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PSSI > SEC Filings for PSSI > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for PSS WORLD MEDICAL INC

Form 10-Q for PSS WORLD MEDICAL INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE COMPANY

PSS World Medical, Inc. (the "Company" or "PSSI"), a Florida corporation, began operations in 1983. The Company markets and distributes medical products and services to front-line caregivers throughout the United States. With approximately 4,000 team members, PSSI is a leader in the markets it serves with innovative approaches to customer service and operational excellence. Its stated purpose is to strengthen the clinical success and financial health of caregivers by solving their biggest problems, and its stated mission is to improve caregivers' financial performance by 20%. The Company is focused to accelerate growth in four markets - Physician, Laboratory, Dispensing, and Home Care & Hospice - with products and solutions that deliver high quality, cost effective, and convenient patient care. The Company has full service distribution centers strategically located to efficiently serve all 50 states throughout the United States.

On October 24, 2012, the Company entered into an Agreement and Plan of Merger ("the Merger Agreement") under which McKesson Corporation will acquire all of its outstanding shares for $29.00 per share in cash. The transaction, which has been approved by the boards of directors of both companies, is subject to customary closing conditions, including all necessary regulatory clearances and the approval of the Company's shareholders. See Footnote 15, Subsequent Events, for additional information.

During the first quarter of fiscal year 2013, the Company's Board of Directors approved a strategic restructuring plan designed to transform the Company by focusing on four lines of business - physician, laboratory, dispensing, and home care and hospice. The Company formerly conducted business through two operating segments, the Physician Business and the Extended Care Business. For information on comparative segment net sales, segment profit and loss, and related financial information, refer to Footnote 11, Segment Information, of the unaudited condensed consolidated financial statements.

The restructuring plan includes the sale of two businesses serving skilled nursing facilities within the Extended Care Business and specialty dental practices within the Physician Business. On November 2, 2012, the Company completed the sale of its specialty dental distribution business to a third party for a sale price of $68,000. The assets and liabilities of this business were classified as held for sale as of September 28, 2012 and March 30, 2012.

Additionally, the plan includes the integration of all distribution operations into one common distribution infrastructure, and the redesign of the shared services segment. The transformation is designed to accelerate revenue growth and reduce operating costs as a percentage of net sales, while streamlining decision making and execution, and improving customer service.

EXECUTIVE OVERVIEW

During the second quarter of fiscal year 2013, net sales from continuing operations increased 7.4% and net sales from discontinued operations decreased 0.1% compared to the same period in the prior fiscal year.

Net sales in the Physician business during the three months ended September 28, 2012 increased 2.0% compared to the same period in the prior fiscal year. The increase in net sales was attributable to revenue generated from acquisitions and an increase in net sales to health systems.

Net sales in the Laboratory business during the three months ended September 28, 2012 increased 22.8% compared to the same period in the prior fiscal year. The increase in net sales was primarily attributable to revenue generated from acquisitions.

Net sales in the Dispensing business during the three months ended September 28, 2012 increased 21.7% compared to the same period of the prior fiscal year. The increase is attributable to revenue generated from acquisitions.


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Net sales in the Home Care & Hospice business during the three months ended September 28, 2012 decreased 5.1% compared to the same period in the prior fiscal year. The decrease is attributable to the loss of a significant national home health agency customer offset by continued focus on the expansion of the store brands product category, resulting in new customer sales, as well as customer conversions from branded products to the Company's store brands.

Consolidated general and administrative expenses from continuing operations increased $10.6 million, or 15.7% compared to the second quarter of the prior fiscal year, mainly attributable to additional expenses incurred from acquisitions completed during the current and prior fiscal years, as well as investments made to advance the Company's long-term business plan.

Consolidated selling expenses from continuing operations increased $4.7 million, or 14.6% compared to the second quarter of the prior fiscal year, due to an increase in commission expenses. Commissions are generally paid to sales representatives based on gross profit dollars and gross margin, which increased 12.3% and 62 basis points, respectively.

Cash flow provided by operating activities during the three and six months ended September 28, 2012 was $25.6 and $48.5 million, respectively. The Company's cash flows from operating activities along with available cash balances funded acquisitions, investments in capital projects, and the repurchase of approximately 0.4 million common shares during the six months ended September 28, 2012.

The following significantly impacted the Company's financial and operating results during the six months ended September 28, 2012.

