OWENS & MINOR INC/VA/ - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

¨	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.)

4800 Cox Road, Glen Allen, Virginia		23060
(Address of principal executive offices)		(Zip Code)

Post Office Box 27626, Richmond, Virginia		23261-7626
(Mailing address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (804) 747-9794

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

The number of shares of Owens & Minor, Inc.’s common stock outstanding as of April 30, 2004, was 39,265,316 shares.

Owens & Minor, Inc. and Subsidiaries

Index


			Page
Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Statements of Income – Three Months Ended March 31, 2004 and 2003	3

		Consolidated Balance Sheets – March 31, 2004 and December 31, 2003	4

		Consolidated Statements of Cash Flows – Three Months Ended March 31, 2004 and 2003	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17

	Item 4.	Controls and Procedures	17

Part II.	Other Information

	Item 1.	Legal Proceedings	18

	Item 6.	Exhibits and Reports on Form 8-K	18

Part I. Financial Information

Item 1.

Financial Statements

Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Income

(unaudited)


	Three Months Ended March 31,
*(in thousands, except per share data)*	2004			2003
Revenue	$	1,106,074		$	1,017,969
Cost of revenue		992,014			911,168

Gross margin		114,060			106,801
Selling, general and administrative expenses		84,017			77,411
Depreciation and amortization		3,706			3,981
Other operating income and expense, net		(1,101	)		(1,167	)

Operating earnings		27,438			26,576
Interest expense, net		3,246			3,519
Discount on accounts receivable securitization		178			204
Distributions on mandatorily redeemable preferred securities		—			1,496
Other expense		—			154

Income before income taxes		24,014			21,203
Income tax provision		9,389			8,312

Net income	$	14,625		$	12,891

Net income per common share – basic	$	0.38		$	0.38

Net income per common share – diluted	$	0.37		$	0.35

Cash dividends per common share	$	0.11		$	0.08

See accompanying notes to consolidated financial statements.

Owens & Minor, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)


*(in thousands, except per share data)*	March 31, 2004			December 31, 2003
Assets
Current assets
Cash and cash equivalents	$	46,393		$	16,335
Accounts and notes receivable, net of allowances of $7,373 and $8,350		335,028			353,431
Merchandise inventories		395,053			384,266
Other current assets		24,283			27,343

Total current assets		800,757			781,375
Property and equipment, net of accumulated depreciation of $72,740 and $74,056		21,333			21,088
Goodwill		198,063			198,063
Other assets, net		48,259			45,222

Total assets	$	1,068,412		$	1,045,748

Liabilities and shareholders’ equity
Current liabilities
Accounts payable	$	325,132		$	314,723
Accrued payroll and related liabilities		8,408			13,279
Other accrued liabilities		68,928			67,630

Total current liabilities		402,468			395,632
Long-term debt		211,051			209,499
Other liabilities		30,767			30,262

Total liabilities		644,286			635,393

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 – 39,258 shares and 38,979 shares		78,516			77,958
Paid-in capital		121,750			118,843
Retained earnings		230,774			220,468
Accumulated other comprehensive loss		(6,914	)		(6,914	)

Total shareholders’ equity		424,126			410,355

Total liabilities and shareholders’ equity	$	1,068,412		$	1,045,748

See accompanying notes to consolidated financial statements.

Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)


	Three Months Ended March 31,
*(in thousands)*	2004			2003
Operating activities
Net income	$	14,625		$	12,891
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		3,706			3,981
Provision for LIFO reserve		2,225			2,700
Provision for losses on accounts and notes receivable		373			759
Changes in operating assets and liabilities:
Accounts and notes receivable		18,030			13,507
Merchandise inventories		(13,012	)		(21,647	)
Accounts payable		25,409			74,743
Net change in other current assets and liabilities		(516	)		(8,721	)
Other, net		2,062			1,875

Cash provided by operating activities		52,902			80,088

Investing activities
Additions to property and equipment		(1,937	)		(690	)
Additions to computer software		(1,321	)		(2,080	)
Net cash paid for acquisition of business		(2,500	)		—
Other, net		4			4

