10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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, 2010

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9120 Lockwood Boulevard, Mechanicsville, Virginia   23116
(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) 723-7000

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of Owens & Minor, Inc.’s common stock outstanding as of July 23, 2010, was 63,337,018 shares.

 

 

 


Table of Contents

Owens & Minor, Inc. and Subsidiaries

Index

 

          Page

Part I. Financial Information

  
   Item 1.   Financial Statements   
     Consolidated Statements of Income – Three Months and Six Months Ended June 30, 2010 and 2009    3
     Consolidated Balance Sheets – June 30, 2010 and December 31, 2009    4
     Consolidated Statements of Cash Flows – Six Months Ended June 30, 2010 and 2009    5
     Consolidated Statements of Changes in Shareholders’ Equity – Six Months Ended June 30, 2010 and 2009    6
     Notes to Consolidated Financial Statements    7
   Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18
   Item 3.   Quantitative and Qualitative Disclosures About Market Risk    22
   Item 4.   Controls and Procedures    22

Part II. Other Information

  
   Item 1.   Legal Proceedings    22
   Item 1A.   Risk Factors    22
   Item 6.   Exhibits    23

 

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Part I. Financial Information

 

Item 1. Financial Statements

Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Income

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(in thousands, except per share data)    2010     2009     2010     2009  

Revenue

   $ 2,019,893      $ 2,013,780      $ 3,989,563      $ 3,962,408   

Cost of revenue

     1,827,674        1,816,081        3,606,893        3,581,076   
                                

Gross margin

     192,219        197,699        382,670        381,332   

Selling, general and administrative expenses

     133,619        143,972        268,782        283,369   

Depreciation and amortization

     7,107        6,046        13,896        11,862   

Other operating income, net

     (669     (1,265     (1,321     (2,725
                                

Operating earnings

     52,162        48,946        101,313        88,826   

Interest expense, net

     3,505        3,291        6,804        6,632   
                                

Income from continuing operations before income taxes

     48,657        45,655        94,509        82,194   

Income tax provision

     19,188        17,880        37,223        32,061   
                                

Income from continuing operations

     29,469        27,775        57,286        50,133   

Loss from discontinued operations, net of tax

     —          (4,127     —          (12,509
                                

Net income

   $ 29,469      $ 23,648      $ 57,286      $ 37,624   
                                

Income (loss) per common share – basic:

        

Continuing operations

   $ 0.47      $ 0.45      $ 0.91      $ 0.81   

Discontinued operations

     —          (0.07     —          (0.20
                                

Net income per share – basic

   $ 0.47      $ 0.38      $ 0.91      $ 0.61   
                                

Income (loss) per common share – diluted:

        

Continuing operations

   $ 0.46      $ 0.44      $ 0.91      $ 0.80   

Discontinued operations

     —          (0.06     —          (0.20
                                

Net income per share – diluted

   $ 0.46      $ 0.38      $ 0.91      $ 0.60   
                                

Cash dividends per common share

   $ 0.177      $ 0.153      $ 0.354      $ 0.306   
                                

See accompanying notes to consolidated financial statements.

 

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Owens & Minor, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)

 

(in thousands, except per share data)    June 30,
2010
    December 31,
2009
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 157,638      $ 96,136   

Accounts and notes receivable, net of allowances of $17,683 and $16,420

     468,026        498,080   

Merchandise inventories

     712,078        689,889   

Other current assets

     54,117        57,962   
                

Total current assets

     1,391,859        1,342,067   

Property and equipment, net of accumulated depreciation of $83,018 and $76,574

     92,565        84,965   

Goodwill, net

     247,271        247,271   

Intangible assets, net

     26,345        27,809   

Other assets, net

     46,704        44,976   
                

Total assets

   $ 1,804,744      $ 1,747,088   
                

Liabilities and shareholders’ equity

    

Current liabilities

    

Accounts and drafts payable

   $ 578,627      $ 546,989   

Accrued payroll and related liabilities

     14,937        34,885   

Deferred income taxes

     29,776        25,784   

Other accrued liabilities

     95,739        90,519   

Current liabilities of discontinued operations

     1,000        1,939   
                

Total current liabilities

     720,079        700,116   

Long-term debt, excluding current portion

     207,902        208,418   

Deferred income taxes

     8,851        8,947   

Other liabilities

     52,384        60,428   
                

Total liabilities

     989,216        977,909   
                

Commitments and contingencies

    

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 – 63,460 shares and 62,870 shares

     126,920        83,827   

Paid-in capital

     161,782        193,905   

Retained earnings

     539,395        504,480   

Accumulated other comprehensive loss

     (12,569     (13,033
                

Total shareholders’ equity

     815,528        769,179   
                

Total liabilities and shareholders’ equity

   $ 1,804,744      $ 1,747,088   
                

See accompanying notes to consolidated financial statements.

 

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Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

 

     Six Months Ended
June 30,
 
(in thousands)    2010     2009  

Operating activities:

    

Net income

   $ 57,286      $ 37,624   

Adjustments to reconcile net income to cash provided by operating activities of continuing operations:

    

Loss from discontinued operations, net of tax

     —          12,509   

Depreciation and amortization

     13,896        11,862   

Provision for LIFO reserve

     8,433        16,440   

Share-based compensation expense

     4,633        4,159   

Provision for losses on accounts and notes receivable

     1,450        2,052   

Changes in operating assets and liabilities:

    

Accounts and notes receivable

     28,604        19,055   

Merchandise inventories

     (30,622     (34,326

Accounts payable

     113,988        70,963   

Net change in other assets and liabilities

     (9,458     (18,103

Other, net

     (5,122     1,178   
                

Cash provided by operating activities of continuing operations

     183,088        123,413   
                

Investing activities:

    

Additions to property and equipment

     (15,488     (9,420

Additions to computer software

     (4,756     (7,311

Acquisitions of intangible assets

     (55     —     

Cash received related to acquisition of business

     —          6,994   

Proceeds from sale of property and equipment

     1,612        —     
                

Cash used for investing activities of continuing operations

     (18,687     (9,737
                

Financing activities:

    

Payments on revolving credit facility

     —          (301,964

Borrowings on revolving credit facility

     —          151,386   

Decrease in drafts payable

     (82,350     (14,254

Cash dividends paid

     (22,324     (19,130

Proceeds from exercise of stock options

     5,602        2,170   

Excess tax benefits related to share-based compensation

     1,735        958   

Other, net (including financing costs of $2.8 million in 2010)

     (4,622     (1,089
                

Cash used for financing activities of continuing operations

     (101,959     (181,923
                

Discontinued operations:

    

Operating cash flows

     (940     12,084   

Investing cash flows

     —          63,000   
                

Net cash (used for) provided by discontinued operations

     (940     75,084   
                

Net increase in cash and cash equivalents

     61,502        6,837   

Cash and cash equivalents at beginning of period

     96,136        7,886   
                

Cash and cash equivalents at end of period

   $ 157,638      $ 14,723   
                

Supplemental disclosure of cash flow information:

    

Income taxes paid, net

   $ 32,201      $ 27,934   

Interest paid

   $ 6,602      $ 6,611   

See accompanying notes to consolidated financial statements.

