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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended December 31, 2010

or

 

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

For the transition period from              to             

Commission File Number 0-23832

 

 

PSS WORLD MEDICAL, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Florida   59-2280364

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification Number)

4345 Southpoint Blvd.

Jacksonville, Florida

  32216
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code (904) 332-3000

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.    x  Yes    ¨  No

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

The number of shares of common stock, par value $0.01 per share, of the registrant outstanding as of February 3, 2011 was 55,342,668 shares.

 

 

 


Table of Contents

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

DECEMBER 31, 2010

TABLE OF CONTENTS

 

Item

        Page  
   Information Regarding Forward-Looking Statements      1   
   Part I—Financial Information   

1.

   Financial Statements:   
  

Unaudited Condensed Consolidated Balance Sheets as of December 31, 2010 and April 2, 2010

     2   
  

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2010 and January 1, 2010

     3   
  

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2010 and January 1, 2010

     4   
  

Unaudited Notes to Condensed Consolidated Financial Statements

     5   

2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   

3.

   Quantitative and Qualitative Disclosures About Market Risk      26   

4.

   Controls and Procedures      26   
   Part II—Other Information   

1A.

   Risk Factors      26   

2.

   Unregistered Sales of Equity Securities and Use of Proceeds      27   

6.

   Exhibits      28   
   Signature      29   


Table of Contents

CAUTIONARY STATEMENTS

Forward-Looking Statements

Management may from time-to-time make written or oral statements with respect to the Company’s annual or long-term goals, including statements contained in this Quarterly Report on Form 10-Q, the Annual Report on Form 10-K for the fiscal year ended April 2, 2010, Reports on Form 8-K, and reports to shareholders that are “forward-looking statements” within the meaning, and subject to the protections of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical earnings and those currently anticipated or projected. Management cautions readers not to place undue reliance on any of the Company’s forward-looking statements, which speak only as of the date made.

Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “assumes,” “should,” “indicates,” “projects,” “targets” and similar expressions identify forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q that involve risks and uncertainties include, without limitation:

 

   

Management’s expectation that the Company’s business strategies will have a positive impact on future periods, helping to offset the impact of the economic slowdown on net sales;

 

   

Management’s estimation and expectation of future payouts of long-term incentive compensation;

 

   

Management’s expectation that cash flows from operations, in conjunction with borrowings under the revolving line of credit, capital markets, and/or other financing arrangements will fund future working capital needs, capital expenditures, and the overall growth in the business; and

 

   

Management’s belief that the outcome of legal proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, management has identified important factors that could affect the Company’s financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements about the Company’s goals or expectations. The Company’s future results could be adversely affected by a variety of factors, including those discussed in Item 1A-Risk Factors in the Company’s 2010 Form 10-K and this Form 10-Q. In addition, all forward-looking statements that are made by or attributable to the Company are qualified in their entirety by and should be read in conjunction with this cautionary notice and the risks described or referred to in Item 1A-Risk Factors of the Company’s 2010 Form 10-K and this Form 10-Q. The Company has no obligation to and does not undertake to update, revise, or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements are made.


Table of Contents

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2010 AND APRIL 2, 2010

(Dollars in Thousands)

 

     December 31,
2010
     April 2,
2010
 
ASSETS      

Current Assets:

     

Cash and cash equivalents

   $ 36,912      $ 52,751   

Accounts receivable, net of allowance for doubtful accounts of $6,320 and $6,310 as of December 31, 2010 and April 2, 2010, respectively

     239,082        227,888   

Inventories

     240,211        218,911   

Prepaid expenses

     5,508        5,294   

Other current assets

     44,974        36,820   
                 

Total current assets

     566,687        541,664   

Property and equipment, net of accumulated depreciation of $135,633 and $117,580 as of December 31, 2010 and April 2, 2010, respectively

     101,958        105,220   

Other Assets:

     

Goodwill

     131,364        121,772   

Intangibles, net of accumulated amortization of $17,656 and $25,084 as of December 31, 2010 and April 2, 2010, respectively

     30,657        24,548   

Other assets

     91,881        78,862   
                 

Total assets (a)

   $ 922,547      $ 872,066   
                 
LIABILITIES AND EQUITY      

Current Liabilities:

     

Accounts payable

   $ 149,698      $ 123,970   

Accrued expenses

     40,075        50,253   

Revolving line of credit and current portion of long-term debt

     1,133        881   

Other current liabilities

     24,346        10,954   
                 

Total current liabilities

     215,252        186,058   

Long-term debt, excluding current portion

     193,645        187,941   

Other noncurrent liabilities

     92,940        90,053   
                 

Total liabilities (a)

     501,837        464,052   
                 

Commitments and contingencies (Note 11)

     

Equity:

     

PSS World Medical Inc. shareholders’ equity:

     

Preferred stock, $0.01 par value; 1,000,000 shares authorized, no shares issued and outstanding

     —           —     

Common stock, $0.01 par value; 150,000,000 shares authorized, 55,304,528 and 57,168,296 shares issued and outstanding as of December 31, 2010 and April 2, 2010, respectively

     544        562   

Additional paid in capital

     118,696        162,469   

Retained earnings

     297,842        244,983   
                 

Total PSS World Medical, Inc. shareholders’ equity

     417,082        408,014   

Noncontrolling interest

     3,628        —     
                 

Total equity

     420,710        408,014   
                 

Total liabilities and equity

   $ 922,547      $ 872,066  
                 

 

(a) See Footnote 4, Variable Interest Entity, for discussion of the assets and liabilities related to the Company’s consolidated variable interest entity.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


Table of Contents

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND JANUARY 1, 2010

(In Thousands, Except Per Share Data)

 

     For the Three Months Ended     For the Nine Months Ended  
     December 31,
2010
    January 1,
2010
    December 31,
2010
    January 1,
2010
 

Net sales

   $ 510,087     $ 502,764     $ 1,485,131     $ 1,558,294  

Cost of goods sold

     352,192       348,064       1,022,265       1,085,049  
                                

Gross profit

     157,895       154,700       462,866       473,245  

General and administrative expenses

     88,860       89,439       266,244       278,284  

Selling expenses

     34,329       33,249       101,237       102,665  
                                

Income from operations

     34,706       32,012       95,385       92,296  
                                

Other (expense) income:

        

Interest expense

     (4,243     (4,214     (12,606     (13,007

Interest and investment income

     33       117       145       346  

Other income, net

     852       742       1,808       5,189  
                                

Other expense

     (3,358     (3,355     (10,653     (7,472
                                

Income before provision for income taxes

     31,348       28,657       84,732       84,824  

Provision for income taxes

     11,757       10,736       31,665       31,913  
                                

Net income

     19,591       17,921       53,067       52,911  

Net income attributable to noncontrolling interest

     42       —          208       —     
                                

Net income attributable to PSS World Medical, Inc.