Cash used for investing activities		(5,754	)		(2,766	)

Financing activities
Repurchase of mandatorily redeemable preferred securities		—			(20,412	)
Repurchase of common stock		—			(10,884	)
Net payments on revolving credit facility		—			(16,000	)
Cash dividends paid		(4,319	)		(2,680	)
Proceeds from exercise of stock options		2,244			683
Decrease in drafts payable		(15,000	)		(28,000	)
Other, net		(15	)		—

Cash used for financing activities		(17,090	)		(77,293	)

Net increase in cash and cash equivalents		30,058			29
Cash and cash equivalents at beginning of period		16,335			3,361

Cash and cash equivalents at end of period	$	46,393		$	3,390

See accompanying notes to consolidated financial statements.

Owens & Minor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1.	Accounting Policies

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are comprised only of normal recurring accruals and the use of estimates) necessary to present fairly the consolidated financial position of Owens & Minor, Inc. and its wholly-owned subsidiaries (O&M or the company) as of March 31, 2004 and the consolidated results of operations and cash flows for the three month periods ended March 31, 2004 and 2003, in conformity with generally accepted accounting principles.

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.	Reclassifications

Certain prior period amounts have been reclassified in order to conform to the current period presentation. The reclassifications have no effect on total revenue or net income as previously reported. The most significant reclassifications are as follows:

•

Certain direct costs related to consulting and other service revenue are now included in cost of revenue. These costs were previously included in selling, general and administrative expense.

•

Customer finance charge income is now included in other operating income and expense, net. This income was previously included in interest expense, net.

4.	Acquisition

In March 2004, the company acquired certain net assets of 5nQ, a small, clinical inventory management solutions company. 5nQ developed and successfully markets an innovative software service, QSight^™, for clinical healthcare inventory management solutions. This strategic acquisition enables Owens & Minor to enhance the OMSolutions^SM technology and service offering to hospitals and suppliers.

The acquisition has been accounted for as a purchase of a business and, accordingly, the operating results of 5nQ have been included in the company’s consolidated financial statements since the date of acquisition. The company paid $2.5 million in cash for the purchase, and will also make additional payments to the previous owners, who are now employed by O&M, based on the amount of QSight^™ subscription revenues through March 2007. The allocation of the purchase price will be completed in the second quarter of 2004 after the valuation of certain acquired assets is complete. Had the acquisition taken place on January 1, 2003, the consolidated revenue and net income of the company would not have materially differed from the amounts reported for the three months ended March 31, 2004 and 2003.

5.	Stock-based Compensation

The company uses the intrinsic value method as defined by Accounting Principles Board Opinion No. 25 to account for stock-based compensation. This method requires compensation expense to be recognized for the excess of the quoted market price of the stock at the grant date or the

measurement date over the amount an employee must pay to acquire the stock. The following table presents the effect on net income and earnings per share had the company used the fair value method, as defined in Statement of Financial Accounting Standards No. (SFAS) 123, Accounting for Stock-Based Compensation, to account for stock-based compensation:


*(in thousands, except per share data)*	Three Months Ended March 31,
	2004			2003
Net income	$	14,625		$	12,891
Add: Stock-based employee compensation expense included in reported net income, net of tax		212			180
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		(413	)		(408	)

Pro forma net income	$	14,424		$	12,663

Per common share – basic:
Net income, as reported	$	0.38		$	0.38
Pro forma net income	$	0.37		$	0.38
Per common share – diluted:
Net income, as reported	$	0.37		$	0.35
Pro forma net income	$	0.36		$	0.34

6.	Retirement Plans

In December 2003, the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards No. (SFAS) 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits. The revised statement requires disclosures in addition to those in the original SFAS 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Most of the additional disclosure requirements were effective for the company as of December 31, 2003, with the remaining requirements effective as of December 31, 2004. The adoption of the revised statement did not affect the company’s financial condition or results of operations. The revised statement requires interim disclosures to be made about the components of net periodic pension cost of the company’s retirement plans. The components of net periodic pension cost of the company’s retirement plans for the three months ended March 31, 2004 and 2003 are as follows:


*(in thousands)*	Three Months Ended March 31,
	2004			2003
Service cost	$	255		$	176
Interest cost		764			721
Expected return on plan assets		(434	)		(350	)
Amortization of prior service cost		70			70
Recognized net actuarial loss		217			174

Net periodic pension cost	$	872		$	791

7.	Comprehensive Income

The company’s comprehensive income for the three months ended March 31, 2004 and 2003 is shown in the table below:


*(in thousands)*	Three Months Ended March 31,
	2004		2003
Net income	$	14,625	$	12,891
Other comprehensive income – change in unrealized gain on investment, net of tax		—		11

Comprehensive income	$	14,625	$	12,902

8.	Net Income per Common Share

The following sets forth the computation of basic and diluted net income per common share:


*(in thousands, except per share data)*	Three Months Ended March 31,
	2004		2003
Numerator:
Numerator for basic net income per common share – net income	$	14,625	$	12,891
Distributions on convertible mandatorily redeemable preferred securities, net of income taxes		—		913

Numerator for diluted net income per common share – net income attributable to common stock after assumed conversions	$	14,625	$	13,804

Denominator:
Denominator for basic net income per common share – weighted average shares		38,872		33,534
Effect of dilutive securities:
Conversion of mandatorily redeemable preferred securities		—		5,575
Stock options and restricted stock		633		419

Denominator for diluted net income per common share – adjusted weighted average shares and assumed conversions		39,505		39,528

Net income per common share – basic	$	0.38	$	0.38
Net income per common share – diluted	$	0.37	$	0.35

9.	Recently Adopted Accounting Pronouncements

In December 2003, the FASB issued FASB Interpretation No. (FIN) 46R (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The company was required to apply FIN 46R to interests in variable interest entities (VIEs) as of March 31, 2004. Application of this Interpretation did not affect the company’s financial condition or results of operations.

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 Notes; and the non-guarantor subsidiaries of the Notes. Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally and unconditionally liable under the guarantees and the company believes the condensed consolidating financial information is more meaningful in understanding the financial position, results of operations and cash flows of the guarantor subsidiaries.


*(in thousands)*

For the three months ended March 31, 2004	Owens & Minor, Inc.			Guarantor Subsidiaries		Non-guarantor Subsidiaries			Consolidated
Statements of Operations
Revenue	$	—		$	1,106,074	$	—		$	1,106,074
Cost of revenue		—			992,014		—			992,014

Gross margin		—			114,060		—			114,060
Selling, general and administrative expenses		66			83,833		118			84,017
Depreciation and amortization		—			3,706		—			3,706
Other operating income and expense, net		—			2		(1,103	)		(1,101	)

Operating earnings		(66	)		26,519		985			27,438
Interest expense, net		(815	)		3,615		446			3,246
Discount on accounts receivable securitization		—			5		173			178

Income before income taxes		749			22,899		366			24,014
Income tax provision		293			8,953		143			9,389

Net income	$	456		$	13,946	$	223		$	14,625


*(in thousands)*

For the three months ended March 31, 2003	Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidated
Statements of Operations
Revenue	$	—		$	1,017,969		$	—		$	1,017,969
Cost of revenue		—			911,168			—			911,168

Gross margin		—			106,801			—			106,801
Selling, general and administrative expenses		—			76,853			558			77,411
Depreciation and amortization		—			3,981			—			3,981
Other operating income and expense, net		—			(60	)		(1,107	)		(1,167	)

Operating earnings		—			26,027			549			26,576
Interest expense, net		(1,259	)		6,554			(1,776	)		3,519
Discount on accounts receivable securitization		—			5			199			204
Distributions on mandatorily redeemable preferred securities		—			—			1,496			1,496
Other expense		154			—			—			154

Income before income taxes		1,105			19,468			630			21,203
Income tax provision		434			7,631			247			8,312