 

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Owens & Minor, Inc. and Subsidiaries

Consolidated Statements Of Changes In Shareholders’ Equity

(unaudited)

 

(in thousands, except per share data)    Common
Shares
Outstanding
    Common
Stock ($2
par value)
    Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total
Shareholders’
Equity
 

Balance December 31, 2008

   62,162      $ 82,881      $ 180,074      $ 438,192      $ (12,096   $ 689,051   

Net income

           37,624          37,624   

Other comprehensive income (loss):

            

Retirement benefit plan adjustments, net of $197 tax expense

             307        307   

Cash flow hedge activity, net of $16 tax benefit

             (25     (25
                  

Comprehensive income

               37,906   
                  

Issuance of restricted stock, net of forfeitures

   302        402        (402         —     

Share-based compensation

         4,186            4,186   

Cash dividends declared ($0.306 per share)

           (19,130       (19,130

Exercise of stock options, including excess tax benefits of $958

   178        239        2,889            3,128   

Other

   (38     (49     (886         (935
                                              

Balance June 30, 2009

   62,604      $ 83,473      $ 185,861      $ 456,686      $ (11,814   $ 714,206   
                                              

Balance December 31, 2009

   62,870      $ 83,827      $ 193,905      $ 504,480      $ (13,033   $ 769,179   

Net income

           57,286          57,286   

Other comprehensive income (loss):

            

Retirement benefit plan adjustments, net of $312 tax expense

             488        488   

Cash flow hedge activity, net of $16 tax benefit

             (24     (24
                  

Comprehensive income

               57,750   
                  

Issuance of restricted stock, net of forfeitures

   310        408        (408         —     

Share-based compensation

         4,633            4,633   

Cash dividends declared ($0.354 per share)

           (22,371       (22,371

Exercise of stock options, including excess tax benefits of $1,735

   313        626        6,711            7,337   

Stock split (three-for-two)

       42,126        (42,126         —     

Other

   (33     (67     (933         (1,000
                                              

Balance June 30, 2010

   63,460      $ 126,920      $ 161,782      $ 539,395      $ (12,569   $ 815,528   
                                              

See accompanying notes to consolidated financial statements.

 

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Owens & Minor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, unless otherwise indicated)

 

1. Basis of Presentation and Use of Estimates

Basis of Presentation

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 (we, us or our) as of June 30, 2010, and December 31, 2009, and the consolidated results of operations for the three and six months ended June 30, 2010 and 2009, and the consolidated cash flows and changes in shareholders’ equity for the six months ended June 30, 2010 and 2009, in conformity with U.S. generally accepted accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

On March 31, 2010, we effected a three-for-two stock split of our outstanding shares of common stock in the form of a stock dividend of one share of common stock for every two shares outstanding to stockholders of record on March 15, 2010. All share and per-share data (except par value) have been retroactively adjusted to reflect this stock split for all periods presented.

In January 2009, we exited our direct-to-consumer diabetes supply (DTC) business. Accordingly, the DTC business is presented as discontinued operations for all periods presented, and unless otherwise noted, all amounts presented in the accompanying consolidated financial statements, including note disclosures, contain only information related to our continuing operations.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from those estimates.

 

2. Fair Value

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable reported in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments. The fair value of long-term debt is estimated based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market (Level 1) or, if quoted market prices or dealer quotes are not available, on the borrowing rates currently available to us for loans with similar terms and average maturities (Level 2). See Note 5 for the fair value of long-term debt.

Property held for sale is reported at the lower of carrying value or estimated fair value less selling costs, with fair value determined based on recent sales prices for comparable properties in similar locations (Level 2). Property held for sale of $10.0 million at June 30, 2010 and $11.5 million at December 31, 2009, is included in other assets, net, in the consolidated balance sheets. We are actively marketing the property for sale; however, the ultimate timing is dependent on local market conditions.

 

3. Intangible Assets

Intangible assets at June 30, 2010, and December 31, 2009, are as follows:

 

     Customer
Relationships
    Other
Intangibles
    Total  

At June 30, 2010:

      

Gross intangible assets

   $ 31,300      $ 4,670      $ 35,970   

Accumulated amortization

     (6,222     (3,403     (9,625
                        

Net intangible assets

   $ 25,078      $ 1,267      $ 26,345   
                        

At December 31, 2009:

      

Gross intangible assets

   $ 31,300      $ 4,631      $ 35,931   

Accumulated amortization

     (5,187     (2,935     (8,122
                        

Net intangible assets

   $ 26,113      $ 1,696      $ 27,809   
                        

 

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Amortization expense for intangible assets was $0.7 million for each of the three months ended June 30, 2010 and 2009, and $1.5 million and $1.3 million for the six months ended June 30, 2010 and 2009.

Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense for the next five years is as follows: remainder of 2010 – $1.5 million; 2011 – $2.8 million; 2012 – $2.1 million; 2013 – $2.1 million, 2014 – $2.1 million and 2015 – $2.1 million.

 

4. Retirement Plans

The components of net periodic pension cost of our retirement plans for the three and six months ended June 30, 2010 and 2009, are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Service cost

   $ 326      $ 287      $ 659      $ 604   

Interest cost

     860        856        1,738        1,741   

Expected return on plan assets

     (49     (459     (117     (917

Amortization of prior service cost

     68        39        139        78   

Recognized net actuarial loss

     316        197        661        425   
                                

Net periodic pension cost

   $ 1,521      $ 920      $ 3,080      $ 1,931   
                                

During the first six months of 2010, we contributed $8.3 million to the defined benefit pension plan in conjunction with a plan of termination approved by our Board of Directors in December 2009. We expect to make additional contributions of approximately $1.0 million through the final termination, which is expected to be in late 2010 or early 2011.

 

5. Debt

We have $200 million of senior notes outstanding, which mature in April 2016 and bear interest at 6.35% payable semi-annually (Senior Notes). We may redeem the Senior Notes in whole or in part, at a redemption price of the greater of 100% of the principal amount of the Senior Notes or the present value of remaining scheduled payments of principal and interest discounted at the applicable Treasury Rate plus 0.25%. The estimated fair value of the Senior Notes was $199.8 million and $196.3 million, and the related carrying amount was $205.2 million and $205.7 million at June 30, 2010, and December 31, 2009.