   $ 19,549     $ 17,921     $ 52,859     $ 52,911  
                                

Earnings per common share attributable to

        

PSS World Medical, Inc.:

        

Basic

   $ 0.36     $ 0.31     $ 0.96     $ 0.90  

Diluted

   $ 0.35     $ 0.30     $ 0.94     $ 0.89  

Weighted average common shares outstanding:

        

Basic

     54,357       58,522       55,145       58,491  

Diluted

     55,567       59,390       56,461       59,244  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


Table of Contents

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND JANUARY 1, 2010

(Dollars in Thousands)

 

     Nine Months Ended  
     December 31,
2010
    January 1,
2010
 

Cash Flows From Operating Activities:

    

Net income

   $ 53,067     $ 52,911  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     18,301       16,059  

Amortization of debt discount and issuance costs

     7,019       6,597  

Noncash compensation expense

     7,259       13,884  

Amortization of intangible assets

     4,528       3,676  

Provision for doubtful accounts

     1,748       3,393  

Provision for deferred compensation

     1,136       1,219  

Provision (benefit) for deferred income taxes

     778       (4,568

Loss on sales of property and equipment

     19       61  

Gain on sale of available for sale securities

     —          (3,635

Changes in operating assets and liabilities, net of effects from business combinations:

    

Accounts receivable, net

     (3,039     (5,093

Inventories

     (17,234     (21,532

Prepaid expenses and other current assets

     (5,319     (13,105

Other assets

     (6,339     (5,464

Accounts payable

     16,082       8,663  

Accrued expenses and other liabilities

     (3,585     14,607  
                

Net cash provided by operating activities

     74,421       67,673  
                

Cash Flows From Investing Activities:

    

Payments for business acquisitions, net of cash acquired

     (20,248     (13,914

Capital expenditures

     (13,065     (21,616

Payment for investment in variable interest entity, net of cash

     (3,277     —     

Proceeds from sale of available for sale securities

     —          10,681  

Other

     (621     40  
                

Net cash used in investing activities

     (37,211     (24,809
                

Cash Flows From Financing Activities:

    

Purchase and retirement of common stock

     (54,713     (19,404

Repayments on the revolving line of credit

     (17,150     —     

Proceeds from borrowings on the revolving line of credit

     17,150       5,350  

Excess tax benefits from share-based compensation arrangements

     2,099       1,302  

Proceeds from exercise of stock options

     1,137       2,609  

Payment of contingent consideration on business acquisition

     (862     —     

Payments under capital lease obligations

     (590     (696

Other

     (120     —     
                

Net cash used in financing activities

     (53,049     (10,839
                

Net (decrease) increase in cash and cash equivalents

     (15,839     32,025  

Cash and cash equivalents, beginning of period

     52,751       82,031  
                

Cash and cash equivalents, end of period

   $ 36,912     $ 114,056  
                

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010 AND JANUARY 1, 2010

(In Thousands, Except Share and Per Share Data, Unless Otherwise Noted)

 

1. BACKGROUND AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to the SEC rules and regulations. The unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations for the periods indicated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The accompanying unaudited condensed consolidated financial statements include the consolidated accounts of PSS World Medical, Inc. and its wholly-owned subsidiaries. The Company holds interest in variable interest entities (“VIE”) that are consolidated by the Company. See Footnote 4, Variable Interest Entity, for additional information. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company conducts business through two operating segments, the Physician Business and the Elder Care Business. These strategic segments serve a broad customer base. A third segment, Corporate Shared Services, includes corporate departments which support the operating activities and strategic initiatives of the operating segments, and engage in certain other operating and administrative activities.

The condensed consolidated balance sheet as of April 2, 2010 has been derived from the Company’s audited consolidated financial statements for the fiscal year ended April 2, 2010 except as noted in the Reclassification section below. The financial statements and related notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2010.

The Company reports its year-end and quarter-end financial position, results of operations, and cash flows as of the Friday closest to calendar month end, determined using the number of business days. Fiscal years 2011 and 2010 consist of 52 weeks or 253 selling days and 53 weeks or 258 selling days, respectively. The three and nine months ended December 31, 2010 consisted of 61 and 188 selling days, respectively, while the three and nine months ended January 1, 2010 consisted of 61 and 193 selling days, respectively. Fluctuations in the number of selling days during a period can have a significant impact on the Company’s results of operations and cash flows.

The results of operations for the interim periods covered by this report may not be indicative of operating results for the full fiscal year or any other interim periods.

Reclassification

Certain items previously reported in financial statement captions have been reclassified to conform to the current financial statement presentation.

Stock Repurchase Program

From time to time, the Company’s Board of Directors authorizes the purchase of its outstanding common shares. The Company is authorized to repurchase a determined amount of its total common stock. Repurchases can be made in the open market, privately negotiated transactions, and other transactions publicly disclosed through filings with the SEC.

 

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Table of Contents

The following table summarizes the common stock repurchases and Board of Directors authorizations during the period from April 2, 2010 to December 31, 2010.

 

(in thousands)    Shares  

Shares available for repurchase, April 2, 2010

     3,317  

Additional shares authorized for repurchase

     2,763  

Shares repurchased

     (2,727
        

Shares available for repurchase, December 31, 2010

     3,353  
        

During the nine months ended December 31, 2010, the Company repurchased approximately 2,727,000 shares of common stock at an average price of $20.07 per common share for $54,713, which reduced Additional paid in capital on the Unaudited Condensed Consolidated Balance Sheets by approximately $54,686.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

During fiscal year 2011, the Company adopted a new accounting standard that changes the consolidation model for VIEs. Variable interest entities are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk to finance the entity’s activities without additional subordinated financial support. VIEs are consolidated by the primary beneficiary, defined as the party which (i) has the power to direct those activities that most significantly impact the entity’s economic performance and (ii) has an obligation to absorb an entity’s losses or a right to receive benefits from an entity that could be potentially significant to the entity. The standard requires ongoing reassessments to determine whether an enterprise is the primary beneficiary of a VIE. The standard expands the disclosure requirements for enterprises with a variable interest in a VIE. See Footnote 4, Variable Interest Entity, for additional disclosures.

In October 2009, Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) for multiple deliverable revenue arrangements. The update requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The update eliminates the residual method of revenue allocation and requires revenues to be allocated using the relative selling price method. The Company will adopt this update prospectively for revenue arrangements entered into or materially modified beginning in the first quarter of fiscal year 2012. The Company has evaluated this standard and determined it will not have a material effect on the Company’s statements of financial condition or results of operations.

In July 2010, the FASB issued an ASU which amended accounting guidance for receivables to require further disaggregated disclosures that improve financial statement users’ understanding of (i) the nature of an entity’s credit risk associated with its financing receivables and (ii) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The Company has adopted this standard with no material effect as the Company determined financing receivables subject to disclosure are immaterial.