Net income	$	671		$	11,837		$	383		$	12,891

Condensed Consolidating Financial Information

(in thousands)


March 31, 2004	Owens & Minor, Inc.		Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Balance Sheets
Assets
Current assets
Cash and cash equivalents	$	44,248	$	2,144		$	1		$	—		$	46,393
Accounts and notes receivable, net		—		3,258			331,770			—			335,028
Merchandise inventories		—		395,053			—			—			395,053
Intercompany advances, net		93,021		203,571			(296,592	)		—			—
Other current assets		5		24,278			—			—			24,283

Total current assets		137,274		628,304			35,179			—			800,757
Property and equipment, net		—		21,333			—			—			21,333
Goodwill		—		198,063			—			—			198,063
Intercompany investments		383,415		22,773			—			(406,188	)		—
Other assets, net		14,961		33,298			—			—			48,259

Total assets	$	535,650	$	903,771		$	35,179		$	(406,188	)	$	1,068,412

Liabilities and shareholders’ equity
Current liabilities
Accounts payable	$	—	$	325,132		$	—		$	—		$	325,132
Accrued payroll and related liabilities		—		8,408			—			—			8,408
Other accrued liabilities		3,120		65,753			55			—			68,928

Total current liabilities		3,120		399,293			55			—			402,468
Long-term debt		210,927		124			—			—			211,051
Intercompany long-term debt		—		138,890			—			(138,890	)		—
Other liabilities		—		30,767			—			—			30,767

Total liabilities		214,047		569,074			55			(138,890	)		644,286

Shareholders’ equity
Common stock		78,516		—			1,500			(1,500	)		78,516
Paid-in capital		121,750		249,797			16,001			(265,798	)		121,750
Retained earnings		121,337		91,814			17,623			—			230,774
Accumulated other comprehensive loss		—		(6,914	)		—			—			(6,914	)

Total shareholders’ equity		321,603		334,697			35,124			(267,298	)		424,126

Total liabilities and shareholders’ equity	$	535,650	$	903,771		$	35,179		$	(406,188	)	$	1,068,412

Condensed Consolidating Financial Information

(in thousands)


December 31, 2003	Owens & Minor, Inc.		Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Balance Sheets
Assets
Current assets
Cash and cash equivalents	$	14,156	$	2,178		$	1		$	—		$	16,335
Accounts and notes receivable, net		—		5,985			347,446			—			353,431
Merchandise inventories		—		384,266			—			—			384,266
Intercompany advances, net		126,182		186,302			(312,484	)		—			—
Other current assets		18		27,325			—			—			27,343

Total current assets		140,356		606,056			34,963			—			781,375
Property and equipment, net		—		21,088			—			—			21,088
Goodwill		—		198,063			—			—			198,063
Intercompany investments		383,415		22,773			—			(406,188	)		—
Other assets, net		13,624		31,598			—			—			45,222

Total assets	$	537,395	$	879,578		$	34,963		$	(406,188	)	$	1,045,748

Liabilities and shareholders’ equity
Current liabilities
Accounts payable	$	—	$	314,723		$	—		$	—		$	314,723
Accrued payroll and related liabilities		—		13,279			—			—			13,279
Other accrued liabilities		6,030		61,538			62			—			67,630

Total current liabilities		6,030		389,540			62			—			395,632
Long-term debt		209,364		135			—			—			209,499
Intercompany long-term debt		—		138,890			—			(138,890	)		—
Other liabilities		—		30,262			—			—			30,262

Total liabilities		215,394		558,827			62			(138,890	)		635,393

Shareholders’ equity
Common stock		77,958		—			1,500			(1,500	)		77,958
Paid-in capital		118,843		249,797			16,001			(265,798	)		118,843
Retained earnings		125,200		77,868			17,400			—			220,468
Accumulated other comprehensive loss		—		(6,914	)		—			—			(6,914	)

Total shareholders’ equity		322,001		320,751			34,901			(267,298	)		410,355

Total liabilities and shareholders’ equity	$	537,395	$	879,578		$	34,963		$	(406,188	)	$	1,045,748