On June 7, 2010, we entered into a Credit Agreement with Bank of America, N.A., Wells Fargo Bank, N.A and a syndication of banks (the “Credit Agreement”). This agreement replaced an existing $306 million revolving credit facility (which was to expire in May 2011) with a $350 million revolving credit facility which expires on June 7, 2013. Under the new facility, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $150 million. The interest rate on the new facility, which is subject to adjustment quarterly, is based on, at our discretion, the London Interbank Offered Rate (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on our leverage ratio (Credit Spread), as defined by the Credit Agreement. We are charged a commitment fee of between 37.5 and 62.5 basis points on the unused portion of the facility. The terms of the agreement limit the amount of indebtedness that we may incur and require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. At June 30, 2010, we had $10.5 million of letters of credit and no borrowings outstanding, leaving $339.5 million available for borrowing.

 

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6. Income from Continuing Operations per Common Share

The following summarizes the calculation of income from continuing operations per common share for the three and six months ended June 30, 2010 and 2009:

 

(in thousands, except per share data)    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Numerator:

        

Income from continuing operations

   $ 29,469      $ 27,775      $ 57,286      $ 50,133   

Less: income allocated to unvested restricted shares

     (362     (236     (668     (424
                                

Income from continuing operations attributable to common shareholders – basic

     29,107        27,539        56,618        49,709   

Add: undistributed income attributable to unvested restricted shares – basic

     173        155        326        263   

Less: undistributed income reallocated to unvested restricted shares – diluted

     (172     (154     (325     (262
                                

Income from continuing operations attributable to common shareholders – diluted

   $ 29,108      $ 27,540      $ 56,619      $ 49,710   
                                

Denominator:

        

Weighted average shares outstanding – basic

     62,334        61,606        62,213        61,549   

Dilutive shares – stock options

     272        304        287        337   
                                

Weighted average shares outstanding – diluted

     62,606        61,910        62,500        61,886   
                                

Income from continuing operations per share attributable to common shareholders:

        

Basic

   $ 0.47      $ 0.45      $ 0.91      $ 0.81   

Diluted

   $ 0.46      $ 0.44      $ 0.91      $ 0.80   

 

7. Shareholders’ Equity

The number of shares of common stock issuable upon exercise of outstanding stock options or achievement of certain performance criteria, vesting of other stock awards, and the number of shares reserved for issuance under our share-based compensation plan and shareholder rights agreement were proportionately increased for the three-for-two stock split, described in Note 1, in accordance with terms of the respective plans. This stock split was recorded by a transfer of $42.1 million from paid-in capital to common stock, representing a $2 par value for each additional share issued. The number of authorized common shares remained at 200 million, and the number of authorized preferred shares, none of which have been issued, remained at 10 million.

 

8. Commitments and Contingencies

We have contractual obligations that are required to be paid to customers in the event that certain contractual performance targets are not achieved as of specified dates, generally within 36 months from inception of the contract. These contingent obligations total $5.4 million as of June 30, 2010. If none of the performance targets are met as of the specified dates, and customers have met their contractual commitments, payments will be due as follows: Remainder of 2010 – $0.8 million; 2011 – $2.4 million; 2012 – $1.6 million; 2013 – $0.5 million, and 2014 – $0.1 million. None of these contingent obligations were accrued at June 30, 2010, as we do not consider any of them probable. We deferred the recognition of revenues that are contingent upon the company’s future performance under the terms of these contracts. As of June 30, 2010, $0.9 million of deferred revenue related to outstanding contractual performance targets is included in other accrued liabilities.

We also have contracts with performance targets that, if met, will result in additional fees. We recognize revenues for these contracts when the fees have been earned and are no longer subject to contingent obligations. These contracts have terms ranging from 12 to 36 months.

 

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The state of California is conducting an administrative review of certain ongoing local sales tax incentives that may be available to us. As a result of this review, we may receive tax incentive payments of up to $1.05 million per quarter for all or some of the period beginning with the third quarter of 2007 and through final resolution of this matter. The exact amount, if any, is dependent upon a number of factors, including the timing of negotiation and execution of certain customer agreements, the variability in sales and company operations in California. We believe this matter may be resolved in late 2010 or early 2011.

Prior to exiting the DTC business, we received reimbursements from Medicare, Medicaid, and private healthcare insurers for certain customer billings. We are subject to audits of these reimbursements for up to seven years from the date of the service.

 

9. Discontinued Operations

In January 2009, we sold assets of the DTC business to Liberty Healthcare Group, Inc., a subsidiary of Medco Health Solutions, Inc. for $63.0 million in cash and recognized a gain on sale of $3.2 million. The following table provides summary financial information for the DTC business for the three and six months ended June 30, 2010 and 2009:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010    2009     2010    2009  

Revenue

   $ —      $ —        $   —      $ —     
                              

Loss from discontinued operations before income taxes

   $ —      $ (6,502   $   —      $ (20,021

Income tax benefit

     —        2,375          —        7,512   
                              

Loss from discontinued operations

   $ —      $ (4,127   $   —      $ (12,509
                              

We incurred charges associated with exiting the DTC business during the three and six months ended June 30, 2009. These charges were related to the valuation of accounts receivable, as we entered into an agreement with a third party during the first quarter of 2009 to pursue the collection of remaining accounts receivable; losses on the disposal of other remaining assets; costs associated with leased facilities; and payroll costs, including severance.

 

10


Table of Contents
10. 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 Senior Notes; and the non-guarantor subsidiaries of the Senior 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.

 

For the three months ended June 30, 2010    Owens &
Minor,
Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Income

          

Revenue

   $ —        $ 2,019,725      $ 168      $ —        $ 2,019,893   

Cost of revenue

     —          1,827,651        23        —          1,827,674   
                                        

Gross margin

     —          192,074        145        —          192,219   

Selling, general and administrative expenses

     (115     133,376        358        —          133,619   

Depreciation and amortization

     —          7,106        1        —          7,107   

Other operating income, net

     —          (669     —          —          (669
                                        

Operating earnings (loss)

     115        52,261        (214     —          52,162   

Interest expense, net

     2,413        1,073        19        —          3,505   
                                        

Income (loss) from continuing operations before income taxes

     (2,298     51,188        (233     —          48,657   

Income tax provision (benefit)

     (904     20,185        (93     —          19,188   

Equity in earnings of subsidiaries

     30,863        —          —          (30,863     —     
                                        

Income (loss) from continuing operations

     29,469        31,003        (140     (30,863     29,469   

Loss from discontinued operations, net of tax

     —          —          —          —          —     
                                        

Net income (loss)

   $ 29,469      $ 31,003      $ (140   $ (30,683   $ 29,469   
                                        

 

For the three months ended June 30, 2009    Owens &
Minor,
Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Income

          

Revenue

   $ —        $ 2,013,570      $ 210      $ —        $ 2,013,780   

Cost of revenue

     —          1,816,080        1        —          1,816,081   
                                        

Gross margin

     —          197,490        209        —          197,699   

Selling, general and administrative expenses

     852        142,982        138        —          143,972   

Depreciation and amortization

     —          6,031        15        —          6,046   

Other operating (income) expense, net

     —          (1,390     125        —          (1,265
                                        

Operating earnings (loss)

