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| PSSI > SEC Filings for PSSI > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
THE COMPANY
PSS World Medical, Inc. (the "Company" or "PSSI"), a Florida corporation, began operations in 1983. The Company is a national distributor of medical products and equipment, pharmaceutical products, healthcare information technology and billing services to alternate-site healthcare providers including physician offices, long-term care and assisted living facilities, home health care and hospice providers through 39 full-service distribution centers, which serve all 50 states throughout the United States ("U.S."). The Company currently conducts business through two operating segments, the Physician Business and the Elder Care Business, which serve a diverse customer base. For information on comparative segment revenue, segment profit and related financial information, refer to Footnote 7, Segment Information, of the consolidated financial statements.
PSSI is a market-leading company in the two alternate-site segments it serves as a result of value-added, solutions-based marketing programs; a differentiated customer distribution and service model; a consultative sales force with extensive product, disease state, reimbursement, and supply chain knowledge; unique arrangements with manufacturers; a full line of the Company's own brand, Select Medical Products™ and specialty brand products ("Select"); innovative information systems and technology that serve its core markets; and a culture of performance.
EXECUTIVE OVERVIEW
During the first quarter of fiscal year 2010, net sales grew 4.5% at the consolidated level and 3.3% and 7.1% in the Physician and Elder Care Businesses, respectively, compared to the first quarter of fiscal year 2009. This was primarily due to progress in the Company's sales growth initiatives as well as the impact from the sale of products related to the H1N1 influenza ("swine flu") pandemic.
The Company recognized sales growth on the disposables, lab diagnostics, and pharmaceuticals product lines within the Physician Business and across the largest customer segments within the Elder Care Business during the first quarter compared to the same quarter in the prior year. Select brand product sales grew 15.0% and 24.8% during the quarter in the Physician and Elder Care Businesses, respectively, reflecting the Company's efforts to promote its globally-sourced brand through sales and marketing initiatives.
Income from operations of $21.6 million during the first quarter of fiscal year 2010 increased 20.1% or $3.6 million compared with the same period in prior year. This was primarily the result of net sales growth discussed above and a decrease in general and administrative expenses due to implemented cost savings initiatives partially offset by increased incentive compensation accruals.
Cash flow from operations during the three months ended June 26, 2009 was approximately $44.9 million. This was primarily the result of growth in profitability, a reduction in inventory levels, and improved accounts receivable collections.
The following significant events impacted the Company during the three months ended June 26, 2009:
Swine Flu Pandemic
During the three months ended June 26, 2009, the Physician Business experienced increased sales in influenza test kits, surgical masks, medical gloves and hand sanitizers, related to the swine flu pandemic. This resulted in an increase of approximately $9.0 million in net sales or $1.6 million in pre-tax income for the current period, when compared to the same period in the prior year.
Adoption of New Accounting Pronouncement
As discussed in Footnote 1, Background and Basis of Presentation, effective March 28, 2009, the Company adopted FSP APB 14-1 and, as required by this new standard the Company retrospectively applied this change in accounting to all prior periods for which the Company had applicable outstanding convertible debt. As a result of the adoption of FSP APB 14-1, pre-tax income decreased $1.8 million ($1.1 million net of tax) and $1.5 million ($0.9 million net of tax) for the three months ended June 26, 2009 and June 27, 2008, respectively. See Footnote 3, Debt, for additional information.
Investment in athenahealth, Inc.
In April 2009, the Company sold its remaining investment in athenahealth, Inc. ("athena"), a leading provider of internet-based healthcare information technology and business services to physician practices, for $10.7 million, resulting in a gain of $3.6 million located in "Other income, net" on the Unaudited Condensed Consolidated Statements of Operations, or $2.3 million net of tax. See Footnote 2, Equity Investment, for additional information.
Change in Long-Term Compensation Estimate
Based on the financial results of the three months ended June 26, 2009, management raised its expectations for probable achievement and over-achievement of performance conditions related to long-term incentive compensation plans. Due to this change in estimate, the Company recognized an additional $4.9 million in incentive-based compensation expense during the current period and expects to recognize an additional $3.2 million in expense in fiscal year 2010. See Footnote 6, Long-Term Incentive Plan and Stock-Based Compensation, for additional information.
NET SALES
The following table summarizes net sales period over period.
For the Three Months Ended
June 26, 2009 June 27, 2008
Percent
Average Daily Average Daily Change of
(dollars in millions) Amount Net Sales Amount Net Sales Total Sales
Physician Business $ 342.3 $ 5.3 $ 331.4 $ 5.2 3.3 %
Elder Care Business 150.4 2.3 140.4 2.2 7.1 %
Corporate Shared Services 0.9 - 0.4 - 108.5 %
Total Company $ 493.6 $ 7.6 $ 472.2 $ 7.4 4.5 %
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Physician Business
Management evaluates the Physician Business by product category. The following
table summarizes the growth rate by product category period over period.