Acquisitions

During the six months ended September 28, 2012, the Company made strategic acquisitions in the physician, dispensing and laboratory markets. The total purchase price of the acquisitions was $75.2 million, of which $6.2 million was held by the Company to secure certain potential future adjustments or claims, and $0.1 million net was paid for working capital adjustments related to prior year acquisitions and other acquisition-related adjustments. Refer to Footnote 2, Purchase Business Combinations, for additional information.

Restructuring Plan

During the six months ended September 28, 2012, the Company's Board of Directors approved a strategic restructuring plan designed to transform the Company by focusing on four lines of business - physician, laboratory, dispensing, and home care and hospice. The transformation is designed to accelerate revenue growth and reduce operating costs as a percentage of net sales, while streamlining decision making and execution, and improving customer service.

The restructuring plan includes the sale of two businesses serving skilled nursing facilities and specialty dental practices, the integration of all distribution operations into one common distribution infrastructure, and the redesign of the shared services segment. Current results of operations may not be indicative of future results. During the three and six months ended September 28, 2012, the Company incurred $2.6 million and $5.6 million, respectively, of costs associated with the strategic restructuring plan.


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NET SALES

The following table summarizes net sales period over period:



                                                       For the Three Months Ended                                     For the Six Months Ended
                                          September 28,          September 30,         Percent          September 28,           September 30,         Percent
(dollars in millions)                         2012                   2011              Change                2012                   2011              Change
Physician                                $         256.7        $         251.6             2.0 %      $          510.8        $         497.1             2.8 %
Laboratory                                         115.7                   94.3            22.8                   221.2                  183.9            20.2
Dispensing                                          23.9                   19.6            21.7                    46.4                   39.2            18.3
Home Care & Hospice                                 24.3                   25.6            (5.1 )                  51.1                   50.9             0.5
Shared Services                                      0.2                    0.6              -                      0.7                    1.1              -

Total continuing operations              $         420.8        $         391.7             7.4 %      $          830.2        $         772.2             7.5 %

Physician

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                                     For the Six Months Ended
                                           September 28,          September 30,         Percent          September 28,           September 30,         Percent
(dollars in millions)                          2012                   2011              Change                2012                   2011              Change
Branded (a)                               $          96.7        $          96.0             0.7 %      $          195.1        $         193.6             0.8 %
Store brand products(b)                              52.8                   49.2             7.5                   104.7                   95.8             9.3
Pharmaceuticals                                      80.2                   77.5             3.6                   157.0                  153.4             2.3
Equipment (c)                                        25.1                   27.0            (6.9 )                  49.8                   50.5            (1.4 )
Other                                                 1.9                    1.9              -                      4.2                    3.8            10.5

Total                                     $         256.7        $         251.6             2.0 %      $          510.8        $         497.1             2.8 %

Selling days                                           63                     63                                     127                    127

(a) Branded products are comprised of disposables from branded manufacturers.

(b) Store brand products are the Company's brands of disposables and equipment.

(c) Equipment from branded manufacturers.

Overall, net sales in the Physician business during the three and six months ended September 28, 2012 were positively impacted by revenue from acquisitions and an increase in net sales to health systems.

Net sales of branded products in the Physician business increased during the three and six months ended September 28, 2012 due to revenue from acquisitions and an increase in net sales to health systems when compared to the same period in the prior fiscal year, partially offset by a decrease in net sales due to competitive pricing pressure.

Net sales of store brand products in the Physician business increased during the three and six months ended September 28, 2012 due to continued focus on the expansion of the store brands product category, resulting in new customer sales, as well as customer conversions from branded products to the Company's store brands.

Net sales of equipment in the Physician business decreased during the three and six months ended September 28, 2012 when compared to the same period in the prior fiscal year.

Net sales of products and services in the other category in the Physician business increased during the six months ended September 28, 2012 due to an increase in healthcare information technology products and services.


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Laboratory

Management evaluates the Laboratory business by product category. The following
table summarizes the growth rate by product category period over period:



                                                       For the Three Months Ended                                     For the Six Months Ended
                                           September 28,          September 30,        Percent          September 28,           September 30,         Percent
(dollars in millions)                          2012                   2011              Change               2012                   2011              Change
Lab diagnostics                           $         100.3        $          81.2           23.5 %      $          191.8        $         158.1            21.3 %
Store brand products and services                     7.9                    7.9             -                     15.8                   15.6             1.7
Equipment                                             6.9                    4.9           41.2                    12.4                    9.5            31.1
Other                                                 0.6                    0.3          100.0                     1.2                    0.7            71.4

Total                                     $         115.7        $          94.3           22.8 %      $          221.2        $         183.9            20.2 %

Selling days                                           63                     63                                    127                    127

Overall, net sales in the Laboratory business during the three and six months ended September 28, 2012 were positively impacted by revenue from acquisitions.