In December 2010, the FASB issued a new accounting standard that provided guidance on supplementary pro forma information for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. While not impacting the disclosure of pro forma information, the new standard changes the way such information is calculated. Specifically, consolidated revenue and earnings would be determined as if the business combination occurred as of the beginning of the comparable prior annual reporting period. This method is consistent with guidance set forth by the SEC. Additionally, the standard required qualitative disclosures around the nature and amount of material, nonrecurring pro forma adjustments directly attributable to business combinations. The Company has elected to early adopt this standard. See Footnote 3, Purchase Businesses Combinations, for further discussion.

 

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3. PURCHASE BUSINESS COMBINATIONS

The following acquisition was accounted for under the purchase method of accounting; accordingly, the operations of the acquired companies have been included in the Company’s results of operations subsequent to the date of acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values at the date of the acquisition as determined by management based on information currently available. The Company made other acquisitions during the current and prior year period that were not deemed material for disclosure individually and in aggregate.

On November 15, 2010, the Physician Business acquired the assets of Linear Medical Solutions, Inc (“Linear”) for $11,536, net of cash received of $359. Linear markets a proprietary system to primary care physicians for dispensing medications to patients on-site within their practices. Net sales and Net income attributable to Linear since the acquisition on November 15, 2010 were $9,720 and $488, respectively.

Payments totaling $11,536, net of cash received, were made during the nine months ended December 31, 2010, of which $1,000 was held in escrow to secure any adjustments or claims. Additional consideration ranging from $0 to $4,000 may be paid based on the achievement of future earnings targets over a two year period. The fair value of the contingent consideration was determined using projected achievement of the earnings targets. See Footnote 12, Fair Value Measurements, for further discussion. Goodwill, representing intangible assets of Linear that do not qualify for separate recognition, is fully tax deductible. The Company acquired inventory of $3,182 and trade receivables with a fair value and gross contractual value of $8,939.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the Linear acquisition, as adjusted:

 

(in thousands)       

Current assets

   $ 12,793  

Goodwill

     1,447  

Customer relationship intangible (5-year life)

     2,100  

Non-compete agreement (5-year life)

     500  

Non-solicitation agreements

     1,098  

Tradename

     840  

Non-current assets

     1,792  

Accounts payable

     (5,175

Contingent consideration

     (3,500
        

Net assets acquired

   $ 11,895  
        

The following table presents unaudited pro forma financial information as if the closing of the acquisition of Linear had occurred on the first day of fiscal year 2010, or March 28, 2009, after giving effect to certain purchase accounting adjustments.

 

     For the Three Months Ended      For the Nine Months Ended  
     December 31,
2010
     January 1,
2010
     December 31,
2010
     January 1,
2010
 

Total net sales

   $ 520,223      $ 521,492      $ 1,538,471      $ 1,609,640  

Net income attributable to PSS World Medical, Inc.

     19,843        18,910        55,570        54,834  

Net income per common share, Basic

   $ 0.37      $ 0.32      $ 1.01      $ 0.94  

Net income per common share, Diluted

   $ 0.36      $ 0.32      $ 0.98      $ 0.93  

Pro forma information is not necessarily indicative of the results of operations that actually would have resulted had the Linear acquisition occurred on the date indicated above or that may result in the future and does not reflect potential synergies, integration costs or other such costs and savings.

 

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4. VARIABLE INTEREST ENTITY

On June 25, 2010, the Company entered into an agreement with Pathway Health Services, Inc. (“Pathway”), a consulting services company within the Elder Care market, under which the Company purchased a $3.3 million convertible note issued by Pathway. The note may be converted, at the Company’s discretion, into 73% of Pathway’s common stock. The Company also acquired a call option and issued a put option for Pathway’s common stock, both of which may be exercised if certain sales thresholds are met and time restrictions lapse. Under the agreement, the Company obtained a majority of seats and control of Pathway’s Board of Directors. The convertible note is considered a variable interest and the Company was determined to be the primary beneficiary of Pathway.

The Company has consolidated Pathway under the purchase method of accounting and recorded noncontrolling interest under current accounting guidance for consolidations. The consolidated assets and liabilities, operating results and cash flows of Pathway are not considered significant to the Company’s financial position, operating results, or cash flows. Pathway’s assets cannot be used to settle the Company’s obligations and Pathway’s creditors have no recourse to the general credit of the Company.

The Company also holds an additional variable interest in an entity not considered material for disclosure.

 

5. EQUITY INVESTMENT

During April 2009, the Company sold shares of athenahealth, Inc. (“athena”) for $10,681, which it had held for investment, resulting in a gain of $3,635, or $2,254 net of tax, recorded in Other income, net on the Unaudited Condensed Consolidated Statements of Operations for the nine months ended January 1, 2010. The Company markets athena products to the primary care physician market.

 

6. EARNINGS PER SHARE

Basic earnings per common share attributable to PSS World Medical, Inc. is computed by dividing Net income attributable to PSS World Medical, Inc. by the weighted average number of the Company’s common shares outstanding during the period. Diluted earnings per common share attributable to PSS World Medical, Inc. is computed by dividing Net income attributable to PSS World Medical, Inc. by the weighted average number of the Company’s common shares and common equivalent shares outstanding during the period adjusted for the potential dilutive effect of stock options and restricted stock using the treasury stock method and the potential impact of outstanding convertible senior notes. Common equivalent shares are excluded from the computation in periods in which they have an antidilutive effect.

The following table sets forth computational data for the denominator in the basic and diluted earnings per common share calculation for the three and nine months ended December 31, 2010 and January 1, 2010:

 

      For the Three Months Ended      For the Nine Months Ended  
(in thousands)    December 31,
2010
     January 1,
2010
     December 31,
2010
     January 1,
2010
 

Denominator-weighted average shares outstanding used in computing basic earnings per common share

     54,357        58,522        55,145        58,491  

Assumed exercise of stock options

     261        329        222        332  

Assumed vesting of restricted stock

     533        539        685        421  

Assumed conversion of the 2008 Notes

     416        —           409        —     
                                   

Denominator-weighted average shares outstanding used in computing diluted earnings per common share

     55,567        59,390        56,461        59,244  
                                   

The Company included shares underlying its $230.0 million principal amount of 3.125% senior convertible notes (“2008 Notes”) in its diluted weighted average shares outstanding during the three and nine months ended December 31, 2010. Under the treasury stock method of accounting for share dilution, shares that would be issuable upon conversion were included, based upon the amount by which the average stock price for the period exceeded the conversion price of $21.22. The average stock price did not exceed the conversion price during the three and nine months ended January 1, 2010. If the price of the Company’s common stock exceeds $28.29 per share, additional potential shares that may be issued related to the warrants, using the treasury stock method, will also be included. Prior to conversion, the purchased options are not considered for purposes of the dilutive earnings per share calculation as their effect is considered to be anti-dilutive.