Condensed Consolidating Financial Information

(in thousands)


For the three months ended March 31, 2004	Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidated
Statements of Cash Flows
Operating activities
Net income	$	456		$	13,946		$	223		$	14,625
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Depreciation and amortization		—			3,706			—			3,706
Provision for LIFO reserve		—			2,225			—			2,225
Provision for losses on accounts and notes receivable		—			260			113			373
Changes in operating assets and liabilities:
Accounts and notes receivable		—			2,467			15,563			18,030
Merchandise inventories		—			(13,012	)		—			(13,012	)
Accounts payable		—			25,409			—			25,409
Net change in other current assets and liabilities		(2,897	)		2,388			(7	)		(516	)
Other, net		1,447			615			—			2,062

Cash provided by (used for) operating activities		(994	)		38,004			15,892			52,902

Investing activities
Additions to property and equipment		—			(1,937	)		—			(1,937	)
Additions to computer software		—			(1,321	)		—			(1,321	)
Net cash paid for acquisition of business		—			(2,500	)		—			(2,500	)
Other, net		—			4			—			4

Cash used for investing activities		—			(5,754	)		—			(5,754	)

Financing activities
Change in intercompany advances		33,161			(17,269	)		(15,892	)		—
Cash dividends paid		(4,319	)		—			—			(4,319	)
Proceeds from exercise of stock options		2,244			—			—			2,244
Decrease in drafts payable		—			(15,000	)		—			(15,000	)
Other, net		—			(15	)		—			(15	)

Cash provided by (used for) financing activities		31,086			(32,284	)		(15,892	)		(17,090	)

Net increase (decrease) in cash and cash equivalents		30,092			(34	)		—			30,058
Cash and cash equivalents at beginning of period		14,156			2,178			1			16,335

Cash and cash equivalents at end of period	$	44,248		$	2,144		$	1		$	46,393

Condensed Consolidating Financial Information

(in thousands)


For the three months ended March 31, 2003	Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidated
Statements of Cash Flows
Operating activities
Net income	$	671		$	11,837		$	383		$	12,891
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Depreciation and amortization		—			3,981			—			3,981
Provision for LIFO reserve		—			2,700			—			2,700
Provision for losses on accounts and notes receivable		—			206			553			759
Changes in operating assets and liabilities:
Accounts and notes receivable		—			713			12,794			13,507
Merchandise inventories		—			(21,647	)		—			(21,647	)
Accounts payable		—			74,743			—			74,743
Net change in other current assets and liabilities		(3,311	)		(5,223	)		(187	)		(8,721	)
Other, net		481			1,394			—			1,875

Cash provided by (used for) operating activities		(2,159	)		68,704			13,543			80,088

Investing activities
Additions to property and equipment		—			(690	)		—			(690	)
Additions to computer software		—			(2,080	)		—			(2,080	)
Other, net		—			4			—			4

Cash used for investing activities		—			(2,766	)		—			(2,766	)

Financing activities
Repurchase of mandatorily redeemable preferred securities		(20,412	)		—			—			(20,412	)
Repurchase of common stock		(10,884	)		—			—			(10,884	)
Net payments on revolving credit facility		(16,000	)		—			—			(16,000	)
Change in intercompany advances		51,529			(37,986	)		(13,543	)		—
Cash dividends paid		(2,680	)		—			—			(2,680	)
Proceeds from exercise of stock options		683			—			—			683
Decrease in drafts payable		—			(28,000	)		—			(28,000	)

Cash provided by (used for) financing activities		2,236			(65,986	)		(13,543	)		(77,293	)

Net increase (decrease) in cash and cash equivalents		77			(48	)		—			29
Cash and cash equivalents at beginning of period		1,244			2,116			1			3,361

Cash and cash equivalents at end of period	$	1,321		$	2,068		$	1		$	3,390

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis describes material changes in the financial condition of Owens & Minor, Inc. and its wholly-owned subsidiaries (O&M or the company) since December 31, 2003. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto and management’s discussion and analysis of financial condition and results of operations included in the company’s 2003 Annual Report on Form 10-K for the year ended December 31, 2003.