     (852     49,867        (69     —          48,946   

Interest (income) expense, net

     (3,910     7,167        34        —          3,291   
                                        

Income (loss) from continuing operations before income taxes

     3,058        42,700        (103     —          45,655   

Income tax provision (benefit)

     1,217        16,704        (41     —          17,880   

Equity in earnings of subsidiaries

     21,807        —          —          (21,807     —     
                                        

Income (loss) from continuing operations

     23,648        25,996        (62     (21,807     27,775   

Loss from discontinued operations, net of tax

     —          —          (4,127     —          (4,127
                                        

Net income (loss)

   $ 23,648      $ 25,996      $ (4,189   $ (21,807   $ 23,648   
                                        

 

11


Table of Contents
For the six months ended June 30, 2010    Owens &
Minor,
Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Income

          

Revenue

   $ —        $ 3,988,746      $ 817      $ —        $ 3,989,563   

Cost of revenue

     —          3,606,849        44        —          3,606,893   
                                        

Gross margin

     —          381,897        773        —          382,670   

Selling, general and administrative expenses

     196        267,604        982        —          268,782   

Depreciation and amortization

     —          13,894        2        —          13,896   

Other operating income, net

     —          (1,321     —          —          (1,321
                                        

Operating earnings (loss)

     (196     101,720        (211     —          101,313   

Interest expense, net

     4,059        2,709        36        —          6,804   
                                        

Income (loss) from continuing operations before income taxes

     (4,255     99,011        (247     —          94,509   

Income tax provision (benefit)

     (1,674     38,994        (97     —          37,223   

Equity in earnings of subsidiaries

     59,867        —          —          (59,867     —     
                                        

Income (loss) from continuing operations

     57,286        60,017        (150     (59,867     57,286   

Loss from discontinued operations, net of tax

     —          —          —          —          —     
                                        

Net income (loss)

   $ 57,286      $ 60,017      $ (150   $ (59,867   $ 57,286   
                                        

 

For the six months ended June 30, 2009    Owens &
Minor,
Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Income

          

Revenue

   $ —        $ 3,961,993      $ 415      $ —        $ 3,962,408   

Cost of revenue

     —          3,581,078        (2     —          3,581,076   
                                        

Gross margin

     —          380,915        417        —          381,332   

Selling, general and administrative expenses

     767        282,265        337        —          283,369   

Depreciation and amortization

     —          11,832        30        —          11,862   

Other operating (income) expense, net

     —          (2,850     125        —          (2,725
                                        

Operating earnings (loss)

     (767     89,668        (75     —          88,826   

Interest (income) expense, net

     (8,465     15,029        68        —          6,632   
                                        

Income (loss) from continuing operations before income taxes

     7,698        74,639        (143     —          82,194   

Income tax provision (benefit)

     3,040        29,078        (57     —          32,061   

Equity in earnings of subsidiaries

     32,966        —          —          (32,966     —     
                                        

Income (loss) from continuing operations

     37,624        45,561        (86     (32,966     50,133   

Loss from discontinued operations, net of tax

     —          —          (12,509     —          (12,509
                                        

Net income (loss)

   $ 37,624      $ 45,561      $ (12,595   $ (32,966   $ 37,624   
                                        

 

12


Table of Contents

Condensed Consolidating Financial Information

 

June 30, 2010

   Owens &
Minor,
Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Balance Sheets

          

Assets

          

Current assets

          

Cash and cash equivalents

   $ 155,117      $ 2,241      $ 280      $ —        $ 157,638   

Accounts and notes receivable, net

     —          468,026        —          —          468,026   

Merchandise inventories

     —          712,078        —          —          712,078   

Other current assets

     354        53,763        —          —          54,117   
                                        

Total current assets

     155,471        1,236,108        280        —          1,391,859   

Property and equipment, net

     —          92,561        4        —          92,565   

Goodwill, net

     —          247,271        —          —          247,271   

Intangible assets, net

     —          26,345        —          —          26,345   

Due from O&M and subsidiaries

     —          73,656        42,232        (115,888     —     

Investment in consolidated subsidiaries

     985,725        —          —          (985,725     —     

Other assets, net

     1,542        45,161        1        —          46,704   
                                        

Total assets

   $ 1,142,738      $ 1,721,102      $ 42,517      $ (1,101,613   $ 1,804,744   
                                        

Liabilities and shareholders’ equity

          

Current liabilities

          

Accounts and drafts payable

   $ —        $ 578,622      $ 5      $ —        $ 578,627   

Accrued payroll and related liabilities

     —          14,922        15        —          14,937   

Other accrued liabilities and deferred income taxes

     6,088        119,092        335        —          125,515   

Current liabilities of discontinued operations

     —          —          1,000        —          1,000   
                                        

Total current liabilities

     6,088        712,636        1,355        —          720,079   

Long-term debt, excluding current portion

     205,234        2,668        —          —          207,902   

Intercompany debt

     —          138,890        —          (138,890     —     

Due to O&M and subsidiaries

     115,888        —          —          (115,888     —     

Other liabilities and deferred income taxes

     —          61,235        —          —          61,235   
                                        

Total liabilities

     327,210        915,429        1,355        (254,778     989,216   
                                        

Shareholders’ equity

          

Common stock

     126,920        —          1,500        (1,500     126,920   

Paid-in capital

     161,782        242,024        62,814        (304,838     161,782   

Retained earnings (deficit)

     539,395        576,507        (23,152     (553,355     539,395   

Accumulated other comprehensive loss

     (12,569     (12,858     —          12,858        (12,569
                                        

Total shareholders’ equity

     815,528        805,673        41,162        (846,835     815,528   
                                        

Total liabilities and shareholders’ equity

   $ 1,142,738      $ 1,721,102      $ 42,517      $ (1,101,613   $ 1,804,744   
                                        

 

13


Table of Contents

Condensed Consolidating Financial Information

 

December 31, 2009

   Owens &
Minor,
Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Balance Sheets

          

Assets

          

Current assets

          

Cash and cash equivalents

   $ 92,088      $ 3,765      $ 283      $ —        $ 96,136   

Accounts and notes receivable, net

     —          498,080        —          —          498,080   

Merchandise inventories

     —          689,889        —          —          689,889   

Other current assets

     136        57,824        2        —          57,962   
                                        

Total current assets

     92,224        1,249,558        285        —          1,342,067   

Property and equipment, net

     —          84,960        5        —          84,965   

Goodwill, net

     —          247,271        —          —          247,271   

Intangible assets, net

     —          27,809        —          —          27,809   

Due from O&M and subsidiaries

     —          —          43,380        (43,380     —     

Investment in consolidated subsidiaries

     925,370        —          —          (925,370     —     

Other assets, net

     1,633        43,341        2        —          44,976   
                                        

Total assets

   $ 1,019,227      $ 1,652,939      $ 43,672      $ (968,750   $ 1,747,088   
                                        

Liabilities and shareholders’ equity

          

