UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1994
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 Identification No.)
incorporation or organization)
4800 Cox Road, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 747-9794
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
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 the Company's Common Stock outstanding as of
July 27, 1994 was 30,690,691.
Owens & Minor, Inc. and Subsidiaries
Index
Part I Financial Information
Consolidated Balance Sheets - June 30, 1994 and
December 31, 1993
Consolidated Statements of Income - Three Months and
Six Months Ended June 30, 1994 and 1993
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1994 and 1993
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part I Other Information
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<S> <C> <C>
June 30, December 31
1994 1993
Assets
Current assets
Cash and cash equivalents $ 1,938 $ 2,048
Accounts and notes receivable, net 239,341 144,629
Merchandise inventories 292,084 124,848
Other current assets 45,487 10,638
Total current assets 578,850 282,163
Property and equipment, net 38,736 23,863
Excess of purchase price over
net assets acquired, net 172,137 17,316
Other assets 10,841 10,980
Total Assets $ 800,564 $ 334,322
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 1,579 $ 1,494
Accounts payable 236,590 120,699
Accrued payroll and related liabilities 7,827 5,768
Other accrued liabilities 50,804 15,111
Total current liabilities 296,800 143,072
Long-term debt 247,667 50,768
Other liabilities 4,236 3,539
Total Liabilities 548,703 197,379
Stockholders' equity
Preferred stock, par value $100;
authorized - 10,000 shares
Series A: Participating Cumulative
Preferred Stock; none issued - -
Series B: Participating Cumulative
Preferred Stock; 4 1/2%,
convertible; issued - 1,150 shares 115,000 -
Common stock, par value $2.00;
authorized - 200,000
shares; issued - 30,668 and
20,285 shares 61,336 40,569
Paid-in capital 17 9,258
Retained earnings 75,508 87,116
Total Stockholders' Equity 251,861 136,943
Commitments and contingencies
Total Liabilities and Stockholders' Equity $ 800,564 $ 334,322
</TABLE>
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
Net sales $ 581,763 $ 341,221 $ 972,557 $ 659,033
Cost of sales 524,954 305,567 876,622 589,745
Gross margin 56,809 35,654 95,935 69,288
Selling, general and
administrative expenses 40,752 26,059 69,125 50,945
Depreciation and
amortization 3,297 1,823 5,599 3,540
Interest expense, net 2,220 666 2,988 1,305
Non-recurring
restructuring expenses 18,617 - 18,617 -
Total expenses 64,886 28,548 96,329 55,790
Income (loss) before
income taxes (8,077) 7,106 (394) 13,498
Income tax expense (benefit) (2,952) 2,841 (25) 5,407
Income (loss) before
cumulative effect of change
in accounting principle (5,125) 4,265 (369) 8,091
Cumulative effect of change
in accounting principle - - - 706
Net income (loss) (5,125) 4,265 (369) 8,797
Dividends on preferred stock 727 - 727 -
Net income (loss) attributable
to common stock $ (5,852) $ 4,265 $ (1,096) $ 8,797
Net income (loss) per common share:
Income (loss) before
cumulative effect of change
in accounting
principle $ (0.19) $ 0.14 $ (0.04) $ 0.27
Cumulative effect of change
in accounting principle - - - 0.02
Net income (loss) per
common share $ (0.19) $ 0.14 $ (0.04) $ 0.29
Cash dividends per
common share $ 0.045 $ 0.035 $ 0.080 $ 0.070
Weighted average common
shares and common share
equivalents 30,948 30,683 31,040 30,584
</TABLE>
See Notes to Consolidated Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
(In thousands) June 30,
<TABLE>
<S> <C> <C>
1994 1993
Operating Activities
Net income (loss) and noncash charges
Net income (loss) $ (369) $ 8,797
Noncash charges (credits) to income
Cumulative effect of change
in accounting principle - (706)
Depreciation and amortization 5,599 3,540
Provision for losses on accounts and
notes receivable 379 565
Provision for LIFO reserve 858 1,256
Other, net 409 414
Cash provided by net income (loss)
and noncash charges 6,876 13,866
Changes in working capital
Accounts and notes receivable (95,091) (7,025)
Merchandise inventories (56,669) (29,513)
Accounts payable 29,548 25,818
Net change in other current assets
and current liabilities 8,562 (287)
Other, net (41) (453)
Cash provided by (used for)
operating activities (106,815) 2,406
Investing Activities
Business acquisition,
net of cash acquired (38,622) (2,693)
Additions to property
and equipment (1,376) (3,209)
Other, net (199) (1,755)
Cash used for investing
activities (40,197) (7,657)
Financing Activities
Cash dividends paid (2,450) (2,095)
Additions to long-term debt 215,550 30,500
Reductions of long-term debt (72,422) (4,773)
Other short-term financing 5,580 (15,107)
Exercise of options 644 305
Cash provided by financing activities 146,902 8,830
Net increase (decrease) in cash
and cash equivalents (110) 3,579
Cash and cash equivalents
at beginning of year 2,048 7,068
Cash and cash equivalents
at end of period $ 1,938 $ 10,647
</TABLE>
See Notes to Consolidated Financial Statements
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 subsidiaries as of June 30, 1994 and the results
of operations for the three and six month periods ended June 30, 1994
and 1993 and cash flows for the six month periods
ended June 30, 1994 and 1993.