 

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7. COMPREHENSIVE INCOME

The following table includes the components of comprehensive income for the three and nine months ended December 31, 2010 and January 1, 2010:

 

     For the Three Months Ended      For the Nine Months Ended  
(in thousands)    December 31,
2010
     January 1,
2010
     December 31,
2010
     January 1,
2010
 

Net income

   $ 19,591      $ 17,921      $ 53,067      $ 52,911  

Unrealized holding gains on available-for-sale investments, net of income taxes

     —           —           —           56  

Unrealized holding gains on interest rate swap, net of income taxes

     —           188        —           425  

Reclassification of gains on available for sale investments included in net income previously recognized in other comprehensive income

     —           —           —           (2,260
                                   

Comprehensive income

     19,591        18,109        53,067        51,132  

Comprehensive income attributable to noncontrolling interest

     42        —           208        —     
                                   

Comprehensive income attributable to PSS World Medical, Inc.

   $ 19,549      $ 18,109      $ 52,859      $ 51,132  
                                   

The unrealized holding gains and losses on available-for-sale investments relate to the Company’s previous investment in athena, as discussed in Footnote 5, Equity Investment.

The unrealized holding gains and losses on the interest rate swap relate to the interest rate swap on the Company’s revolving line of credit, which matured during fiscal year 2010.

 

8. INCENTIVE AND STOCK-BASED COMPENSATION

Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee directors. The Company measures stock-based compensation at the grant date, based on the estimated fair value of the award, and recognizes the cost as compensation expense on a straight-line basis, net of estimated forfeitures, over the awards estimated vesting period. The Company’s stock-based compensation expense is recorded in General and administrative expenses on the Unaudited Condensed Consolidated Statements of Operations.

Restricted Stock Awards

The Company issues (i) restricted stock which vests based on the recipient’s continued service over time (“Time-Based Awards”) and (ii) restricted stock or restricted stock units which vest based on the Company achieving specified performance measurements (“Performance-Based Awards”).

Performance-Based Awards

On June 10, 2010, the Company’s Compensation Committee of the Board of Directors (the “Committee”), approved awards of performance-based restricted stock units (“Performance Shares”) and performance-accelerated restricted stock units (“PARS Units”) to certain of the Company’s executive officers. During the three months ended December 31, 2010 the Company granted performance-based restricted stock (“PARS”) to the Company’s non-executive officers. These awards were granted under the Company’s 2006 Incentive Plan.

 

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Fiscal Year 2011 Issuances

The Performance Shares will vest after three years and convert to shares of common stock based on the Company’s achievement of certain earnings per share growth targets, the calculation of which will not be impacted by any change in generally accepted accounting principles promulgated by standard setting bodies. These awards, which are denominated in terms of a target number of shares, will be forfeited if performance falls below a designated threshold level and may vest for up to 250% of the target number of shares for exceptional performance. The ultimate number of shares delivered to recipients and the related compensation cost recognized as expense will be based on actual performance.

The PARS and PARS Units will vest on the five-year anniversary of the grant date and convert to shares of common stock, subject to accelerated vesting after three years if the Company achieves an earnings per share growth target, the calculation of which will not be impacted by any change in generally accepted accounting principles promulgated by standard setting bodies. Upon vesting, the grantees may defer acceptance of the units to a later date, whereas the units will remain outstanding.

Change in Estimate

During the nine months ended December 31, 2010, the Company changed the number of estimated shares to be delivered on previously issued Performance Shares. The impact of the change in estimate was not considered significant to the Company’s operating results or financial position.

During the nine months ended January 1, 2010, the Company changed (i) the number of estimated shares to be delivered on previously issued Performance Shares due to an increase in estimated achievement of performance conditions based on actual and expected future financial performance above previous estimates and (ii) the vesting period of previously issued PARS awards, which impacted the related expected forfeitures over the remaining vesting period.

As a result of the change in accounting estimates during the three and nine months ended January 1, 2010, stock based compensation expense increased $1,319 ($818 net of tax) or $0.01 per diluted share for the three months ended January 1, 2010 and increased $7,826 ($4,852 net of tax) or $0.08 per diluted share for the nine months ended January 1, 2010.

These estimates may be adjusted in future periods based on actual experience and changes in management assumptions.

Total stock-based compensation expense during the three months ended December 31, 2010 and January 1, 2010 was approximately $1,997 and $3,204, respectively, with related income tax benefits of $760 and $1,217, respectively. Total stock-based compensation expense during the nine months ended December 31, 2010 and January 1, 2010 was approximately $7,259 and $13,158, respectively, with related income tax benefits of $2,761and $4,995, respectively.

As of December 31, 2010, there was $19,261 of unrecognized compensation cost related to non-vested restricted stock and restricted stock units granted under the stock incentive plans. The compensation cost related to these non-vested awards is expected to be recognized over a weighted average period of 1.9 years.

 

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Outstanding stock-based awards granted under equity incentive plans as of December 31, 2010 and April 2, 2010 are as follows:

 

     Performance-Based Awards     Time-Based Awards      Stock Options  
     Performance
Shares
    PARS      PARS                     
(in thousands)    Units     Units      Shares     Shares     Deferred
Units
     Shares  

Balance, April 2, 2010

     515       88        652       321       11        558  

Granted

     94       103        460       69       2        —     

Addition from change in estimate

     43       —           —          —          —           —     

Vested / Exercised

     (164     —           (541     (90     —           (188

Forfeited

     —          —           (24     (13     —           —     
                                                  

Balance, December 31, 2010

     488       191        547       287       13        370  
                                                  

Corporate Long-Term Executive Cash-Based Incentive Plans

During fiscal year 2009, the Compensation Committee of the Board of Directors approved the 2008 Shareholder Value Plan (“2008 SVP”), a cash based performance award program under the 2006 Incentive Plan. The performance period under the 2008 SVP is the 36-month period from March 31, 2008 to April 1, 2011. The Company had approximately $9,642 and $6,820 of accrued compensation cost related to the 2008 SVP as of December 31, 2010 and April 2, 2010, respectively. The accrual was recorded in Other current liabilities and Other noncurrent liabilities as of December 31, 2010 and April 2, 2010, respectively, due to the timing of the projected payout in June 2011.

 

9. ACCRUED EXPENSES

Accrued expenses as of December 31, 2010 and April 2, 2010 were as follows:

 

     As of  
     December 31,
2010
     April 2,
2010
 

Accrued payroll

   $ 16,725      $ 14,848  

Accrued annual incentive compensation

     6,214        17,912  

Other

     17,136        17,493  
                 

Accrued expenses

   $ 40,075      $ 50,253  
                 

 

10. SEGMENT INFORMATION

The Company’s reportable segments are strategic businesses that offer products and services to different segments of the healthcare industry, and are the basis on which management regularly evaluates the Company. These segments are managed separately based on the unique product and service offering required by the markets they serve. The Company evaluates the operating performance of its segments based mainly on net sales and income from operations. Corporate Shared Services allocates a portion of its costs and interest expense to the operating segments. The allocation of shared operating costs is generally proportionate to the revenues of each operating segment. Interest expense is allocated based on an internal carrying value of historical capital used to acquire or develop the operating segments’ operations.