Current liabilities

          

Accounts and drafts payable

   $ —        $ 546,984      $ 5      $ —        $ 546,989   

Accrued payroll and related liabilities

     —          34,870        15        —          34,885   

Other accrued liabilities and deferred income taxes

     5,684        110,217        402        —          116,303   

Current liabilities of discontinued operations

     —          —          1,939        —          1,939   
                                        

Total current liabilities

     5,684        692,071        2,361        —          700,116   

Long-term debt, excluding current portion

     205,682        2,736        —          —          208,418   

Intercompany debt

     —          138,890        —          (138,890     —     

Due to O&M and subsidiaries

     38,682        4,698        —          (43,380     —     

Other liabilities and deferred income taxes

     —          69,375        —          —          69,375   
                                        

Total liabilities

     250,048        907,770        2,361        (182,270     977,909   
                                        

Shareholders’ equity

          

Common stock

     83,827        —          1,500        (1,500     83,827   

Paid-in capital

     193,905        242,024        62,814        (304,838     193,905   

Retained earnings (deficit)

     504,480        516,491        (23,003     (493,488     504,480   

Accumulated other comprehensive loss

     (13,033     (13,346     —          13,346        (13,033
                                        

Total shareholders’ equity

     769,179        745,169        41,311        (786,480     769,179   
                                        

Total liabilities and shareholders’ equity

   $ 1,019,227      $ 1,652,939      $ 43,672      $ (968,750   $ 1,747,088   
                                        

 

14


Table of Contents

Condensed Consolidating Financial Information

 

For the six months ended June 30, 2010

   Owens &
Minor,
Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Cash Flows

          

Operating activities:

          

Net income (loss)

   $ 57,286      $ 60,017      $ (150   $ (59,867   $ 57,286   

Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities of continuing operations:

          

Depreciation and amortization

     —          13,894        2        —          13,896   

Provision for LIFO reserve

     —          8,433        —          —          8,433   

Share-based compensation expense

     —          4,633        —          —          4,633   

Provision for losses on accounts and notes receivable

     —          1,450        —          —          1,450   

Changes in operating assets and liabilities:

          

Accounts and notes receivable

     —          28,604        —          —          28,604   

Merchandise inventories

     —          (30,622     —          —          (30,622

Accounts payable

     —          113,988        —          —          113,988   

Net change in other assets and liabilities

     (217     (9,178     (63     —          (9,458

Other, net

     (1,040     (4,080     (2     —          (5,122
                                        

Cash provided by (used for) operating activities

     56,029        187,139        (213     (59,867     183,088   
                                        

Investing activities:

          

Additions to property and equipment

     —          (15,484     (4     —          (15,488

Additions to computer software

     —          (4,756     —          —          (4,756

Acquisition of intangible assets

     —          (55     —          —          (55

Proceeds from sale of property and equipment

     —          1,612        —          —          1,612   
                                        

Cash used for investing activities

     —          (18,683     (4     —          (18,687
                                        

Financing activities:

          

Change in intercompany advances

     21,987        (83,008     1,154        59,867       —     

Decrease in drafts payable

     —          (82,350     —          —          (82,350

Cash dividends paid

     (22,324     —          —          —          (22,324

Proceeds from exercise of stock options

     5,602        —          —          —          5,602   

Excess tax benefits related to share-based compensation

     1,735        —          —          —          1,735   

Other, net

     —          (4,622     —          —          (4,622
                                        

Cash provided by (used for) financing activities

     7,000        (169,980     1,154        59,867       (101,959
                                        

Discontinued operations:

          

Operating cash flows

     —          —          (940     —          (940
                                        

Net cash used for discontinued operations

     —          —          (940     —          (940
                                        

Net increase (decrease) in cash and cash equivalents

     63,029        (1,524     (3     —          61,502   

Cash and cash equivalents at beginning of period

     92,088        3,765        283        —          96,136   
                                        

Cash and cash equivalents at end of period

   $ 155,117      $ 2,241      $ 280      $ —        $ 157,638   
                                        

 

15


Table of Contents

Condensed Consolidating Financial Information

 

For the six months ended June 30, 2009

   Owens &
Minor,
Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Cash Flows

          

Operating activities:

          

Net income (loss)

   $ 37,624      $ 45,561      $ (12,595   $ (32,966   $ 37,624   

Adjustments to reconcile net income (loss) to cash provided by operating activities of continuing operations:

          

Loss from discontinued operations, net of tax

     —          —          12,509        —          12,509   

Provision for LIFO reserve

     —          16,440        —          —          16,440   

Depreciation and amortization

     —          11,832        30        —          11,862   

Share-based compensation expense

     —          4,159        —          —          4,159   

Provision for losses on accounts and notes receivable

     —          2,020        32        —          2,052   

Changes in operating assets and liabilities:

          

Accounts and notes receivable

     —          19,076        (21     —          19,055   

Merchandise inventories

     —          (34,336     10        —          (34,326

Accounts payable

     —          71,014        (51     —          70,963   

Net change in other assets and liabilities

     232        (18,467     132        —          (18,103

Other, net

     (978     2,156        —          —          1,178   
                                        

Cash provided by operating activities

     36,878        119,455        46        (32,966     123,413   
                                        

Investing activities:

          

Additions to property and equipment

     —          (9,420     —          —          (9,420

Additions to computer software

     —          (7,311     —          —          (7,311

Cash received related to acquisition of business

     —          6,994        —          —          6,994   
                                        

Cash used for investing activities

     —          (9,737     —          —          (9,737
                                        

Financing activities:

          

Change in intercompany advances

     (17,784     60,583        (75,765     32,966       —     

Payments on revolving credit facility

     —          (301,964     —          —          (301,964

Borrowings on revolving credit facility

     —          151,386        —          —          151,386   

Decrease in drafts payable

     —          (14,254     —          —          (14,254

Cash dividends paid

     (19,130     —          —          —          (19,130

Proceeds from exercise of stock options

     2,170        —          —          —          2,170   

Excess tax benefits related to share-based compensation

     958        —          —          —          958   

Other, net

     —          (1,089     —          —          (1,089
                                        

Cash used for financing activities

     (33,786     (105,338     (75,765     32,966       (181,923
                                        

Discontinued operations:

          

Operating cash flows

     —          —          12,084        —          12,084   

Investing cash flows

     —          —          63,000        —          63,000   
                                        

Net cash provided by discontinued operations

     —          —          75,084        —          75,084   
                                        

Net increase (decrease) in cash and cash equivalents

     3,092        4,380        (635     —          6,837   

Cash and cash equivalents at beginning of period

     5,888        947        1,051        —          7,886   
                                        

Cash and cash equivalents at end of period

   $ 8,980      $ 5,327      $ 416      $ —        $ 14,723   
                                        

 

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11. Recent Accounting Pronouncements

There has been no change in our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2009, except as discussed below.