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
In general, the Company uses estimated gross profit rates to determine
the cost of sales during interim periods. To improve the accuracy
of its estimated gross margins for interim reporting purposes, the Company
takes physical inventories at selected
distribution centers and reported results of operations for the quarter
reflect the results of such inventories, if materially different.
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 to minimize year-end
adjustments.
4. Business Combination
On May 10, 1994, the Company exchanged $40.2 million in cash and 1.15 million
shares of 4.5%, $100 par value, Series B Cumulative Preferred Stock for all
the capital stock of Stuart Medical,
Inc. (Stuart), a distributor of medical/surgical supplies. The Series B
Cumulative Preferred Stock is convertible into approximately 7.0 million
shares of common stock. The transaction was
accounted for as a purchase and, accordingly, the operating results
of Stuart have been included in the Company's consolidated operating
results since May 1, 1994. The purchase price exceeded the
net assets acquired by approximately $156 million which is
being amortized on a straight-line basis over 40 years.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if Stuart had been combined
as of the beginning of each of the periods presented, after including the
impact of certain adjustments, such as increased interest
expense on acquisition debt, amortization of the excess of
purchase price over net assets acquired, reversal of non-recurring
restructuring expenses ($18.6 million pre-tax) and related
income tax effects.
<TABLE>
<S> <C> <C>
(In thousands,
except per
share data) Six Months Ended
June 30, 1994 Six Months Ended
June 30, 1993
Net sales $ 1,295,000 $ 1,100,000
Net income $ 13,000 $ 10,800
Net income per
common share $ 0.34 $ 0.27
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the combination had been in effect for
the entire period presented. In addition, they are not intended to be
a projection of future results.
5. Long-Term Debt
Simultaneous with the Stuart combination, the Company entered into a $350
million Senior Credit Agreement with interest based on, at the Company's
discretion, the London Interbank
Borrowing Offering Rate (LIBOR) or the Prime Rate. The Credit Agreement
expires in April 1999. The proceeds were used to fund the $40.2 million
exchanged in the combination, repay certain of the long-
term debt of Stuart and the Company and fund the working capital
requirements associated with the accounts receivable of Stuart.
Stuart sold its accounts receivable at a discount to a related
funding company, thus no receivables were acquired by the Company
in the combination.
6. Non-recurring Restructuring Expenses
During the second quarter of 1994 non-recurring restructuring expenses
were incurred under a formal restructuring plan adopted in connection
with the Company's combination with Stuart and its
related decision to contract out the management and operation
of its mainframe computer system.
The $18.6 million (pre-tax) of non-recurring expenses are comprised
primarily of severance costs associated with termination of employees
(approximately $5.2 million), costs of consolidating
distribution facilities and offices (approximately $4.0 million)
and costs of terminating leases associated with the contracting out
of the Company's mainframe computer operations (approximately $6.4
million). The restructuring expenses also include approximately
$3.0 million of non-cash asset write-downs. The Company anticipates
incurring additional restructuring expenses associated with this plan
over the remainder of 1994,
with total restructuring expenses estimated to be $35 million.
