UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2003
OR
For the transition period from to
Commission file number 1-9810
Owens & Minor, Inc.
(Exact name of Registrant as specified in its charter)
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 July 31, 2003, was 33,759,351 shares.
Owens & Minor, Inc. and Subsidiaries
Index
Part I.
Part II.
2
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
(unaudited)
Three Months Ended
June 30,
Six Months Ended
Net sales
Cost of goods sold
Gross margin
Selling, general and administrative expenses
Depreciation and amortization
Restructuring credit
Operating earnings
Interest expense, net
Discount on accounts receivable securitization
Distributions on mandatorily redeemable preferred securities
Income before income taxes
Income tax provision
Net income
Net income per common share-basic
Net income per common share-diluted
Cash dividends per common share
See accompanying notes to consolidated financial statements.
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Consolidated Balance Sheets
Assets
Current assets
Cash and cash equivalents
Accounts and notes receivable, net of allowance of $7,921 and $6,849
Merchandise inventories
Other current assets
Total current assets
Property and equipment, net of accumulated depreciation of $73,444 and $70,528
Goodwill
Other assets, net
Total assets
Liabilities and shareholders’ equity
Current liabilities
Accounts payable
Accrued payroll and related liabilities
Other accrued liabilities
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc.
Shareholders’ equity
Preferred stock, par value $100 per share;
authorized—10,000 shares
Series A; Participating Cumulative
Preferred Stock; none issued
Common stock, par value $2 per share;
authorized—200,000 shares; issued and
outstanding—33,727 shares and 34,113 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
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Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to cashprovided by operating activities:
Provision for LIFO reserve
Provision for losses on accounts and notes receivable
Changes in operating assets and liabilities:
Accounts and notes receivable, excluding sales of receivables
Net decrease in receivables sold
Net change in other current assetsand current liabilities
Other, net
Cash provided by operating activities
Investing activities
Additions to property and equipment
Additions to computer software
Cash used for investing activities
Financing activities
Payments to repurchase mandatorily redeemable preferred securities
Payments to repurchase common stock
Net payments on revolving credit facility
Cash dividends paid
Proceeds from exercise of stock options
Increase (decrease) in drafts payable
Cash provided by (used for) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
5
Notes to Consolidated Financial Statements
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, 2003, and the consolidated results of operations for the three and six months periods and cash flows for the six month periods ended June 30, 2003 and 2002, in conformity with generally accepted accounting principles (GAAP).
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Certain prior period amounts have been reclassified in order to conform to the current period presentation.
The company uses the intrinsic value method as defined by Accounting Principles Board Opinion No. 25 to account for stock-based compensation. This method requires compensation expense to be recognized for the excess of the quoted market price of the stock at the grant date or the measurement date over the amount an employee must pay to acquire the stock. The following table presents the effect on net income and earnings per share had the company used the fair value method, as defined in Statement of Financial Accounting Standards No. (SFAS) 123, Accounting for Stock-Based Compensation, to account for stock-based compensation:
Add: stock-based employee compensationexpense included in reported net income,net of tax
Deduct: total stock-based employeecompensation expense determined underfair value based method for all awards, netof tax
Pro forma net income
Per common share—basic:
Net income, as reported
Per common share—diluted:
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Balance at
December 31,2002
June 30,2003
Losses under lease commitments
Other
Total
Asset write-offs
Other comprehensive income – change in unrealized gain on investment, net of tax
Comprehensive income
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Numerator:
Numerator for basic net income per common share – net income
Distributions on convertible mandatorily redeemable preferred securities, net of income taxes
Numerator for diluted net income per common share – net income attributable to common stock after assumed conversions
Denominator:
Denominator for basic net income per common share – weighted average shares
Effect of dilutive securities:
Conversion of mandatorily redeemable preferred securities
Stock options and restricted stock
Denominator for diluted net income per common share – adjusted weighted average shares and assumed conversions
Net income per common share – basic
Net income per common share – diluted
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9
For the three months ended
June 30, 2003
Owens &
Minor, Inc.
Guarantor
Subsidiaries
Non-guarantor
Statements of Operations
June 30, 2002
Intercompany dividend income
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
10
For the six months ended
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Balance Sheets
Accounts and notes receivable, net
Intercompany advances, net
Property and equipment, net
Intercompany investments
Intercompany long-term debt
Common stock
Accumulated other comprehensive income (loss)
12
Condensed Consolidating Financial Information
(in thousands)
Company-obligated mandatorily redeemablepreferred securities of subsidiary trust, holdingsolely convertible debentures of Owens & Minor, Inc.
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Statements of Cash Flows
Accounts and notes receivable
Change in intercompany advances
Decrease in drafts payable
Net increase (decrease) in cash and cash equivalents
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Adjustments to reconcile net income (loss) to cashprovided by (used for) operating activities:
Cash provided by (used for) operating activities
Investments in intercompany debt
Decrease in intercompany investment
Proceeds from issuance of intercompany debt
Intercompany dividends paid
Increase in drafts payable
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following 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, 2002. 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 2002 Annual Report on Form 10-K for the year ended December 31, 2002.