 

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The following tables present financial information about the Company’s business segments:

 

     For the Three Months Ended     For the Nine Months Ended  
     December 31,
2010
    January 1,
2010
    December 31,
2010
    January 1,
2010
 

Net Sales:

        

Physician Business

   $ 357,298     $ 352,961     $ 1,028,104     $ 1,093,784  

Elder Care Business

     152,263       149,400       455,639       462,751  

Corporate Shared Services

     526       403       1,388       1,759  
                                

Total net sales

   $ 510,087     $ 502,764     $ 1,485,131     $ 1,558,294  
                                

Income (Loss) from Operations:

        

Physician Business

   $ 34,908     $ 35,500     $ 99,661     $ 106,764  

Elder Care Business

     10,311       9,840       26,999       28,595  

Corporate Shared Services

     (10,513     (13,328     (31,275     (43,063
                                

Total income from operations

   $ 34,706     $ 32,012     $ 95,385     $ 92,296  
                                

Income (Loss) Before Provision for Income Taxes:

        

Physician Business

   $ 34,422     $ 34,910     $ 97,804     $ 104,760  

Elder Care Business

     8,302       7,835       21,027       22,641  

Corporate Shared Services

     (11,376     (14,088     (34,099     (42,577
                                

Total income before provision for income taxes

   $ 31,348     $ 28,657     $ 84,732     $ 84,824  
                                

 

     As of  
     December 31,
2010
     April 2,
2010
 

Total Assets:

     

Physician Business

   $ 492,346      $ 440,916  

Elder Care Business

     305,383        298,063  

Corporate Shared Services

     124,818        133,087  
                 

Total assets

   $ 922,547      $ 872,066  
                 

 

11. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is party to various legal and administrative proceedings and claims arising in the normal course of business. While any litigation contains an element of uncertainty, the Company believes the outcome of proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.

Commitments and Other Contingencies

The Company has employment agreements with certain executive officers which provide that in the event of their termination or resignation, under certain conditions, the Company may be required to pay severance to the executive officers in amounts ranging from one-fourth to one times their annual base salary and target annual bonus. In the event that a termination or resignation follows or is in connection with a change in control, the Company may be required to pay severance to the executive officers in amounts ranging from three-fourths to two times their annual base salary and target annual bonus. The Company may also be required to continue welfare benefit plan coverage for the executive officers following a termination or resignation for a period ranging from three months to two years.

 

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If a supplier agreement for Select products between a vendor and the Physician Business or the Elder Care Business were to be terminated, the Company may be required to purchase from the vendor all remaining finished and unfinished products and product-materials held by the vendor. As of December 31, 2010, the Company had no material obligation to purchase remaining products or materials due to a termination of a supply agreement with a vendor who supplies Select products to the Company.

 

12. FAIR VALUE MEASUREMENTS

The Company records and discloses certain financial and non-financial assets and liabilities at their fair value. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

  Level 1: Inputs using unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.

 

  Level 2: Inputs or other than quoted prices in markets that are observable for the asset or liability, either directly or indirectly.

 

  Level 3: Inputs that are both significant to the fair value measurement and unobservable.

The following table presents the Company’s assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2010, by level within the fair value hierarchy:

 

(in thousands)                            
December 31, 2010    Level 1      Level 2      Level 3      Total  

Assets:

           

Conversion option on VIE convertible note(a)

   $ —         $ —         $ 878      $ 878  

Liabilities:

           

Deferred compensation(b)

   $ 79,631      $ —         $ —         $ 79,631  

Contingent consideration(c)

     —           —           4,513        4,513  

April 2, 2010

   Level 1      Level 2      Level 3      Total  

Liabilities:

           

Deferred compensation(b)

   $ 69,263      $ —         $ —         $ 69,263  

Contingent consideration(c)

     —           —           1,715        1,715  

 

(a) Represents the Company’s conversion option to acquire 73% of the outstanding common stock in the Company’s consolidated VIE, which is located in Other assets on the Company’s Unaudited Condensed Consolidated Balance Sheets. See Footnote 4, Variable Interest Entity, for further information. The conversion option was calculated using an internal model that utilizes as its basis, unobservable inputs, including estimated interest rates based upon the estimated market interest rate which the VIE would have paid on a high-yield note in the open market. The remaining investment in Pathway has been eliminated in consolidation.
(b) Represents the Company’s obligation to pay benefits under its non-qualified deferred compensation plans, which is included in Other noncurrent liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets. The obligation to pay benefits is based on participants’ allocation percentages to plan investments. The investments are measured using quoted market prices.
(c) Represents the estimated fair value of the additional variable cash consideration payable in connection with the Company’s acquisitions that are contingent upon the achievement of certain performance milestones. The Company estimated the fair value using expected future cash flows over the period in which the obligations are expected to be settled, and applied a discount rate that appropriately captures a market participant’s view of the risk associated with the obligation. The liabilities are included in Other current liabilities and Other noncurrent liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets, depending on the period of expected payout.

 

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The following table summarizes the change in the fair value for Level 3 instruments for the nine months ended December 31, 2010:

 

     Level 3
Instruments
 

Assets:

  

Balance, April 2, 2010

   $ —     

Additions

     947  

Fair value adjustment included in earnings

     (69
        

Balance, December 31, 2010

   $ 878  
        

Liabilities:

  

Balance, April 2, 2010

   $ 1,715  

Additions

     3,650  

Settlement of obligation

     (875

Fair value adjustment included in earnings

     23  
        

Balance, December 31, 2010

   $ 4,513  
        

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, short-term trade receivables, and accounts payable, approximate their fair values due to the short-term nature of these assets and liabilities. The gross carrying value of the Company’s 2008 Notes at December 31, 2010 and April 2, 2010 was $230,000 and the fair value, which is estimated using a third party valuation model, was approximately $266,156 and $285,800, respectively.

 

13. INCOME TAXES

As of December 31, 2010 and April 2, 2010, the Company recorded an income tax receivable of $2,922 in Other current assets on the Unaudited Condensed Consolidated Balance Sheets, and an income tax payable of $237 in Other current liabilities on the Unaudited Condensed Consolidated Balance Sheets, respectively, related to the timing of payments on the Company’s income tax filings.

The Company’s deferred tax asset and liability balances as of December 31, 2010 and April 2, 2010 are presented in the following table:

 

      As of  
(in thousands)    December 31,
2010
    April 2,
2010
 

Current deferred tax assets(a)

   $ 17,789     $ 15,629  

Noncurrent deferred tax liabilities(b)

     (7,616     (4,590
                

Net deferred tax asset

   $ 10,173     $ 11,039  
                

 

(a) Current deferred tax assets are recorded in Other current assets on the Unaudited Condensed Consolidated Balance Sheets.
(b) Noncurrent deferred tax liabilities are recorded in Other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets.

The Company files a United States federal income tax return and income tax returns in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to income tax examinations for years prior to the fiscal year ended March 30, 2007.

During the three months ended December 31, 2010, the IRS began an examination of the Company’s federal income tax return for the fiscal year ended March 27, 2009 and the examination is ongoing. While the Company is not presently aware of any proposed adjustments, the Company cannot determine at this time the impact this examination will have on the Company’s financial condition or results of operations.