For the Three Months Ended
June 26, June 27, Percent
(dollars in millions) 2009 2008 Change
Branded (a) $ 183.7 $ 173.7 5.8 %
Select(b) 46.5 40.4 15.0 %
Pharmaceuticals 77.4 75.9 1.9 %
Equipment 26.8 31.7 (15.4 )%
Immunoassay 6.5 7.2 (10.1 )%
Other 1.4 2.5 (42.9 )%
Total $ 342.3 $ 331.4 3.3 %
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(a) Branded products are comprised of disposables and lab diagnostics from branded manufacturers.
(b) Select products are comprised of the Company's brand of disposables and lab diagnostics.
Net sales growth during the three months ended June 26, 2009 was driven by momentum in the consumable and pharmaceutical sales growth programs and the effects from the swine flu pandemic. During the three months ended June 26, 2009, the Physician Business experienced increased sales in influenza test kits, surgical masks, medical
gloves and hand sanitizer, related to the swine flu pandemic. This resulted in an increase of approximately $9.0 million in net sales, with approximately $7.2 million of the increase relating to the sale of branded lab diagnostics and $0.6 million related to the sale of Select disposables. In addition to the effect of the swine flu, Select product sales increased during the three months ended June 26, 2009 due to the Company's continued focus on promoting its globally-sourced Select products, which resulted in new customer sales as well as customer conversions from other manufacturers branded products to Select brand products. The Physician Business introduced a program to add new customers during the quarter which resulted in approximately 5,000 new customers. The Company expects this program to have a positive impact on future periods. Equipment sales decreased due to the current economic conditions including a decrease in discretionary spending and procedures and tight credit policies which negatively impacted customers' ability to obtain equipment financing.
Elder Care Business
Management evaluates the Elder Care business by customer segment. The following
table summarizes the change in net sales by customer segment period over period.
For the Three Months Ended
June 26, June 27, Percent
(dollars in millions) 2009 2008 Change
Nursing home and assisted living facilities $ 91.9 $ 86.1 6.7 %
Hospice and home health care agencies 43.9 38.2 14.9 %
Billing services 3.0 3.5 (13.4 )%
Other 11.6 12.6 (8.2 )%
Total $ 150.4 $ 140.4 7.1 %
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Net sales during the three months ended June 26, 2009 compared to the same period in the prior year increased approximately $10.0 million. The Company's net sales were impacted by the continued utilization of innovative customer-specific solution programs and a focus on regional and independent customer segments within the nursing home market. Net sales growth in the hospice and home health care lines of business during the quarter reflects the continued successful execution of strategies to diversify its customer base through expansion in the home health care market and other non-facility based care. The Company's net sales reduction in billing services is attributable to decreases in Medicaid reimbursements.
Across its Elder Care customer segments, Select product sales increased 24.8% during the three months ended June 26, 2009, when compared to the same period in the prior year due to the Company's focus on promoting its globally sourced products which resulted in additional sales to new and existing customers.
GROSS PROFIT
Gross profit for the Physician and Elder Care Businesses increased $5.6 million and $1.5 million, respectively, from the same quarter in the prior year. These increases were primarily due to the growth in net sales discussed above, as well as the Company's continued focus on its sourcing strategies and margin enhancement initiatives. The Company's sourcing strategies are designed to improve the Physician and Elder Care Business' cost competitiveness and increase its gross margins on certain products.
GENERAL AND ADMINISTRATIVE EXPENSES
For the Three Months Ended
June 26, 2009 June 27, 2008
% of % of
Net Net
(dollars in millions) Amount Sales Amount Sales Increase
Physician Business(a) $ 48.2 14.1 % $ 50.5 15.2 % $ (2.3 )
Elder Care Business(a) 29.2 19.4 % 29.5 21.0 % (0.3 )
Corporate Shared Services(b) 14.2 2.9 % 9.6 2.0 % 4.6
Total Company(b) $ 91.6 18.6 % $ 89.6 19.0 % $ 2.0
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(a) General and administrative expenses as a percentage of net sales are calculated based on reportable segment net sales.
(b) General and administrative expenses as a percentage of net sales are calculated based on consolidated net sales.
Physician Business
General and administrative expenses as a percentage of net sales decreased period over period due to leveraging of the Company's infrastructure over increased sales. Decreases in general and administrative expenses are discussed below.
General and administrative expenses decreased $2.3 million during the three months ended June 26, 2009, when compared to the same period in the prior year. This decrease was attributable to (i) a decrease in cost to deliver of $0.6 million due to favorable renegotiations with third party freight carriers and decline in fuel prices, and (ii) a decrease in relocation expenses of $0.7 million due to the Company's realignment of its divisional branches from four regions to six regions in the prior year period.