Net sales of lab diagnostic products in the Laboratory business increased during the three and six months ended September 28, 2012 due to revenue from acquisitions when compared to the same period in the prior fiscal year.

Net sales of store brand products and services in the Laboratory business decreased during the three months ended September 28, 2012 due to a decrease in net sales of store brand equipment partially offset by an increase in net sales of store brand reagents.

Net sales of equipment in the Laboratory business increased during the three and six months ended September 28, 2012 primarily due to current and prior year acquisitions.

Dispensing

Management evaluates the Dispensing business by service category. The following
table summarizes the growth rate by service category period over period:



                                                       For the Three Months Ended                                      For the Six Months Ended
                                         September 28,           September 30,          Percent          September 28,           September 30,         Percent
(dollars in millions)                         2012                    2011              Change                2012                   2011              Change
Repack operations                       $           13.3        $           11.3            17.5 %      $           25.6        $          22.8            12.1 %
Management services                                  9.2                     8.1            13.3                    18.2                   16.2            12.3
Other                                                1.4                     0.2              -                      2.6                    0.2              -

Total                                   $           23.9        $           19.6            21.7 %      $           46.4        $          39.2            18.3 %

Selling days                                          63                      63                                     127                    127

Net sales during the three and six months ended September 28, 2012 were positively impacted by acquisitions of companies providing physician dispensing products and services during the current and prior fiscal years.


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Home Care & Hospice

Management evaluates the Home Care & Hospice business by customer category. The
following table summarizes the change in net sales period over period:



                                                       For the Three Months Ended                                       For the Six Months Ended
                                         September 28,            September 30,         Percent           September 28,           September 30,         Percent
(dollars in millions)                         2012                    2011               Change                2012                   2011              Change
Home Care                               $           14.2        $            15.4           (7.5 )%      $           30.0        $          30.6            (1.9 )%
Hospice                                              9.5                      9.4            0.7                     18.9                   18.8             0.5
Other                                                0.6                      0.8          (27.9 )                    2.2                    1.5            51.0

Total                                   $           24.3        $            25.6           (5.1 )%      $           51.1        $          50.9             0.5 %

Selling days                                          63                       63                                     127                    127

Overall, net sales during the three months ended September 28, 2012 decreased when compared to the same period in the prior fiscal year due to the loss of a significant national home health agency customer.

GROSS PROFIT

Gross profit dollars for the Physician business increased $2.4 million and gross margin increased 28 basis points during the three months ended September 28, 2012, when compared to the same period in the prior fiscal year. Gross profit dollars increased $7.8 million and gross margin increased 65 basis points during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. The increase in gross profit dollars was a result of an increase in net sales. The increase in gross margin was a result of net sales growth in the Company's store brand products, which generally have higher gross margins than the Company's other product categories, and product pricing tools developed by the Company.

Gross profit dollars for the Laboratory business increased $7.1 million and gross margin increased 68 basis points during the three months ended September 28, 2012, when compared to the same period in the prior fiscal year. Gross profit dollars increased $11.6 million and gross margin increased 30 basis points during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. The increase in gross profit dollars was a result of an increase in net sales. The increase in gross margin was attributable to higher margin reagent and diagnostics from acquisitions and product mix.

Gross profit dollars for the Dispensing business increased $2.8 million and gross margin increased 209 basis points during the three months ended September 28, 2012, when compared to the same period in the prior fiscal year. Gross profit dollars increased $6.0 million and gross margin increased 527 basis points during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. The increase in gross profit dollars was a result of an increase in net sales. The increase gross margin was due to increased claims processing services performed in-house when compared to the same periods in the prior fiscal year.

Gross profit dollars for the Home Care & Hospice business decreased $0.1 million while gross margin increased 158 basis points during the three months ended September 28, 2012, when compared to the same period in the prior fiscal year. Gross profit dollars increased $0.5 million while gross margin increased 75 basis points during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. The increase in gross profit dollars was a result of an increase in net sales and growth in net sales of the Company's store brand products, as well as the loss of lower margin national customer business.


