3,041) Other, net - 54 (1,200) - (1,146) - ------------------------------------------------------------------------------------------------------------------------------------ Cash used for investing activities - (8,342) (1,200) - (9,542) - ------------------------------------------------------------------------------------------------------------------------------------ Financing activities Change in intercompany advances 5,354 (29,019) 23,665 - - Other short-term financing, net - (34,706) - - (34,706) Cash dividends paid (3,596) - - - (3,596) Proceeds from exercise of stock options 80 - - - 80 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) financing activities 1,838 (63,725) 23,665 - (38,222) - ------------------------------------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (1) (40) - - (41) Cash and cash equivalents at beginning of period 505 40 1 - 546 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 504 $ - $ 1 $ - $ 505 ==================================================================================================================================== </TABLE> 11
Condensed Consolidating Financial Statements (In thousands) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ For the six months ended Owens & Guarantor Non-guarantor June 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> Statements of Cash Flows Operating activities Net income (loss) $ (1,128) $ 6,009 $ 1,392 $ 631 $ 6,904 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization - 8,973 - - 8,973 Nonrecurring restructuring provision - 11,200 - - 11,200 Provision for LIFO reserve - 2,497 - - 2,497 Provision for losses on accounts and notes receivable - 105 119 - 224 Changes in operating assets and liabilities: Accounts and notes receivable - 25,242 (35,576) - (10,334) Merchandise inventories - (45,707) - - (45,707) Accounts payable - 73,919 - - 73,919 Net change in other current assets and current liabilities 1,319 (5,789) (226) - (4,696) Other, net 554 (150) (112) (631) (339) - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) operating activities 745 76,299 (34,403) - 42,641 - ------------------------------------------------------------------------------------------------------------------------------------ Investing activities Additions to property and equipment - (2,453) - - (2,453) Additions to computer software - (2,961) - - (2,961) Other, net - 38 - - 38 - ------------------------------------------------------------------------------------------------------------------------------------ Cash used for investing activities - (5,376) - - (5,376) - ------------------------------------------------------------------------------------------------------------------------------------ Financing activities Proceeds from mandatorily redeemable preferred securities, net (4,390) - 132,000 - 127,610 Retirement of preferred stock 115,000) - - - (115,000) Reduction of long-term debt (32,550) - - - (32,550) Change in intercompany advances 154,088 (56,491) (97,597) - - Other short-term financing, net - (14,386) - - (14,386) Cash dividends paid (6,010) - - - (6,010) Proceeds from exercise of stock options 3,117 - - - 3,117 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) financing activities (745) (70,877) 34,403 - (37,219) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents - 46 - - 46 Cash and cash equivalents at beginning of period 505 78 - - 583 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 505 $ 124 $ - $ - $ 629 ==================================================================================================================================== </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 six months of 1999. Combined outstanding debt and off balance sheet accounts receivable securitization levels were reduced by $10.0 million to $215.0 million at June 30, 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 June 30, 1999, including the Mandatorily Redeemable Preferred Securities (Securities) as equity and excluding the effect of the accounts receivable securitization, was 41.6% compared to 43.4% at December 31, 1998. This improvement was primarily the result of positive operating cash flows. In May 1998, O&M 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 second quarter and the first six months of 1999 compared to the same period of 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 June 30, 1999, the company had $225.0 million of unused credit under its revolving credit facility and approximately $68.9 million under its receivables financing facility. The company used a portion of this available financing to fund the acquisition of the net assets of Medix, Inc. (Medix) on July 30, 1999. Working Capital Management. The company's working capital increased by $9.3 million from December 31, 1998, to $244.6 million at June 30, 1999. This increase was a result of higher levels of inventories and accounts receivable needed to support sales growth. The company also continues to focus on the management of inventory levels, and inventory turnover increased to 9.5 times for the quarter from 8.4 times in the fourth quarter of 1998. Capital Expenditures. Capital expenditures were approximately $8.4 million in the first six months of 1999, of which approximately $6.9 million was for computer hardware and software, including $1.8 million for system upgrades to prepare for Year 2000. The company expects to continue to invest in technology, including system upgrades, to support strategic initiatives and improve operational efficiency. These capital expenditures are expected to be funded through cash flow from operations. Acquisition. On July 30, 1999, the company acquired the net assets of Medix, a distributor of medical/surgical supplies, for approximately $85 million in cash, which included assumed debt. This acquisition strengthens the company's presence in the Midwest and is expected to provide opportunities for increased sales in this geographic area. The success of the acquisition will depend in part on the company's ability to integrate and capture synergies in the combined businesses. 13