In the first quarter of 2010, we adopted a Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) relating to disclosures about fair value measurements. This ASU clarified existing guidance for disclosures about inputs and valuation techniques used in estimating fair value measurements, requires additional disclosures for significant transfers in and out of Levels 1 and 2, and requires a reconciliation of Level 3 activity to be presented on a gross basis. The adoption of this update had no impact on our financial position and results of operations or disclosures.

In the first quarter of 2010, we adopted an ASU that provided additional guidance relating to the evaluation and disclosure of subsequent events. The adoption of this guidance had no impact on our financial position or results of operations.

In October 2009, FASB issued an ASU for multiple deliverable revenue arrangements. The update requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The update eliminates the residual method of revenue allocation and requires revenues to be allocated using the relative selling price method. We will adopt this update prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011. We are evaluating the impact of adoption of this update on our financial position and results of operations.

 

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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 (we, us, or our) since December 31, 2009. 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 our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Second quarter and first six months of 2010 compared with 2009

Overview. In the second quarter and first six months of 2010, we earned net income of $29.5 million and $57.3 million, improved from $23.6 million from the second quarter of 2009 and $37.6 million for the first six months of 2009. Income from continuing operations per diluted common share was $0.46 for the second quarter of 2010, an increase from $0.44 for the same period of 2009. Income from continuing operations per diluted common share was $0.91 for the first six months of 2010, improved from $0.80 in the same period of 2009. Operating earnings were $52.2 million for the second quarter of 2010, increased from $48.9 million for the second quarter of 2009. For the first six months of 2010, operating earnings were $101.3 million, increased from $88.8 million for the first six months of 2009.

Stock Split. On March 31, 2010, we effected a three-for-two stock split of our outstanding shares of common stock in the form of a stock dividend of one share of common stock for every two shares outstanding to stockholders of record on March 15, 2010. All share and per-share data (except par value) have been retroactively adjusted to reflect this stock split for all periods presented.

Divestiture. In January 2009, we exited our direct-to-consumer diabetes supply (DTC) business. Accordingly, the DTC business is presented as discontinued operations in our consolidated financial statements.

Financial Highlights. The following table presents highlights from our consolidated statements of income on a percentage of revenue basis:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Gross margin

   9.52   9.82   9.59   9.62

Selling, general and administrative expense

   6.62   7.15   6.74   7.15

Operating earnings

   2.58   2.43   2.54   2.24

Income from continuing operations

   1.46   1.38   1.44   1.27

Revenue. Revenue increased to $2.02 billion for the second quarter of 2010 from $2.01 billion for the second quarter of 2009. The increase in revenue resulted from higher sales of products and services to existing customers of $41.2 million (a growth rate of 2.2%) and to new customers of $50.5 million, totaling $91.7 million, which were partially offset by a decrease in sales to lost customers of $85.4 million.

Revenue increased to $3.99 billion for the first six months of 2010 from $3.96 billion for the comparable period in 2009. Higher revenue for this period was due to an increase in sales of products and services to existing customers of $99.8 million (a growth rate of 2.8%) and to new customers of $101.2 million, totaling $201.0 million, which were partially offset by a decrease in sales to lost customers of $174.3 million.

We believe that revenue growth for the second quarter and first six months of 2010 was adversely impacted by unfavorable economic conditions and the related effect on hospital utilization trends.

Gross margin. Gross margin as a percentage of revenue decreased 30 basis points for the second quarter of 2010 compared to the second quarter of 2009. Gross margin dollars decreased 2.8% to $192.2 million for the second quarter of 2010 from $197.7 million for the second quarter of 2009. The decrease of $5.5 million was partially due to a reduction in gross margin dollars from our acute-care distribution customers of $3.4 million, reflecting a shift in the mix of products purchased by customers, as well as pricing pressures in the marketplace. In addition, gross margin in the second quarter of 2009 benefitted from the recognition of previously deferred revenue of $2.7 million related to customer contracts with performance contingencies resulting from the achievement of performance targets.

Gross margin as a percentage of revenue decreased 3 basis points for the first six months of 2010 compared to the same period in 2009. Gross margin dollars increased $1.3 million to $382.7 million for the first six months of 2010 from $381.3 million for the same period of 2009. The increase is comprised of a lower LIFO provision (of $8.0 million), resulting from lower supplier price increases, and revenue from our third-party logistics business in the first six months of 2010. The increase was partially offset by a reduction in gross margin dollars from our acute-care distribution customers.

 

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We value inventory under the LIFO method. Had inventory been valued under the first-in, first-out (FIFO) method, gross margin as a percentage of revenue would have been 21 basis points greater for the first six months of 2010 and 41 basis points greater for the first six months of 2009.

Selling, general and administrative (SG&A) expenses. SG&A expenses decreased 7.2% to $133.6 million for the second quarter of 2010, compared with $144.0 million for the second quarter of 2009. SG&A expenses decreased $4.8 million for labor costs, including incentive compensation expense, and $2.8 million for information technology outsourcing and consulting primarily related to technology infrastructure enhancements. Additionally, SG&A expenses in the second quarter of 2009 included $1.3 million in Burrows acquisition transition-related expenses. The decreases in SG&A expenses were partially offset by an increase of $1.3 million for costs incurred relating to providing third-party logistics services.

SG&A expenses decreased 5.2% to $268.8 million for the first six months of 2010, compared with $283.4 million for the first six months of last year. SG&A expenses decreased $6.4 million for labor costs, including incentive compensation expense, and $3.9 million for information technology outsourcing related to technology infrastructure enhancements. Additionally, SG&A expenses in the first six months of 2009 included $3.4 million in Burrows acquisition transition-related expenses. These decreases in SG&A expenses were partially offset by increases of $2.6 million for costs incurred related to our third-party logistics business. The decrease in incentive compensation expense for the second quarter and first six months of 2010 compared with last year reflects estimated lower achievement of annual performance targets.

Depreciation and amortization. Depreciation and amortization expense increased $1.1 million for the second quarter and $2.0 million for the first six months of 2010 compared with the same periods of 2009. These increases were primarily due to amortization of computer software related to technology infrastructure enhancements, technology for our third-party logistics business, and distribution center voice-pick technology, as well as amortization of leasehold improvements for our third party logistics business and relocated distribution centers.

Other operating income, net. Other operating income, net, was $0.7 million and $1.3 million for the second quarter of 2010 and 2009, including finance charge income of $0.5 million and $1.2 million. Other operating income, net was $1.3 million and $2.7 million for the first six months of 2010 and 2009, including finance charge income of $1.1 million and $2.5 million.