Results of Operations
Second quarter and first six months of 2003 compared with 2002
Overview. In the second quarter of 2003, the company earned net income of $13.6 million, or $0.37 per diluted common share, compared with $11.5 million, or $0.31 per diluted common share in the second quarter of 2002. For the first six months of 2003, the company earned net income of $26.5 million compared to $22.3 million in the first six months of 2002. The increase in net income resulted from increased sales; reduced financing costs; improved productivity in field operations offset by investments in strategic initiatives; and a lower effective tax rate. Throughout the first half of 2003, the company continued the implementation of its new strategic initiatives, launched in late 2002, by hiring new staff and marketing new services to customers. Productivity improvements achieved in the core business partially offset costs associated with the implementation of these initiatives. The company expects to continue to invest in its strategic initiatives, which include the OMSolutionsSM and third-party logistics services, and Owens & Minor University, the company’s new in-house training program.
Net sales. Net sales increased 8% to $1.05 billion in the second quarter of 2003 from $979.6 million in the second quarter of 2002. Net sales increased 6.5% to $2.07 billion in the first six months of 2003 from $1.95 billion in the comparable period of 2002. This increase in sales resulted primarily from additional sales volume with existing accounts.
Gross margin. Gross margin for the second quarter of 2003 was 10.5% of net sales, down slightly from 10.6% of sales in the second quarter of 2002. Gross margin was 10.6% percent of sales for the first six months of 2003, consistent with the first six months of 2002. Both customer margin and margin from supplier incentives have remained consistent from year to year.
Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses for the second quarter of 2003 were 7.7% of net sales, up from 7.6% in the second quarter of 2002. SG&A expenses for the first six months of 2003 were 7.7% of net sales, consistent with the first half of 2002. The quarter-to-quarter increase in SG&A expenses resulted from additional spending on the company’s strategic initiatives, partially offset by productivity improvements.
Financing costs. Financing costs, which include interest expense, net of finance charge collections, discount on accounts receivable securitization, and distributions on mandatorily redeemable preferred securities, totaled $3.8 million for the second quarter of 2003, compared with $5.5 million for the second quarter of 2002. Financing costs for the second quarter of 2002 included $0.7 million of fees associated with a new accounts receivable financing facility and a $0.2 million write-off of deferred fees resulting from the replacement of the company’s revolving credit facility. The remaining $0.8 million decrease resulted from an overall decrease in the company’s outstanding financing, including the repurchase of $27.6 million in mandatorily redeemable preferred securities, lower interest rates, and an increase in customer finance charge collections.
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The company expects to continue to manage its financing costs by managing working capital levels. Future financing costs will be affected primarily by changes in short-term interest rates, as well as working capital requirements.
Income taxes. The income tax provision was $8.8 million in the second quarter of 2003 compared with $7.8 million in the same period of 2002. The effective tax rate was 39.2% for the second quarter of 2003, compared to 39.6% for the full year of 2002. This rate decrease resulted primarily from lower nondeductible expenses.
Financial Condition, Liquidity and Capital Resources
Liquidity. From December 31, 2002 to June 30, 2003, the company reduced its debt from $240.2 million to $213.7 million. During this period, the company also spent $20.4 million to repurchase 415,449 shares of its $2.6875 Term Convertible Securities, Series A (Securities) and $10.9 million to repurchase 661,500 shares of common stock under a repurchase plan initiated in late 2002. These repurchases, as well as the reduction of debt, were funded primarily by operating cash flows. As of June 30, 2003, the company had repurchased $27.6 million of Securities and $10.9 million of common stock, for a total of $38.5 million of the $50 million authorized under the repurchase plan, which expires December 31, 2003.
In the first six months of 2003, $114.9 million of cash was provided by operating activities, compared with $2.0 million used for operating activities in the first six months of 2002. Cash flows in the first six months of 2003 were positively affected by the timing of payments for inventory purchases as well as improved collections of accounts receivable. In the first six months of 2002, the company reduced its sales of accounts receivable under the Receivables Financing Facility, resulting in a $70 million decrease in operating cash flow. The company uses the facility as a source of short-term financing, selling receivables as needed to provide cash for operations.