 

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Table of Contents

Uncertain Tax Positions

There were no significant changes to the Company’s uncertain tax positions during the nine months ended December 31, 2010. For a detail of the Company’s uncertain tax positions, please refer to Footnote 12, Income Taxes in the Company’s Annual Report Form 10-K for the fiscal year ended April 2, 2010.

 

14. SUPPLEMENTAL CASH FLOW INFORMATION

The Company’s supplemental disclosures for the nine months ended December 31, 2010 and January 1, 2010 are as follows:

 

     Nine Months Ended  
Cash paid for:    December 31, 2010      January 1, 2010  

Interest

   $ 3,992      $ 5,525  

Income taxes, net

   $ 31,781      $ 30,026  

During the nine months ended December 31, 2010 and January 1, 2010, the Company did not have any material non-cash transactions.

 

15. SUBSEQUENT EVENTS

Subsequent to December 31, 2010, the Company purchased 100% of the outstanding stock of Dispensing Solutions, Inc. (“DSI”). DSI, a formerly privately held company based in California, markets a proprietary system to primary care physicians for dispensing medications to patients on-site within their practices. The acquisition price for DSI was approximately $36,000, with additional consideration of up to $6,000 if the company achieves defined earnings targets over a one year period.

The following table presents unaudited pro forma financial information, excluding the pro forma results of other acquisitions made during the current period, as if the closing of the acquisition of DSI had occurred on the first day of fiscal year 2010, or March 28, 2009.

 

     For the Three Months Ended      For the Nine Months Ended  
     December 31,
2010
     January 1,
2010
     December 31,
2010
     January 1,
2010
 

Total net sales

   $ 517,650      $ 508,461      $ 1,507,983      $ 1,573,942  

Pro forma information is not necessarily indicative of the results of operations that actually would have resulted had the DSI acquisition occurred on the date indicated above or that may result in the future and does not reflect potential synergies.

Due to the proximity of DSI’s closing to the Company’s filing date, the initial accounting for the acquisition has not been finalized. As a result, the Company is unable to provide additional disclosures required for business combinations. The complete disclosures required for business combinations will be made in the Company’s Annual Report on Form 10-K for fiscal year ended April 1, 2011.

 

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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 is a national distributor of medical products and equipment, pharmaceutical products, healthcare information technology, medication dispensing and professional services to healthcare providers including physician offices, long-term care and assisted living facilities, home health care and hospice providers through 41 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. A third reporting segment, Corporate Shared Services, includes costs of corporate departments that provide services to the operating segments. For information on comparative segment revenue, segment profit and related financial information, refer to Footnote 10, Segment Information, of the condensed consolidated financial statements.

PSSI is a market leader in the two 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 other specialty brand products (collectively “Select”); innovative information systems and technology that serve its core markets; and a culture of performance.

The Company’s stated purpose is to strengthen the clinical success and financial health of caregivers by solving their biggest problems. The Company uses its purpose statement to guide business decisions and strategies.

EXECUTIVE OVERVIEW

The demand for the Company’s products is, among other factors, dependent upon the state of the economy in the markets in which it operates.

During the third quarter of fiscal year 2011, consolidated net sales increased 1.5% compared to the same period in the prior year. The increase in net sales was primarily attributable to the impact of the Company’s acquisitions made during the current fiscal year.

Net sales in the Physician Business increased 1.2%, compared to the third quarter of the prior year. The increase in net sales was attributable to revenue generated from acquisitions made during the three and nine months ended December 31, 2010 as well as increased Select and pharmaceutical sales. This was partially offset by the impact from decreased patient visits to physician offices, driven by general economic conditions and relatively high unemployment in the U.S. The Company also recognized $20.3 million of H1N1 influenza related product sales during the third quarter of fiscal year 2010.

Net sales in the Elder Care Business increased 1.9% compared to the third quarter of the prior year. Net sales increased primarily due to the impact of the Company’s noncontrolling interest in Pathway. See Footnote 4, Variable Interest Entity, for further discussion.

General and administrative expenses decreased $0.5 million and $12.1 million during the three and nine months ended December 31, 2010, respectively, when compared to the same period in the prior year. The decrease in general and administrative expenses was mainly attributable to reductions in incentive compensation costs and other cost containment measures.

Income from operations increased 8.4% or $2.7 million to $34.7 million during the three months ended December 31, 2010 and increased 3.3% or $3.1 million to $95.4 million during the nine months ended December 31, 2010 when compared to the same period in the prior year. The increase in the third quarter was due to the increase in net sales as discussed above, success in improving gross margins, and reductions in general and administrative expenses as discussed above.

 

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Cash flow from operating activities during the three and nine months ended December 31, 2010 was approximately $35.9 million and $74.4 million, respectively. The Company repurchased common shares, in open market transactions, of 0.1 million and 2.7 million during the three and nine months ended December 31, 2010.

NET SALES

The following table summarizes net sales period over period.

 

     For the Three Months Ended     For the Nine Months Ended  
(dollars in millions)    December 31,
2010
     January 1,
2010
     Percent
Change
    December 31,
2010
     January 1,
2010
     Percent
Change
 

Physician Business

   $ 357.3      $ 353.0        1.2   $ 1,028.1      $ 1,093.8        (6.0 )% 

Elder Care Business

     152.3        149.4        1.9       455.6        462.8        (1.5

Corporate Shared Services

     0.5        0.4        30.6       1.4        1.7        (21.1
                                        

Total Company

   $ 510.1      $ 502.8        1.5   $ 1,485.1      $ 1,558.3        (4.7 )% 
                                        

The comparability of net sales year over year was impacted by the number of selling days in each period. The three and nine months ended December 31, 2010 consisted of 61 and 188 selling days, respectively, while the three and nine months ended January 1, 2010 consisted of 61 and 193 selling days, respectively.

 

     For the Three Months Ended     For the Nine Months Ended  
     December 31, 2010      January 1, 2010            December 31, 2010      January 1, 2010         
(dollars in millions)    Net Sales Per
Selling Day
     Net Sales Per
Selling Day
     Percent
Change
    Net Sales Per
Selling Day
     Net Sales Per
Selling Day
     Percent
Change
 

Physician Business

   $ 5.9      $ 5.8        1.2   $ 5.5      $ 5.7        (3.5 )% 

Elder Care Business

     2.5        2.4        1.9       2.4        2.4        1.1  
                                        

Total Company

   $ 8.4      $ 8.2        1.5   $ 7.9      $ 8.1        (2.2 )% 
                                        

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     For the Nine Months Ended  
(dollars in millions)    December 31,
2010
     January 1,
2010
     Percent
Change
    December 31,
2010
     January 1,
2010
     Percent
Change
 

Branded (a)

   $ 184.7      $ 200.4        (7.8 )%    $ 547.1      $ 613.3        (10.8 )% 

Select(b)

     52.3        48.6        7.5       154.0        148.5        3.7  

Pharmaceuticals

     78.9        72.4        9.0       229.9        238.5        (3.6

Equipment (c)

     30.6        31.4        (2.6     83.1        90.3        (8.0

Other

     10.8        0.2        —          14.0        3.2        —     
                                        

Total

   $ 357.3      $ 353.0        1.2    $ 1,028.1      $ 1,093.8        (6.0 )% 
                                        

Selling days

     61        61          188        193     

 

(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, lab diagnostics, and equipment.
(c) Equipment from branded manufacturers.