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GENERAL AND ADMINISTRATIVE EXPENSES



                                                        For the Three Months Ended                                        For the Six Months Ended
                                          September 28,           September 30,                            September 28,           September 30,
                                               2012                    2011                                     2012                    2011
                                                     % of                    % of                                     % of                    % of
                                                     Net                     Net         Increase                     Net                     Net         Increase
(dollars in millions)                   Amount      Sales       Amount      Sales       (Decrease)       Amount      Sales       Amount      Sales       (Decrease)
Physician (a)                           $  39.2       15.3 %    $  36.7       14.6 %    $       2.5      $  80.5       15.7 %    $  75.3       15.1 %    $       5.2
Laboratory (a)                             14.0       12.1          9.7       10.3              4.3         27.3       12.4         20.0       10.9              7.3
Dispensing (a)                              9.9       41.4          6.0       30.5              3.9         18.7       40.4         12.7       32.5              6.0
Home Care & Hospice (a)                     5.5       22.5          5.3       20.7              0.2         11.6       22.7         10.6       20.9              1.0
Shared Services (b)                         9.7        2.3         10.0        2.5             (0.3 )       19.9        2.4         21.0        2.7             (1.1 )

Total(b)                                $  78.3       18.6 %    $  67.7       17.3 %    $      10.6      $ 158.0       19.0 %    $ 139.6       18.1 %    $      18.4

(a) General and administrative expenses as a percentage of net sales is calculated based on reportable segment net sales.

(b) General and administrative expenses as a percentage of net sales is calculated based on consolidated net sales from continuing operations.

Physician

General and administrative expenses increased $2.5 million during the three months ended September 28, 2012, when compared to the same period in the prior fiscal year. This increase was attributable to (i) an increase in cost to deliver of $0.9 million related to the growth in net sales, and additional expenses from acquired companies; (ii) an increase in payroll and payroll-related expenses of $0.7 million; and (iii) an increase in depreciation and amortization expense of $0.2 million due to the addition of property and equipment and intangible assets related to acquisitions.

General and administrative expenses increased $5.2 million during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. This increase was attributable to (i) an increase in cost to deliver of $1.7 million related to the growth in net sales, and additional expenses from acquired companies; (ii) an increase in payroll and payroll-related expenses of $1.1 million as a result of acquisitions; (iii) an increase in depreciation and amortization expense of $0.5 million due to the addition of property and equipment and intangible assets related to acquisitions; and (iv) an increase in legal fees of $0.3 million related to acquisitions, and other less significant charges.

Laboratory

General and administrative expenses increased $4.3 million during the three months ended September 28, 2012, when compared to the same period in the prior fiscal year. This increase was attributable to (i) an increase in payroll and payroll-related expenses of $1.5 million as a result of acquisitions; (ii) an increase in cost to deliver of $0.8 million related to the growth in net sales, and additional expenses from acquired companies; (iii) an increase in allocated corporate expenses of $0.6 million; and (iv) an increase in depreciation and amortization expense of $0.4 million due to the addition of property and equipment and intangible assets related to acquisitions, and other less significant charges.

General and administrative expenses increased $7.3 million during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. This increase was attributable to (i) an increase in payroll and payroll-related expenses of $2.4 million as a result of acquisitions; (ii) an increase in cost to deliver of $1.3 million related to the growth in net sales, and additional expenses from acquired companies; (iii) an increase in allocated corporate expenses of $1.1 million; and (iv) an increase in depreciation and amortization expense of $0.6 million due to the addition of property and equipment and intangible assets related to acquisitions, and other less significant charges.


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Dispensing

General and administrative expenses increased $3.9 million during the three months ended September 28, 2012, when compared to the same period in the prior fiscal year. The increase was attributable to (i) an increase in payroll and payroll-related expenses of $1.0 million as a result of acquisitions; (ii) an increase in depreciation and amortization expense of $0.6 million due to the addition of property and equipment and intangible assets related to acquisitions; and (iii) an increase in cost to deliver of $0.5 million related to the growth in net sales, and additional expenses from acquired companies, and other less significant charges.

General and administrative expenses increased $6.0 million during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. This increase was attributable to (i) an increase in payroll and payroll-related expenses of $1.9 million as a result of acquisitions; (ii) an increase in depreciation and amortization expense of $1.0 million due to the addition of property and equipment and intangible assets related to acquisitions; and (iii) an increase in cost to deliver of $0.9 million related to the growth in net sales, and additional expenses from acquired companies.

Home Care & Hospice

General and administrative expenses increased $1.0 million during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. This increase was partly attributable to higher costs to deliver related to acquisitions and cost of facilities shared with the skilled nursing facilities business.

Shared Services

General and administrative expenses decreased $1.2 million during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. This decrease was attributable to a decrease in incentive and stock-based compensation expense of $2.6 million related to a change in estimated payouts of performance incentives and the modification of the Performance Shares for . . .

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