Operating earnings. Operating earnings increased in the second quarter of 2010 by 6.6% to $52.2 million compared with $48.9 million in 2009, and increased in the first six months of 2010 by 14.1% to $101.3 million compared with $88.8 million in 2009. The increases in operating earnings in the second quarter and first six months were primarily driven by lower SG&A expenses. Decreases in SG&A expenses were partially offset by a lower gross margin in the second quarter but supplemented by slightly higher gross margin during the first six months.

Interest expense, net. Interest expense, net of interest earned on cash balances, was $3.5 million for the second quarter of 2010 and $6.8 million for the first six months of 2010, which increased slightly from $3.3 million and $6.6 million for the comparable periods in 2009. Our effective interest rate was 6.6% on average borrowings of $209.7 million for the first six months of 2010, compared to 5.9% on average borrowings of $225.1 million for the same period in 2009.

Income taxes. The provision for income taxes was $19.2 million and $37.2 million for the second quarter and first six months of 2010, compared to $17.9 million and $32.1 million for the comparable periods in 2009. The effective tax rate was 39.4% for both the second quarter and first six months of 2010, compared to 39.2% and 39.0% for the same periods of 2009.

Income from continuing operations. Income from continuing operations increased to $29.5 million and $57.3 million for the second quarter and first six months of 2010 compared to $27.8 million and $50.1 million for the comparable periods of 2009. The increases are primarily attributable to increases in operating earnings partially offset by increases in income tax expense.

Loss from discontinued operations, net of tax. There was no income or loss from discontinued operations for the second quarter and first six months of 2010. Loss from discontinued operations, net of tax, for the second quarter and first six months of 2009 was $4.1 million and $12.5 million, primarily due to pre-tax charges associated with exiting the DTC business related to valuation of accounts receivable; losses on the disposal of remaining assets; costs associated with leased facilities; and payroll costs, including severance.

 

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Financial Condition, Liquidity and Capital Resources

(Dollars in millions)

 

For the six months ended June 30,

   2010     2009  

Net cash provided by (used for) – continuing operations:

    

Operating activities

   $ 183.1      $ 123.4   

Investing activities

   $ (18.7   $ (9.7

Financing activities

   $ (102.0   $ (181.9

Net cash (used for) provided by discontinued operations

   $ (0.9   $ 75.1   

Financial condition. Accounts and notes receivable, net of allowances, decreased 6.0% to $468.0 million at June 30, 2010, from $498.1 million at December 31, 2009. The decrease was primarily due to improved collections and a net increase in the allowance for uncollectible accounts of $1.3 million. Accounts receivable days outstanding (DSO) were 19.8 days at June 30, 2010, and 21.4 days at December 31, 2009, based on three months’ sales.

Merchandise inventories increased to $712.1 million at June 30, 2010, from $689.9 million at December 31, 2009. The increase was primarily due to changes in volume, including inventory buildup for new customers and normal fluctuations between periods. Average inventory turnover was 10.6 for the second quarter of 2010, 10.6 for the fourth quarter of 2009, and 10.4 for the second quarter of 2009, based on three months’ sales.

Liquidity and capital expenditures. In the first six months of 2010, cash and cash equivalents increased by $61.5 million to $157.6 million at June 30, 2010. We generated cash from continuing operating activities of $183.1 million, compared to $123.4 million in the first six months of 2009. Cash from continuing operating activities in the first six months of 2010 and 2009 was positively affected by operating earnings, increases in accounts payable and decreases in accounts and notes receivable, partially offset by higher inventories. During the first six months of 2010, we contributed $8.3 million to our defined benefit pension plan in conjunction with a plan of termination approved by the Board of Directors in December 2009. We expect to make additional contributions of approximately $1.0 million through the final termination, which is targeted to be in late 2010 or early 2011.

Cash used for investing activities increased to $18.7 million in the first six months of 2010 from $9.7 million in the same period of 2009. Capital expenditures were $20.2 million in the first six months of 2010, compared to $16.7 million in the same period of 2009, primarily related to our strategic and operational efficiency initiatives, such as investments in leasehold improvements for our third party logistics business and relocated or expanded distribution centers and investments in voice-pick and customer-facing technology. Cash used for investing activities for the first six months of 2009 included the receipt of a $7.0 million purchase price adjustment related to the Burrows acquisition.

Cash used for financing activities in the first six months of 2010 was $102.0 million, compared to $181.9 million used in the comparable period of 2009. During the first six months of 2010, cash from continuing operations was used to reduce drafts payable by $82.4 million and pay dividends of $22.3 million. Additionally, in the first six months of 2009, cash from continuing operations and discontinued operations, along with $63.0 million of proceeds from the sale of the DTC business, was used to reduce our net borrowings under the revolving credit facility by $150.6 million. Dividends of $19.1 million were paid during the first six months of 2009.

Cash used by operating activities of discontinued operations was $0.9 million for the first six months of 2010, related to lease payments, compared with $12.1 million cash received in the first six months of 2009, which primarily related to the collection of accounts receivable, partially offset by the payment of costs associated with exiting the DTC business.

Capital Resources. Our sources of liquidity include cash and cash equivalents and a revolving credit facility. On June 7, 2010, we entered into a Credit Agreement with Bank of America, N.A., Wells Fargo Bank, N.A and a syndication of banks (the “Credit Agreement”). This agreement replaced an existing $306 million revolving credit facility (which was to expire in May 2011) with a $350 million revolving credit facility which expires on June 7, 2013. The interest rate on the new facility, which is subject to adjustment quarterly, is based on, at our discretion, the London Interbank Offered Rate (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on our leverage ratio (Credit Spread), as defined by the Credit Agreement. We are charged a commitment fee of between 37.5 and 62.5 basis points on the unused portion of the facility. The terms of the agreement limit the amount of indebtedness that we may incur and require us to maintain ratios for leverage and interest coverage. We had $10.5 million of letters of credit and no borrowings outstanding, leaving $339.5 million available for borrowing at June 30, 2010.

 

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We have $200 million of senior notes outstanding, which mature in 2016 and bear interest at 6.35%, payable semi-annually on April 15th and October 15th. We may redeem the senior notes in whole or in part, at a redemption price equal to the greater of 100% of the principal amount of the senior notes or the present value of the remaining scheduled payments of principal and interest discounted at the applicable Treasury Rate plus 0.25%. Our revolving credit facility and senior notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of either agreement. We believe we were in compliance with our debt covenants at June 30, 2010.

We paid cash dividends on our common stock at the rate of $0.177 per share and $0.354 per share for the second quarter and first six months of 2010 and $0.153 per share and $0.306 per share for the same periods in 2009. We anticipate continuing to pay quarterly cash dividends in the future. However, the payment of future dividends remains within the discretion of the Board of Directors and will depend upon our results of operations, financial condition, capital requirements and other factors.