Net sales during the three and nine months ended December 31, 2010 were impacted by increased sales related to acquisitions made during the nine month ended December 31, 2010, offset by decreased physician office visits, five fewer selling days during the current nine month ended period, and decreased product sales of approximately $20.3 and $52.5 million related to the fiscal year 2010 H1N1 influenza pandemic, respectively.

 

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Select product sales increased during the three and nine months ended December 31, 2010 due to continued focus on and expansion of the Select product line, partially offset by five fewer sales days during the nine months ended December 31, 2010.

Pharmaceutical sales during the three months ended December 31, 2010 increased as a result of additional customers, partially offset by decreased physician office visits. Pharmaceutical sales decreased during the nine months ended December 31, 2010 due to decreased physician office visits and five fewer sales days during the current nine month ended period as discussed above.

Equipment sales decreased during the nine months ended December 31, 2010 due to a tightened credit market which negatively impacted customers’ ability to obtain equipment financing.

Net sales growth in the other sales segment during the three and nine months ended December 31, 2010 increased mainly from revenues generated from the Company’s acquisition of Linear.

Elder Care Business

Management evaluates the Elder Care business by customer category. The following table summarizes the change in net sales by customer category period over period.

 

     For the Three Months Ended     For the Nine Months Ended  
(dollars in millions)    December 31,
2010
     January 1,
2010
     Percent
Change
    December 31,
2010
     January 1,
2010
     Percent
Change
 

Nursing home and assisted living facilities

   $ 87.7      $ 89.8        (2.3 )%    $ 263.3      $ 281.9        (6.6 )% 

Hospice and home health care agencies

     47.9        45.3        5.7       144.2        136.6        5.6  

Billing services

     3.0        4.3        (31.0     9.1        10.5        (12.3

Other

     13.7        10.0        37.0       39.0        33.8        15.5  
                                        

Total

   $ 152.3      $ 149.4        1.9    $ 455.6      $ 462.8        (1.5 )% 
                                        

Selling days

     61        61          188        193     

Net sales during the three and nine months ended December 31, 2010 compared to the same period in the prior year increased $2.9 million and decreased $7.2 million, respectively. Net sales in the nursing home and assisted living customer segment was negatively impacted by competitive pressure within the regional nursing home group and five fewer billing days during the current nine month period.

Net sales growth in the hospice and home health care customer segment reflected the continued successful execution of strategies to diversify the Company’s customer base through expansion in the home health care market and other non-facility based care.

Net sales growth in the other sales segment for the three and nine months ended December 31, 2010 reflects net sales attributed to the Company’s noncontrolling interest in Pathway of $2.6 million and $5.6 million, respectively. Pathway is a consulting service provider within the Elder Care market, which was consolidated by the Company during the current fiscal year. See Footnote 4, Variable Interest Entity, for additional information.

Net sales in the billing services segment decreased during the three and nine months ended December 31, 2010 as a result of Federal and state regulation changes which resulted in a one-time increase in the segment’s billings during the three months ended January 1, 2010.

Across its Elder Care customer segments, Select product sales increased 8.3% and decreased 1.0% during the three and nine months ended December 31, 2010, when compared to the same period in the prior year. The increase in Select sales during the three months ended December 31, 2010 was the result of Company focus on customer conversion to Select products. The impact from the current quarter partially offset the overall decrease in Select sales for the nine months ended December 31, 2010, which was a result of increased competitive pricing pressure, decreased sales in the nursing home and assisted living customer segments, and five fewer billing days during the current nine month period.

 

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GROSS PROFIT

In the Physician Business, gross profit dollars increased $1.1 million during the three months ended December 31, 2010, when compared to the same period in the prior year, resulting from an increase in sales volume. Gross profit as a percentage of net sales (“gross margin”) remained relatively consistent when compared to the same period in the prior year. Gross profit dollars decreased $10.5 million during the nine months ended December 31, 2010, when compared to the same period in the prior year, resulting from a decrease in sales volume. Gross margin increased 97 basis points resulting from gross margin enhancement initiatives including a shift from branded to Select product sales, which have higher gross margins.

In the Elder Care Business, gross profit dollars increased $2.1 million and $0.3 million during the three and nine months ended December 31, 2010, when compared to the same period in the prior year, resulting from increased sales and gross margin during the current three month ended period and increased gross margin in the current nine month ended period. Gross margin increased 83 basis points and 52 basis points, during the three and nine month period, respectively, resulting from gross margin enhancement activities, favorable freight charges, and sales related to the Company’s consulting services, which have higher gross margins.

GENERAL AND ADMINISTRATIVE EXPENSES

 

     For the Three Months Ended     For the Nine Months Ended  
     December 31, 2010     January 1, 2010           December 31, 2010     January 1, 2010        
(dollars in millions)    Amount      % of
Net
Sales
    Amount      % of
Net
Sales
    Increase
(Decrease)
    Amount      % of
Net
Sales
    Amount      % of
Net
Sales
    (Decrease)
Increase
 

Physician Business(a)

   $ 48.6        13.6   $ 47.7        13.5   $ 0.9     $ 145.2        14.1   $ 147.0        13.4   $ (1.8

Elder Care Business(a)

     29.7        19.5       28.4        19.0       1.3       89.8        19.7       88.0        19.0       1.8  

Corporate Shared Services(b)

     10.6        2.1       13.3        2.7       (2.7     31.2        2.1       43.3        2.8       (12.1
                                                            

Total Company(b)

   $ 88.9        17.4   $ 89.4        17.8   $ (0.5   $ 266.2        17.9   $ 278.3        17.9   $ (12.1
                                                            

 

(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.

General and administrative expenses remained relatively consistent in the Physician and Elder Care Businesses when compared to the same period in the prior year.

Corporate Shared Services

General and administrative expenses for the three months ended December 31, 2010 decreased $2.7 million when compared to the same period in the prior year. This decrease was largely attributable to (i) a reduction in annual and long-term bonus expense accrual of $1.8 million related to the Company’s estimated performance achievement and (ii) decreased stock-based compensation expense of $1.2 million, related to a change in estimated performance achievement during the prior year and the related compensation accrual recognized during that period. The overall decrease in expense was partially offset by increased business insurance of $1.2 million related to unfavorable claims experience for workmen’s compensation.