7. Stock Split
All share and per share information includes the effect of the 3 for 2
stock split distributed June 8, 1994 to shareholders of record
on May 24, 1994.
Item 2.
Owens & Minor, Inc. and Subsidiaries
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Net Sales
During the second quarter net sales increased 70.5% (20% same store) to
$581.8 million in 1994 from $341.2 million in 1993. For the year sales
increased 47.6% (20% same store) compared to the first six
months of 1993. The sales increase is due primarily to the
combination with Stuart Medical, Inc. (Stuart), the Company's
continued market share improvement from previously announced
new supply agreements with Voluntary Hospitals of America, Inc.
(VHA) and Columbia/HCA Healthcare Corporation (Columbia/HCA),
account penetration and product line expansion.
Gross Margin
Gross margin as a percentage of net sales declined during the second
quarter to 9.8% in 1994 from 10.4% in 1993. Gross margin is also
down for the first six months from 10.5% in 1993 to 9.9% in
1994. This anticipated decline is due primarily to the above mentioned
new national supply contracts. Although the gross margin
of these contracts reduces the Company's overall gross margin
as a percentage of net sales, the reduction is being offset by the
increased sales, producing an increase in gross margin dollars
for the first six months of 1994 of approximately 38.5%.
Selling, General and Administrative Expenses
In conjunction with the realization of synergies from the Stuart
combination and the benefits realized from the Company's emphasis on
training and technology development, the Company has been
able to absorb the increased sales volume without corresponding
increases in administrative expenses. These synergies and benefits
have decreased selling, general and administrative expenses as a
percentage of sales from 7.6% for the second quarter of 1993 and
7.7% for the first six months of 1993 to 7.0% for the second
quarter of 1994 and 7.1% for the first six months of 1994, respectively.
Depreciation and Amortization
Depreciation and amortization increased approximately $1.5 million during
the second quarter of 1994 as compared to the second quarter of
1993 and $2.1 million for the first six months in 1994
compared to the same period in 1993. The increase is due primarily
to the additional assets acquired in the combination with Stuart, the
approximately
$156 million excess of purchase price over net assets acquired
resulting from the combination and the Company's continued investment
in new and improved technology.
Interest Expense, Net
Interest expense, net of interest income, increased from $.7 million
during the second quarter of 1993 to $2.2 million during the same
period in 1994. For the first six months of 1994 interest
expense, net of interest income, increased $1.7 million compared
to the same period in 1993. The increase is due to increased
borrowings (approximately $197) to finance the combination
with Stuart and the unfavorable trend in interest rates during
the first half of 1994.
Income Tax Expense (Benefit)
The effective tax rate varied during the second quarter as a percentage of
income before income taxes from 40.0% tax expense in 1993 to
tax benefit of 36.5% in 1994. The rate has also varied
similarly year to date. The rate variance is due to the amortization
of the excess of purchase price over net assets acquired in
the Stuart combination, which is not tax deductible.
Non-recurring Restructuring Expenses
During the second quarter of 1994 the Company incurred approximately
$19 million of non-recurring restructuring expenses. These non-
recurring restructuring expenses as discussed in the Company's
1994 proxy statement relate to its combination
with Stuart. The anticipated amounts discussed in the proxy
statement have increased due to the Company's recent decision to
contract out the operation
of its mainframe computer system due to the combination.
As discussed in note 5 of the Notes to Consolidated Financial Statements,
the expenses relate to severance costs associated with the
termination of employees, consolidation of distribution facilities
and offices, termination of leases related to the Company's current
mainframe computer system and write-down of assets. Restructuring
expenses of approximately $16 million will be recorded as
incurred throughout the remainder of the year.
Net Income (Loss)
During the second quarter and the first six months of 1994, the Company
incurred a net loss due to the anticipated restructuring expenses
previously mentioned. Without these non-recurring expenses and
the related tax benefit the Company earned approximately $6.0 million
or $.17 per common share for the quarter ended June 30, 1994
and $10.8 million or $.32 per common share for the
six months ended June 30, 1994, increases of 41.7% and 33.5%,
respectively, over the same periods in 1993. The increase in net
income prior to restructuring expenses is due primarily to the
increased sales and the reduction in operating expenses as a
percent of net sales.