We believe available financing sources, including cash generated from continuing operations and borrowings under the revolving credit facility, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, payments of quarterly cash dividends and other cash requirements. While we believe that we will have the ability to meet our financing needs in the foreseeable future, changes in economic conditions may impact (i) the ability of financial institutions to meet their contractual commitments to us, (ii) the ability of our customers and suppliers to meet their obligations to us or (iii) our cost of borrowing.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 11 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010.

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 we believe our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of our 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;

 

   

changes in government regulations, including healthcare laws and regulations;

 

   

our ability to implement strategic initiatives;

 

   

dependence on sales to certain customers;

 

   

the ability of customers to meet financial commitments due to us;

 

   

our ability to retain existing customers and the success of marketing and other programs in attracting new customers;

 

   

dependence on suppliers;

 

   

our ability to adapt to changes in product pricing and other terms of purchase by suppliers of product;

 

   

changes in manufacturer preferences between direct sales and wholesale distribution;

 

   

competition;

 

   

changing trends in customer profiles and ordering patterns;

 

   

our ability to meet customer demand for additional value-added services;

 

   

our ability to meet performance targets specified by customer contracts under contractual commitments;

 

   

the availability of supplier incentives;

 

   

access to special inventory buying opportunities;

 

   

the ability of business partners and financial institutions to perform their contractual responsibilities;

 

   

our ability to manage operating expenses;

 

   

the effect of price volatility in the commodities markets, including fuel price fluctuations, on our operating costs and supplier product prices;

 

   

our ability to continue to obtain financing at reasonable rates and to manage financing costs and interest rate risk;

 

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the risk that a decline in business volume or profitability could result in an impairment of goodwill or other long-lived assets;

 

   

our ability to timely or adequately respond to technological advances in the medical supply industry;

 

   

the risk that information systems are interrupted or damaged by unforeseen events or fail for any extended period of time;

 

   

our ability to successfully identify, manage or integrate acquisitions;

 

   

the costs associated with and outcome of outstanding and any future litigation, including product and professional liability claims;

 

   

the outcome of outstanding tax contingencies; and

 

   

our ability to manage reimbursements from Medicare, Medicaid, private healthcare insurers and individual customers.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We provide credit in the normal course of business to our customers and are exposed to losses resulting from nonpayment or delinquent payment by customers. We perform initial and ongoing credit evaluations of our customers and maintain reserves for estimated credit losses. We measure our performance in collecting customer accounts receivable in terms of days sales outstanding (DSO). At June 30, 2010, accounts and notes receivable, net of allowances, were approximately $468 million, and DSO was 19.8 days, based on three months’ sales. A hypothetical increase in DSO of one day would result in a decrease in our cash balances, an increase in borrowings against our revolving credit facility, or a combination thereof, of approximately $22 million.

We are exposed to market risk from changes in interest rates related to our revolving credit facility. We had no outstanding borrowings and $10.5 million in letters of credit under the revolving credit facility at June 30, 2010. A hypothetical increase in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately $0.1 million per year for every $10 million of outstanding borrowings under the revolving credit facility.

 

Item 4. Controls and Procedures

The company carried out an evaluation, with the participation of the company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the company’s disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) 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 were effective at June 30, 2010, 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, 2010, that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

Part II. Other Information

 

Item 1. Legal Proceedings

Certain legal proceedings pending against us are described in our Annual Report on Form 10-K for the year ended December 31, 2009. Through June 30, 2010, there have been no material developments in any legal proceedings reported in such Annual Report.

 

Item 1A. Risk Factors

Certain risk factors that we believe could affect our business and prospects are described in our Annual Report on Form 10-K for the year ended December 31, 2009. The risk factor entitled “Changes in the Healthcare Environment” set forth under Item 1A to Part I of our Form 10-K for the year ended December 31, 2009 has been revised and restated as follows:

Changes in the Healthcare Environment

O&M, our customers and our suppliers are subject to extensive federal and state regulations relating to healthcare as well as the policies and practices of the private healthcare insurance industry. In recent years, there have been a number of government and private initiatives to reduce healthcare costs and government spending. These changes have included an increased reliance on managed care; consolidation of competitors, suppliers and customers; and the development of larger, more sophisticated purchasing groups. All of these changes place additional financial pressure on healthcare providers, who in turn seek to reduce the costs and pricing of products and services provided by us. We expect the healthcare industry to continue to change significantly and these potential changes, which may include a reduction in government support of healthcare services, adverse changes in legislation or regulations, and reductions in healthcare reimbursement practices, could have a material adverse effect on our results of operations.

 

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In March 2010, Congress passed and President Obama signed into law the Patient Protection and Affordable Care Act and related Reconciliation Bill, which includes a variety of healthcare reform provisions and requirements that will become effective at varying times from 2010 to 2018. This healthcare reform legislation includes, among other things, provisions for expanded Medicaid eligibility and access to healthcare insurance as well as increased taxes and fees on certain corporations and medical products. The uncertainties surrounding the components of this legislation and the impact of its implementation on the healthcare industry may have an adverse effect on both customer purchasing and payment behavior and supplier product prices and terms of sale, which would adversely affect our results of operations.

 

Item 6. Exhibits

 

(a) Exhibits

 

  4.1    Form of Credit Agreement dated as of June 7, 2010 by and among Owens & Minor Distribution, Inc. and Owens & Minor Medical, Inc., as Borrowers, Owens & Minor, Inc. and certain of its domestic subsidiaries, as Guarantors, Bank of America, N.A., as Administrative Agent, Wells Fargo Bank, N.A., as Syndication Agent, and a syndication of banks as specified on the signature pages thereof (incorporated by reference to the Company’s Current Report on Form 8-K, Exhibit 4.1, dated June 10, 2010).
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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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.

 

    Owens & Minor, Inc.
    (Registrant)
Date July 30, 2010    

/s/ CRAIG R. SMITH

    Craig R. Smith
    President & Chief Executive Officer
Date July 30, 2010    

/s/ JAMES L. BIERMAN

    James L. Bierman
    Senior Vice President & Chief Financial Officer
Date July 30, 2010    

/s/ D. ANDREW EDWARDS

    D. Andrew Edwards
    Vice President, Controller & Chief Accounting Officer


Table of Contents

Exhibits Filed with SEC

 

Exhibit #

    
  4.1    Form of Credit Agreement dated as of June 7, 2010 by and among Owens & Minor Distribution, Inc. and Owens & Minor Medical, Inc., as Borrowers, Owens & Minor, Inc. and certain of its domestic subsidiaries, as Guarantors, Bank of America, N.A., as Administrative Agent, Wells Fargo Bank, N.A., as Syndication Agent, and a syndication of banks as specified on the signature pages thereof (incorporated by reference to the Company’s Current Report on Form 8-K, Exhibit 4.1, dated June 10, 2010).
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.