Results of Operations Second quarter and first six months of 1999 compared with 1998 Net sales. Net sales decreased 3.3% to $772.4 million in the second quarter of 1999 from $799.0 million in the second quarter of 1998. Net sales decreased 5.2% to $1.5 billion in the first six months of 1999 from $1.6 billion in the first six months of 1998. These decreases are primarily due to the impact of the 1998 cancellation of the company's distribution contract with Columbia/HCA Healthcare Corporation (Columbia/HCA). The decrease in sales was partially offset by both increased penetration of existing accounts and new customer contracts. Sales in 1999 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 10.4% in the second quarter of 1999 and increased to 10.5% in the first six months of 1999 from 10.3% in the first quarter and the first six months of 1998. This improvement reflects the company's continued emphasis on supply chain initiatives with key suppliers as well as the lower sales base during the first quarter of 1999. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses as a percentage of net sales increased to 7.7% for the second quarter of 1999 and increased to 7.8% for the first six months of 1999 compared to 7.6% for the second quarter and the first six months of 1998. The increase, as a percentage of net sales, was the result of a lower sales base for the 1999 periods. SG&A expense decreased $1.6 million for the quarter and $3.9 million for the first six months of 1999 from the comparable periods in 1998. This reduction was the result of cost-saving initiatives, including the reduction of approximately 250 full-time equivalent employees since June 30, 1998. Depreciation and amortization. Depreciation and amortization for the second quarter and the first six months of 1999 was comparable to the same periods in 1998. Interest expense, net, and discount on accounts receivable securitization. Interest expense, net, and discount on accounts receivable securitization decreased to $3.8 million in the second quarter of 1999 from $4.6 million in the second quarter of 1998 and decreased to $7.9 million in the first six months of 1999 from $9.8 million in the first six months of 1998. This reduction has been a result of the lower level of financing under the off balance sheet accounts receivable securitization for the second quarter and the first six months of 1999 compared to the same periods in 1998. The company expects to continue to manage these costs by continuing its working capital reduction initiatives and management of interest rate risks, 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 from this transaction to repurchase all of its outstanding Series B Cumulative Preferred Stock. As of June 30, 1999, the company had accrued $1.2 million of distributions related to these Securities. Nonrecurring restructuring expenses. As a result of the Columbia/HCA contract cancellation in the second quarter of 1998, the company recorded a nonrecurring restructuring charge of approximately $6.6 million, after taxes, to downsize operations. In the second quarter of 1999, the company re-evaluated its restructuring reserve. Since the actions under this plan had resulted in lower projected total costs than originally anticipated, the company recorded a reduction in the reserve which increased net income by approximately $0.6 million, after taxes. 14
Income taxes. The income tax provision was $9.4 million in the first six months of 1999 compared with $4.8 million in the same period in 1998. The effective tax rate was 44.0%, compared to 41.0% for the same period in 1998. This increase results primarily from reduced deductibility of expenses related to certain nontaxable income. Net income. Net income increased to $6.5 million in the second quarter of 1999 from $0.1 million in the second quarter of 1998 and increased to $12.0 million in the first six months of 1999 from $6.9 million in the same period of 1998. The increase was due to the impact of the restructuring charge in 1998 and the restructuring accrual adjustment in 1999, as well as lower sales during the 1999 periods. Excluding the effect of the restructuring charge in 1998 and the related adjustment in 1999, net income for the quarter ended June 30, 1999 was $5.9 million compared to $6.8 million in 1998, and $11.4 million and $13.5 million for the six month periods ended June 30, 1999 and 1998. 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 date-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. These repairs are substantially complete and replacements are expected to be substantially complete at the end of the third quarter of 1999, prior to any currently anticipated impact on O&M's 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 June 30, 1999, it had completed approximately 80% of replacement, and 85% 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. 15