Elder Care Business
General and administrative expenses decreased $0.3 million during the three months ended June 26, 2009, when compared to the same period in the prior year. This decrease was primarily attributable to (i) a decrease in bad debt expense of $0.6 million primarily related to the bankruptcy of one of the Elder Care Business' customers that occurred during the three months ended June 27, 2008 and (ii) a decrease in expenses incurred for the National Meeting of $0.5 million. These decreases were partially offset by an increase of $0.9 million in payroll and bonus related charges primarily due to performance accruals.
Corporate Shared Services
General and administrative expenses for the three months ended June 26, 2009 increased $4.5 million when compared to the same period in the prior year. This increase is primarily attributable to an increase of $4.9 million in long-term incentive based compensation expense related to a change in estimate. This was partially offset by a decrease in payroll and payroll related costs of $0.3 million.
SELLING EXPENSES
The following table summarizes selling expenses as a percentage of net sales
period over period.
For the Three Months Ended
June 26, 2009 June 27, 2008
% of % of
Net Net
(dollars in millions) Amount Sales Amount Sales Increase
Physician Business $ 27.6 8.1 % $ 26.2 7.9 % $ 1.4
Elder Care Business 5.1 3.4 % 5.1 3.6 % -
Total Company $ 32.7 6.6 % $ 31.3 6.6 % $ 1.4
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Overall, the change in selling expenses is attributable to an increase in commission expense due to the growth in net sales discussed above. A majority of the Company's sales representatives are fully commission-based. Commissions are generally paid to sales representatives based on gross profit dollars and gross profit as a percentage of net sales.
PROVISION FOR INCOME TAXES
The following table summarizes the provision for income taxes period over
period.
For the Three Months Ended
June 26, 2009 June 27, 2008
Effective Effective
(dollars in millions) Amount Rate Amount Rate Increase
Total Company $ 8.2 38.2 % $ 6.2 39.8 % $ 2.0
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources Highlights
Cash flows from operations are primarily impacted by segment profitability and
operating working capital. Management monitors operating working capital
performance through the following:
As of
June 26, 2009 June 27, 2008
Days Sales Outstanding:(a)
Physician Business 39.1 41.0
Elder Care Business 49.7 49.9
Days On Hand:(b)
Physician Business 54.7 52.2
Elder Care Business 52.0 53.1
Days in Accounts Payable:(c)
Physician Business 39.8 41.1
Elder Care Business 23.3 28.1
Cash Conversion Days:(d)
Physician Business 54.0 52.1
Elder Care Business 78.4 74.9
Inventory Turnover:(e)
Physician Business 6.6 x 6.9 x
Elder Care Business 6.9 x 6.8 x
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(a) Days sales outstanding ("DSO") is average accounts receivable divided by average daily net sales. Average accounts receivable is the sum of accounts receivable, net of the allowance for doubtful accounts, at the beginning and end of the most recent four quarters divided by five. Average daily net sales are net sales for the most recent four quarters divided by 360.
(b) Days on hand ("DOH") is average inventory divided by average daily cost of goods sold ("COGS"). Average inventory is the sum of inventory at the beginning and end of the most recent four quarters divided by five. Average daily COGS is COGS for the most recent four quarters divided by 360.
(c) Days in accounts payable ("DIP") is average accounts payable divided by average daily COGS. Average accounts payable is the sum of accounts payable at the beginning and end of the most recent four quarters divided by five.
(d) Cash conversion days is the sum of DSO and DOH, less DIP.
(e) Inventory turnover is 360 divided by DOH.
In addition to cash flow, the Company monitors other components of liquidity, including the following:
As of
(dollars in millions) June 26, 2009 March 27, 2009
Capital Structure:
Convertible senior notes, net $ 181.1 $ 179.2
Revolving line of credit 50.0 50.0
Other debt 2.5 2.7
Cash and cash equivalents (129.6 ) (82.0 )
Net debt 104.0 149.9
Shareholders' equity 397.3 378.0
Total capital $ 501.3 $ 527.9
Operating Working Capital:
Accounts receivable, net $ 230.4 $ 230.4
Inventories 196.2 207.6
Accounts payable (133.8 ) (127.3 )
$ 292.8 $ 310.7
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Cash Flows from Operating Activities
Net cash provided by operating activities was $44.9 million and $13.8 million for the three months ended June 26, 2009 and June 27, 2008, respectively.
Net cash provided by operating activities during the three months ended June 26, 2009 was primarily the result of overall operating profits in addition to benefits of approximately $17.2 million provided by previous investments in operating working capital.
As of June 26, 2009, the Company has a deferred income tax liability of $18.2 million (tax effected) related to interest deductions taken for tax purposes on its 2.25% $150.0 million convertible senior notes. The liability will be fully deferred for 5 years and paid ratably from fiscal year 2014 to fiscal year 2018 in accordance with the American Recovery and Reinvestment Act of 2009.