Reclassifications

As a result of the growth of the OMSolutions^SM business and the increasing effect of customer finance charge income on interest expense in recent periods, the company made certain changes to the presentation of its income statement effective January 1, 2004, to provide more useful information to investors. These reclassifications have no effect on total revenue or net income as previously reported. The most significant reclassifications are as follows:

•

Certain direct costs related to consulting and other service revenue are now included in cost of revenue. These costs were previously included in selling, general and administrative expense.

•

Customer finance charge income is now included in other operating income and expense, net. This income was previously included in interest expense, net.

Financial information for all prior periods included in this report has been reclassified to conform to the current presentation.

Results of Operations

First quarter of 2004 compared with first quarter of 2003

Overview. In the first quarter of 2004, the company earned net income of $14.6 million, or $0.37 per diluted common share, compared with $12.9 million, or $0.35 per diluted common share in the first quarter of 2003. Operating earnings were $27.4 million in the first quarter of 2004, compared to $26.6 million in the first quarter of 2003, an increase of 3%. The increase in operating earnings resulted from a 9% increase in revenue, partially offset by lower gross margin. Net income per diluted common share increased 6% as a result of the increase in operating earnings combined with lower financing costs.

Revenue. Revenue increased 9% to $1.11 billion in the first quarter of 2004 from $1.02 billion in the first quarter of 2003. On a per-day basis, revenue increased 7% as the first quarter of 2004 had one more sales day than the first quarter of 2003. Increased sales volume to existing customers accounted for slightly more than half of the revenue increase, with the balance contributed primarily by new core distribution business.

Operating earnings. Operating earnings increased 3% to $27.4 million in the first quarter of 2004 from $26.6 million in 2003. As a percentage of revenue, operating earnings decreased slightly to 2.5% in 2004 from 2.6% in the first quarter of 2003. For the full year of 2003, operating earnings were 2.5% of revenue. The decrease in operating earnings as a percentage of revenue from the first quarter of 2003 resulted from lower gross margin and continued spending on strategic initiatives, particularly OMSolutions^SMand Owens & Minor University, partially offset by productivity improvements in the core distribution business. OMSolutions^SM expenses exceeded revenue for the quarter, and are

expected to do so for the second quarter. The company anticipates that the OMSolutions^SM business will become accretive in the second half of the year.

The following table presents the components of operating earnings under the current basis of presentation for the most recent five quarters:


Quarter ended	3/31/04			12/31/03			9/30/03			6/30/03			3/31/03
In thousands:
Gross margin	$	114,060		$	111,489		$	109,220		$	108,892		$	106,801
SG&A expense		84,017			82,682			80,868			78,834			77,411
Depreciation and amortization		3,706			3,917			3,868			3,952			3,981
Other operating income and expense, net		(1,101	)		(1,373	)		(969	)		(1,313	)		(1,167	)

Operating earnings	$	27,438		$	26,263		$	25,453		$	27,419		$	26,576

As a percentage of revenue:
Gross margin		10.3	%		10.1	%		10.3	%		10.3	%		10.5	%
SG&A expense		7.6	%		7.5	%		7.6	%		7.5	%		7.6	%
Depreciation and amortization		0.3	%		0.4	%		0.4	%		0.4	%		0.4	%
Other operating income and expense, net		(0.1	)%		(0.1	)%		(0.1	)%		(0.1	)%		(0.1	)%

Operating earnings		2.5	%		2.4	%		2.4	%		2.6	%		2.6	%

Percentages may not foot due to rounding

Gross margin for the first quarter of 2004 was 10.3% of revenue, down from 10.5% in the first quarter of 2003, but consistent with the gross margin of 10.3% for the full year of 2003. The decrease from the first quarter of 2003 resulted primarily from competitive pricing pressure, increased sales volume with larger customers and fewer inventory buying opportunities.