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, 91% have responded, and, of those responding, 93% have indicated that they have either remedied their Y2K compliance issues, or plan to do so before the end of 1999. The company has successfully completed testing with three of its largest suppliers and will continue testing with selected suppliers during the remainder of 1999. 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 has developed contingency plans to address the most likely risks of non-compliance and is in the process of implementing those plans. The company has successfully completed testing with over 50 customers and will continue testing during the remainder of 1999. The company estimates the cost of its Y2K remediation efforts will total approximately $9.4 million of operating expenses and $6.7 million of capital expenditures. These expenditures will be funded from operating cash flows. Through June 30, 1999, O&M had incurred approximately $7.5 million of expenses and $5.5 million of capital spending related to its Y2K efforts, of which $0.7 million and $1.3 million were incurred in the second quarter of 1999. For the remainder of 1999, the company expects to incur approximately $2.0 million of expenses and $1.1 million of capital spending. Other information technology efforts have not been significantly delayed by Y2K initiatives. O&M has completed its 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. Some of the possible consequences include, but are not limited to, loss of communications, loss of utility services, and an inability to process customer transactions or engage in similar normal business activities. The company has developed contingency plans to address these and other possible scenarios. In the event that the company or third party is adversely affected by the century change, the company will implement its contingency plan for each situation. These plans include alternate means of communication with customers and suppliers, manual operation of certain systems, and other previously established emergency procedures. 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. Recent Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities. In May 1999, the FASB delayed the effective date of this standard by one year. The company will be required to adopt the provisions of this standard beginning on January 1, 2001. Management believes the effect of the adoption of this standard will be limited to financial statement presentation and disclosure and will not have a material effect on the company's financial condition or results of operations. 16
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 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 June 30, 1999, there have been no material developments in any legal proceedings reported in such Annual Report. Item 4. Submission of Matters to a Vote of Shareholders The following matters were submitted to a vote of O&M's shareholders at its annual meeting held on April 29, 1999, with the voting results designated below each such matter. (1) Election of Vernard W. Henley, G. Gilmer Minor, III and Peter S. Redding as directors of O&M for a three-year term. <TABLE> <CAPTION> Votes Against Broker Directors Votes For Or Withheld Abstentions Non-Votes ------------------------- -------------- ------------------ --------------- -------------------- <S> <C> Vernard W. Henley 27,752,315 817,855 0 0 G. Gilmer Minor, III 27,988,203 581,967 0 0 Peter S. Redding 27,750,823 819,347 0 0 </TABLE> 17
(2) Ratification of the appointment of KPMG LLP as O&M's independent auditors. Votes Against Votes For Or Withheld Abstentions ---------------------- ---------------------- ------------------- 28,509,953 24,511 35,706 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 3 Amended and Restated Bylaws of Owens & Minor, Inc. 4 Amendment and Consent dated June 30, 1999 to Credit Agreement dated as of September 15, 1997 by and among Owens & Minor, Inc., certain of its subsidiaries, the various banks and lending institutions identified on the signature pages thereto and NationsBank, as administrative agent. 27 Financial Data Schedule (b) Reports on Form 8-K None 18
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 August 11, 1999 /s/ Richard F. Bozard --------------- ------------------------ Richard F. Bozard Vice President & Treasurer Acting Chief Financial Officer Date August 11, 1999 /s/ Olwen B. Cape --------------- ------------------------ Olwen B. Cape Vice President & Controller Chief Accounting Officer
Exhibits Filed with SEC Exhibit # 3 Amended and Restated Bylaws of Owens & Minor, Inc. 4 Amendment and Consent dated June 30, 1999 to Credit Agreement dated as of September 15, 1997, by and among Owens & Minor, Inc., certain of its subsidiaries, the various banks and lending institutions identified on the signature pages thereto and NationsBank, as administrative agent. 27 Financial Data Schedule