Cash Flows from Investing Activities
Net cash provided by investing activities was $0.8 million and $12.4 million during the three months ended June 26, 2009 and June 27, 2008, respectively, and was primarily impacted by the following factors:
• During the three months ended June 26, 2009, the Company sold its remaining investment in athenahealth for $10.7 million, resulting in a gain of approximately $3.6 million or $2.3 million, net of taxes. During the fourth quarter of fiscal year 2008, the Company sold a portion of its investment in athenahealth, resulting in a gain of approximately $4.6 million, $2.8 million, net of taxes. Proceeds of $21.0 million were received during the three months ended June 27, 2008.
• Capital expenditures totaled $7.6 million and $5.9 million during the three months ended June 26, 2009 and June 27, 2008, respectively, of which approximately $6.4 million and $3.8 million, respectively, related to development and enhancement of the Company's ERP system, electronic commerce platforms, and supply chain integration. Capital expenditures related to distribution center expansions were approximately $0.6 million and $1.5 million during the three months ended June 26, 2009 and June 27, 2008.
Cash Flows from Financing Activities
Net cash provided (used) by financing activities was $1.9 million and $(17.5) million during the three months ended June 26, 2009 and June 27, 2008, respectively. Net cash provided or used by financing activities during the three months ended June 26, 2009 and June 27, 2008, respectively, were mainly impacted by the following factors:
• The Company received proceeds from the exercise of stock options of approximately $1.6 million and $2.4 million during the three months ended June 26, 2009 and June 27, 2008, respectively. The Company recognized related excess tax benefits of $0.5 million and $0.4 million during the three months ended June 26, 2009 and June 27, 2008, respectively.
• The Company made net repayments of approximately $20.0 million on its revolving line of credit during the three months ended June 27, 2008.
Capital Resources
The capital and credit markets have recently experienced adverse conditions. The resulting restricted access to capital along with significant volatility within capital markets have increased the costs associated with issuing or refinancing debt because of increased risk spreads over relevant interest rate benchmarks. The Company continues to be well positioned; however, there can be no guarantee the recent disruptions in the overall economy and the financial markets will not adversely impact the business and results of operations.
The Company finances its business primarily through cash generated from operations, proceeds from the $230.0 million senior convertible notes offering and the $200.0 million revolving line of credit. The ability to generate sufficient cash flows from operations is dependent on the continued demand for the Company's products and services, and access to products and services from suppliers. Given current operating, economic and industry conditions, management believes demand for products and services will grow at slower rates. The Company's capital structure provides the financial resources to support the business strategies of customer service and revenue growth. The revolving line of credit, which is an asset-based agreement, is primarily collateralized by the Company's accounts receivable and inventory. The Company's long-term priorities for use of capital are internal growth, acquisitions, and repurchase of the Company's common stock.
As the Company's business grows, its cash and working capital requirements are expected to increase. The Company expects the overall growth in the business will be funded through a combination of cash flows from operating activities, borrowings under the revolving line of credit, capital markets, and/or other financing arrangements.
Based on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors, the Company may seek to retire a portion of its outstanding equity through cash purchases and/or reduce its debt. The Company may also seek to issue additional debt or equity to meet its future liquidity requirements. Such transactions may occur in the open market, privately negotiated transactions, or otherwise. The amounts involved could be material.
Future Contractual Obligations
In the normal course of business, the Company enters into obligations and commitments that require future contractual payments. There were no material changes outside the normal course of business from the obligations reported as of March 27, 2009.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
Critical Accounting Estimates are disclosed in the Annual Report on Form 10-K for the fiscal year ended March 27, 2009 filed on May 20, 2009 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no material changes in the Company's Critical Accounting Estimates, as disclosed in the Annual Report, outside of the long-term incentive compensation estimate change discussed below.
Long-Term Incentive Compensation
Equity Incentive Plans
As of June 26, 2009, the Company has grants of incentive stock options, nonqualified stock options, time-based restricted stock and performance-based restricted stock outstanding.
Estimates are required to determine the number of share-based awards which will ultimately vest, and, in the case of performance-based restricted stock, estimates of the Company's goals. Changes in the estimated forfeiture rate, differences between actual and estimated forfeitures when an award vests or changes in estimates regarding the Company's performance can have material effects on share-based compensation expense. For this reason, management has determined that the estimates used to determine equity-based compensation expense are critical accounting estimates.
When estimating the Company's expected earnings per share performance for performance-based restricted stock, the Company reviews the most current information available, including operating plans, actual financial and operating results, forecasts prepared by management and environmental and market risks. These performance goals are re-assessed periodically throughout the service period. Such estimates are revised, if necessary, if they differ materially from . . .
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