Competitive pricing pressure has been a significant factor in recent years, and management expects this trend to continue. As suppliers seek more restrictive agreements with distributors, the company has access to fewer special inventory buying opportunities than in the past. The company is working to counteract the effects of these trends by continuing to offer customers a wide range of value-added services, such as OMSolutions^SM, PANDAC^® and other programs, as well as expanding the MediChoice^® private label product line. The company also continues to work with suppliers on programs to enhance gross margin.

SG&A expenses were 7.6% of revenue in both the first quarter of 2004 and the first quarter of 2003. The company continues to invest in its strategic initiatives, such as OMSolutions^SM and Owens & Minor University. These additional costs were partially offset by productivity improvements achieved in the core distribution business. The company expects to continue to invest in its strategic initiatives while also focusing on operation standardization in order to further improve productivity.

Financing costs. Financing costs, which include interest expense, discount on accounts receivable securitization and distributions on mandatorily redeemable preferred securities, totaled $3.4 million for the first quarter of 2004, compared with $5.2 million for the first quarter of 2003. The decrease in financing costs from the first quarter of 2003 resulted primarily from reductions in outstanding financing,

most significantly the repurchase of $20.8 million and conversion of $104.4 million of mandatorily redeemable preferred securities in 2003.

The company expects to continue to manage its financing costs by managing working capital levels. Future financing costs will be affected primarily by changes in short-term interest rates, as well as working capital requirements.

Income taxes. The provision for income taxes was $9.4 million in the first quarter of 2004 compared with $8.3 million in the same period of 2003. The effective tax rate was 39.1% for the first quarter of 2004, compared to 38.9% for the full year of 2003.

Financial Condition, Liquidity and Capital Resources

Liquidity. The company’s liquidity remained strong in the first quarter of 2004, as its cash and cash equivalents increased $30.1 million to $46.4 million at the end of the quarter, and long-term debt remained consistent at $211.1 million, up only $1.6 million from December 31, 2003. In the first three months of 2004, the company generated $52.9 million of cash flow from operations, compared with $80.1 million in the first quarter of 2003. Cash flows in both quarters were positively affected by improved collections of accounts receivable, while first quarter 2003 cash flows were also significantly enhanced by timing of payments for inventory purchases. Accounts receivable days sales outstanding at March 31, 2004 were 26.1 days, improved from 27.8 days at December 31, 2003 and 30.8 days at March 31, 2003. Inventory turnover remained consistent at 10.2 in the first quarters of both 2004 and 2003.

Effective May 4, 2004, the company amended its revolving credit facility, extending its expiration to May 2009. The credit limit of the amended facility is $250.0 million, up from $150.0 million previously, and the interest rate is based on, at the company’s discretion, LIBOR, the Federal Funds Rate or the Prime Rate, plus an adjustment based on the company’s leverage ratio. Under the new terms of the facility, the company is charged a commitment fee of between 0.15% and 0.35% on the unused portion of the facility. The terms of the agreement limit the amount of indebtedness that the company may incur, require the company to maintain certain levels of net worth, leverage ratio and fixed charge coverage ratio, and restrict the ability of the company to materially alter the character of the business through consolidation, merger, or purchase or sale of assets. As a result of the increased borrowing capacity under the amended revolving credit facility, the company intends to terminate its off balance sheet accounts receivable financing facility (Receivables Financing Facility).

The company expects that its available financing will be sufficient to fund its working capital needs and long-term strategic growth, although this cannot be assured. At March 31, 2004, the company had $143.5 million of unused credit under its previous $150.0 million revolving credit facility and $225.0 million of unused financing under its Receivables Financing Facility. Had the amendment of the revolving credit facility and the termination of the Receivables Financing Facility mentioned above been effective prior to March 31, 2004, the company would have had $243.5 million of unused financing capacity.

Capital Expenditures. Capital expenditures were $3.3 million in the first quarter of 2004, compared to $2.8 million in the first quarter of 2003. The increase was primarily due to the relocation of one of the company’s distribution centers, partially offset by reduced capital spending on information systems. The company expects capital expenditures for the remainder of 2004 to include increased spending on the design and construction of a new corporate headquarters. Capital expenditures for information systems upgrades are expected to continue to run at a lower rate than in 2003.