Financial Condition
The Company uses several measurements for internal purposes of managing
assets, liquidity and capital resources. Due to the Stuart
combination the majority of measurements have changed due to
different customer bases and different management objectives. In the
transition process the Company will continue its emphasis on
management of assets, liquidity and capital resources as a key
ingredient to making the combination successful. The following
is a summary of a few of the measurements the Company uses.
<TABLE>
<S> <C> <C> <C>
June 30, 1994 December 31, 1993 June 30, 1993
Return on Common Equity* 15.6% 14.6% 14.3%
Current Ratio 1.95 1.97 1.97
Inventory Turnover 8.5 11.5 10.3
Accounts Receivable Days Sales 35.3 34.2 34.2
Capitalization Ratio 49.6% 27.1% 30.3%
</TABLE>
* Excludes impact of non-recurring restructuring expenses and
related tax benefit.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Shareholders.
The following matters were submitted to a vote of the Company's
shareholders at its annual meeting held on May 10, 1994 with the
voting results designated below each such matter:
(1) Proposal to approve the transactions contemplated by the
Agreement of Exchange, dated as of December 22, 1993, as amended and
restated on March 31, 1994, by and among Stuart Medical.,
Owens & Minor Medical, Inc. (formerly, Owens & Minor, Inc.),
Owens & Minor, Inc. (formerly, O&M Holding, Inc.) and certain
shareholders of Stuart Medical, Inc.
Votes Against Broker
Votes For or Withheld Abstentions Non-Votes
15,651,396 63,615 129,579 2,051,149
(2) Election of William F. Fife, James E. Ukrop and James E. Rogers as
directors of the Company for a three-year term and election
of Vernard W. Henley as a director of the Company for a two-year
term.
<TABLE>
<S> <C> <C> <C> <C>
Votes
Against or Broker
Votes For Withheld Abstentions Non Votes
William F. Fife 17,843,578 52,161 0 0
James E. Ukrop 17,846,209 49,530 0 0
James E. Rogers 17,846,214 49,525 0 0
Vernard W. Henley 17,845,115 50,624 0 0
</TABLE>
(3) Ratification of the appointment of KPMG Peat Marwick as the
Company's independent accountants.
<TABLE>
<S> <C> <C> <C>
Votes Against Broker
Votes For or Withheld Abstentions Non-Votes
17,850,620 17,501 27,618 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Report on Form 8-K dated May 10, 1994, Items
2, 5 and 7, with respect to the consummation of its business combination
with Stuart and the election of a new chairman and
chairman emeritus. The following financial statements were filed
(or incorporated by reference) as a part of such Form 8-K:
Stuart Medical, Inc. Financial Statements (audited)
Balance Sheets as of December 31, 1993 and 1992.
Statements of Income for the year ended December 31, 1993, the eight
months ended December 31, 1992 and the years ended April 30, 1992
and 1991.
Statements of Shareholders' Equity at December 31, 1993 and 1992
and April 30, 1992, 1991 and 1990.
Statements of Cash Flows for the year ended December 31, 1993, the eight
months ended December 31, 1992 and the years ended April 30,
1992 and 1991.
Stuart Medical, Inc. Interim Financial Statements (unaudited)
Balance Sheets as of March 31, 1994 and December 31, 1993.
Statements of Income for the three months ended March 31, 1994 and 1993.
Statements of Cash Flows for the three months ended March 31, 1994 and 1993.
Owens & Minor, Inc. and Stuart Medical, Inc. Pro Forma Combined
Financial Statements (unaudited)
Pro Forma Combined Condensed Balance Sheet as of December 31, 1993.
Pro Forma Combined Condensed Statement of Income for the year ended
December 31, 1993.
Pro Forma Combined Condensed Balance Sheet as of March 31, 1994.
Pro Forma Combined Condensed Statement of Income for the three months
ended March 31, 1994.
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.
Date /s/ Glenn J. Dozier
Glenn J. Dozier
Senior Vice President, Finance,
Chief Financial Officer
Date /s/ F. Thomas Smiley
F. Thomas Smiley
Vice President, Controller