On August 5, 2003, the company initiated the redemption of all of the $2.6875 Term Convertible Securities, Series A (Securities) issued by Owens & Minor Trust I, a business trust owned by the company. As of August 4, 2003, there was an aggregate of 2,087,306 Securities outstanding, for an aggregate liquidation amount of $104.4 million. The redemption will occur on September 4, 2003. Prior to the close of business on September 3, 2003, each Security is convertible into 2.4242 shares of the common stock of O&M at the holder’s option. Any Securities that are not converted prior to the redemption date will be redeemed for 102.0156% of the liquidation amount of $50 per Security. If no Securities were converted, the redemption of all of the Securities would result in a loss on early retirement of debt of approximately $4.6 million, or $2.8 million net of tax, that would be recorded in the company’s financial statements for the quarter ended September 30, 2003. In addition, diluted shares outstanding would decrease by approximately 5.1 million for subsequent periods. If all of the Securities were converted, there would be no early retirement charge and basic shares outstanding would increase by approximately 5.1 million for subsequent periods. Management expects that diluted shares outstanding would not be affected by the conversion of the Securities.
The company expects that its available financing will be sufficient to fund its working capital needs and long-term strategic growth, as well as the redemption of the Securities discussed above, although this cannot be assured. At June 30, 2003, the company had $146.0 million of unused credit under its revolving credit facility and $225.0 million of unused financing under its Receivables Financing Facility.
Capital Expenditures. Capital expenditures were $7.7 million for the first six months of 2003, compared with $5.3 million for the first six months of 2002. Expenditures for computer hardware and software
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increased to $6.2 million from $3.9 million in the first six months of 2002, as the company focused on upgrading its information systems. The company expects capital expenditures for 2003 to continue to run at a higher rate than in 2002 as it continues to invest in its information systems.
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies the financial accounting and reporting requirements, originally established in SFAS 133, for derivative instruments and hedging activities. SFAS 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. This statement is effective for contracts entered into or modified after June 30, 2003, as well as for hedging relationships designated after June 30, 2003, excluding certain implementation issues that have been effective prior to this date under SFAS 133. The adoption of this statement is not anticipated to have a material effect on the company’s financial position or results of operations.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The provisions of SFAS 150 modify the accounting for certain financial instruments with characteristics of both liabilities and equity by requiring that they be classified as liabilities. The company will be required to adopt the provisions of this standard beginning on July 1, 2003. Upon adoption of the standard, the company will present the distributions on its mandatorily redeemable preferred securities as interest expense on the company’s consolidated statements of income. Financial statements for prior periods will not be affected. Although adoption of the standard will affect presentation in the financial statements, it will not affect the company’s financial condition or results of operations.
Risks
The company is subject to risks associated with changes in the medical industry, including continued efforts to control costs, which place pressure on operating margin, changes in the way medical and surgical services are delivered and changes in manufacturer preferences between the sale of product directly to hospital customers and the use of wholesale distribution. The loss of one or more of the company’s contracts with major customers or group purchasing organizations could have a significant effect on the company’s business.
Forward-looking Statements
Certain statements in this discussion constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Although O&M believes its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to: general economic and business conditions; the ability of the company to implement its strategic initiatives; dependence on sales to certain customers; dependence on suppliers; changes in manufacturer preferences between direct sales and wholesale distribution; competition; changing trends in customer profiles; the ability of the company to meet customer demand for additional value added services; the ability to convert customers to CostTrackSM; the availability of supplier incentives; the ability to capitalize on buying opportunities; the ability of business partners to perform their contractual responsibilities; the ability to manage operating expenses; the ability of the company to manage financing costs and interest rate risk; the risk that a decline in business volume or profitability could result in an impairment of goodwill; the ability to timely or adequately respond to technological advances in the
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medical supply industry; the ability to successfully identify, manage or integrate possible future acquisitions; outcome of outstanding litigation; and changes in government regulations. As a result of these and other factors, no assurance can be given as to the company’s future results. The company is under no obligation to update or revise any forward-looking statements, whether as a result of new information, future results, or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company believes there has been no material change in its exposure to market risk from that discussed in Item 7A in the company’s Annual Report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
The company conducted an evaluation, with the participation of the company’s management (including its Chief Executive Officer and Chief Financial Officer) of the effectiveness of its disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the company required to be included in the company’s periodic SEC filings. There has been no change in the company’s internal control over financial reporting during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
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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, 2002. Through June 30, 2003, 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 24, 2003, with the voting results designated below each such matter:
Directors
Votes Against
Or Withheld
Broker
Non-Votes
John T. Crotty
Richard E. Fogg
James E. Rogers
James E. Ukrop
Votes For
Abstentions
Item 6. Exhibits and Reports on Form 8-K
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The company filed a Current Report on Form 8-K dated April 16, 2003, under Items 7 and 9, announcing its earnings for the first quarter ended March 31, 2003.
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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.
(Registrant)
Date August 13, 2003
/s/ G. GILMER MINOR, III
G. Gilmer Minor, III
Chairman and Chief Executive Officer
/s/ JEFFREY KACZKA
Jeffrey Kaczka
Senior Vice President
Chief Financial Officer
/s/ OLWEN B. CAPE
Olwen B. Cape
Vice President & Controller
Chief Accounting Officer
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Exhibits Filed with SEC
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