Risks

The company is subject to risks associated with changes in the healthcare industry, including competition and continued efforts to control costs, which place pressure on operating earnings, changes in the way medical and surgical services are delivered, and changes in manufacturer

preferences between the sale of product directly to hospital customers and the use of wholesale distribution. The loss of one of the company’s larger customers could have a significant effect on its business.

Forward-looking Statements

Certain statements in this discussion constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Although O&M believes its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to: general economic and business conditions; the ability of the company to implement its strategic initiatives; dependence on sales to certain customers; dependence on suppliers; changes in manufacturer preferences between direct sales and wholesale distribution; competition; changing trends in customer profiles; the ability of the company to meet customer demand for additional value added services; the ability to convert customers to CostTrack^SM; the availability of supplier incentives; the ability to capitalize on buying opportunities; the ability of business partners to perform their contractual responsibilities; the ability to manage operating expenses; the ability of the company to manage financing costs and interest rate risk; the risk that a decline in business volume or profitability could result in an impairment of goodwill; the ability to timely or adequately respond to technological advances in the medical supply industry; the ability to successfully identify, manage or integrate possible future acquisitions; the costs associated with and outcome of outstanding and any future litigation, including product and professional liability claims; and changes in government regulations. As a result of these and other factors, no assurance can be given as to the company’s future results. The company is under no obligation to update or revise any forward-looking statements, whether as a result of new information, future results, or otherwise.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The company believes there has been no material change in its exposure to market risk from that discussed in Item 7A in the company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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 of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the company required to be included in the company’s periodic SEC filings. There has been no change in the company’s internal controls over financial reporting during the quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

Part II. Other Information

Item 1.

Legal Proceedings

Certain legal proceedings pending against the company are described in the company’s Annual Report on Form 10-K for the year ended December 31, 2003. Through March 31, 2004, there have been no material developments in any legal proceedings reported in such Annual Report.

Item 6.

Exhibits and Reports on Form 8-K.

(a)

Exhibits



3.1		Amended and Restated Articles of Incorporation of Owens & Minor, Inc.

4.1		Amended and Restated Credit Agreement dated as of May 4, 2004 by and among Owens & Minor Distribution, Inc. and Owens & Minor Medical, Inc., as Borrowers, Owens & Minor, Inc. and certain of its Subsidiaries, as Guarantors, the banks identified herein, Wachovia Bank, National Association and SunTrust Bank, as Syndication Agents, and Bank of America, N.A., as Administrative Agent

31.1		Certification of Chief Executive Officer pursuant to Rule 13(a)-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 13(a)-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

(b)	Reports on Form 8-K:

The company filed a Current Report on Form 8-K dated February 3, 2004, under Items 7 and 9, announcing its earnings for the fourth quarter and full year ended December 31, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



				Owens & Minor, Inc.
				(Registrant)



Date May 6, 2004				/s/ G. GILMER MINOR, III

				G. Gilmer Minor, III
				Chairman and Chief Executive Officer



Date May 6, 2004				/s/ JEFFREY KACZKA

				Jeffrey Kaczka
				Senior Vice President
				Chief Financial Officer



Date May 6, 2004				/s/ OLWEN B. CAPE

				Olwen B. Cape
				Vice President & Controller
				Chief Accounting Officer

Exhibits Filed with SEC

Exhibit #



3.1		Amended and Restated Articles of Incorporation of Owens & Minor, Inc.

4.1		Amended and Restated Credit Agreement dated as of May 4, 2004 by and among Owens & Minor Distribution, Inc. and Owens & Minor Medical, Inc., as Borrowers, Owens & Minor, Inc. and certain of its Subsidiaries, as Guarantors, the banks identified herein, Wachovia Bank, National Association and SunTrust Bank, as Syndication Agents, and Bank of America, N.A., as Administrative Agent

31.1		Certification of Chief Executive Officer pursuant to Rule 13(a)-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 13(a)-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

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