General and administrative expenses for the nine months ended December 31, 2010 decreased $12.1 million when compared to the same period in the prior year. This decrease was mainly attributable to (i) a reduction in stock-based compensation expense of $5.9 million, related to a change in estimated performance achievement during the prior year and the related compensation accrual recognized during that period and (ii) decreased annual and long-term bonus expense accrual of $6.0 million related to the Company’s estimated performance achievement. The overall decrease in expense was partially offset by (i) additional depreciation expense of $1.4 million due to increased investments in information technology infrastructure, (ii) increased payroll and payroll related costs of $1.8 million related to general merit and benefit increases and a reduction in capitalized salaries related to internally developed software projects, and (iii) increased business insurance of $1.2 million related to unfavorable claims adjustments for workmen’s compensation.

 

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SELLING EXPENSES

The following table summarizes selling expenses as a percentage of net sales period over period.

 

     For the Three Months Ended      For the Nine Months Ended  
     December 31, 2010     January 1, 2010            December 31, 2010     January 1, 2010        
(dollars in millions)    Amount      % of
Net
Sales
    Amount      % of
Net
Sales
    Increase      Amount      % of
Net
Sales
    Amount      % of
Net
Sales
    (Decrease)
Increase
 

Physician Business

   $ 29.0        8.1   $ 28.2        8.0   $ 0.8      $ 85.5        8.3   $ 87.1        8.0   $ (1.6

Elder Care Business

     5.3        3.5       5.0        3.3       0.3        15.7        3.5       15.6        3.4       0.1  
                                                             

Total Company

   $ 34.3        6.7   $ 33.2        6.6   $ 1.1      $ 101.2        6.8   $ 102.7        6.6   $ (1.5
                                                             

Selling expenses are principally driven by commission expenses, which are generally paid to sales representatives based on gross profit dollars and gross margin. The change in selling expenses during the nine months ended December 31, 2010 for the Physician Business was due to a change in commission structure during fiscal year 2011.

PROVISION FOR INCOME TAXES

The following table summarizes the provision for income taxes period over period.

 

     For the Three Months Ended      For the Nine Months Ended  
     December 31, 2010     January 1, 2010            December 31, 2010     January 1, 2010        
(dollars in millions)    Amount      Effective
Rate
    Amount      Effective
Rate
    Increase      Amount      Effective
Rate
    Amount      Effective
Rate
    Decrease  

Total Company

   $ 11.8        37.5   $ 10.7        37.5   $ 1.1      $ 31.7        37.4   $ 31.9        37.6   $ (0.2

 

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources Highlights

Cash flows from operations are impacted by segment profitability and changes in operating working capital. Management monitors operating working capital performance through the following metrics:

 

      As of  
      December 31,
2010
    January 1,
2010
 

Days Sales Outstanding:(a)

    

Physician Business

     39.1       38.7  

Elder Care Business

     48.2       49.9  

Days On Hand:(b)

    

Physician Business

     58.3       56.1  

Elder Care Business

     62.5       53.7  

Days in Accounts Payable:(c)

    

Physician Business

     39.3       39.6  

Elder Care Business

     22.8       23.2  
    

Cash Conversion Days:(d)

    

Physician Business

     58.1       55.2  

Elder Care Business

     87.8       80.4  

Inventory Turnover:(e)

    

Physician Business

     6.2x        6.4x   

Elder Care Business

     5.8x        6.7x   

Return on Committed Capital(f)

    

Total Company

     35.7     33.9

 

(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.
(f) Return on committed capital (“ROCC”) is defined as return divided by average committed capital. Return is calculated as net income less (i) provision for income taxes, (ii) amortization, and (iii) interest expense. Committed capital is calculated as total assets, less (i) cash, (ii) goodwill and intangibles, and (iii) liabilities, excluding current and long-term debt.

 

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In addition to cash flow, the Company monitors other components of liquidity, including the following:

 

     As of  
(dollars in millions)    December 31,
2010
    April 2,
2010
 

Capital Structure:

    

Convertible senior notes, net

   $ 193.4     $ 187.1  

Revolving line of credit

     0.3       —     

Other debt

     1.1       1.7  

Cash and cash equivalents

     (36.9     (52.8
                

Net debt

     157.9       136.0  

Total equity

     420.7       408.0  
                

Total Capital

   $ 578.6     $ 544.0  
                

Operating Working Capital:

    

Accounts receivable, net

   $ 239.1     $ 227.9  

Inventories

     240.2       218.9  

Accounts payable

     (149.7     (124.0
                
   $ 329.6     $ 322.8  
                

Cash Flows from Operating Activities

Net cash provided by operating activities was $74.4 million and $67.7 million for the nine months ended December 31, 2010 and January 1, 2010, respectively.

Net cash provided by operating activities during the nine months ended December 31, 2010 was the result of increased net income for the period, offset by an increase in operating working capital of approximately $4.2 million.

As of December 31, 2010, the Company has a deferred income tax liability of $17.4 million (tax effected) related to interest deductions taken for tax purposes on its 2004 Notes. The liability will be fully deferred for the next three 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 used in investing activities was $37.2 million and $24.8 million during the nine months ended December 31, 2010 and January 1, 2010, respectively, and included the following:

 

   

Capital expenditures totaled $13.1 million and $21.6 million during the nine months ended December 31, 2010 and January 1, 2010, respectively, of which approximately $9.0 million and $16.9 million, respectively, related to development and enhancement of the Company’s ERP system, contracts and rebates system, warehouse management system, electronic commerce platforms, and supply chain integration. Capital expenditures related to distribution center expansions and enhancements were approximately $1.1 million and $0.7 million during the nine months ended December 31, 2010 and January 1, 2010, respectively.

 

   

During the nine months ended December 31, 2010, the Company purchased a $3.3 million convertible note issued by Pathway. See Footnote 4, Variable Interest Entity, for additional information.

 

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Payments for business combinations, net of cash acquired, were $20.2 million and $13.9 million during the nine months ended December 31, 2010 and January 1, 2010, respectively, and consisted of the following:

On November 15, 2010, the Company acquired Linear Medical Solutions, Inc. The maximum aggregate purchase price was approximately $15.5 million, net of cash acquired of $0.4 million. Payments totaling $11.5 million were made during the nine months ended December 31, 2010 from cash on hand. See Footnote 3, Purchase Business Combinations, for further discussion.

During the nine months ended December 31, 2010, the Company completed multiple acquisitions not deemed significant for individual disclosure. Payments totaling $8.7 million were made during the nine months ended December 31, 2010 from cash on hand.

During the nine months ended January 1, 2010, the Company completed multiple acquisitions not deemed significant for individual disclosure. Payments totaling $13.8 million were made during the nine months ended January 1, 2010 from cash on hand.

 

   

During the nine months ended January 1, 2010, the Company sold shares of athena, which it had held for investment for $10.7 million, resulting in a gain of approximately $3.6 million or $2.3 million, net of taxes.

Cash Flows from Financing Activities

Net cash used in financing activities was $53.0 million and $10.8 million during the nine months ended December 31, 2010 and January 1, 2010, respectively, and was impacted by the following factors:

 

   

The Company repurchased approximately 2.7 million shares of common stock at an average price of $20.07 per common share for approximately $54.7 million, during the nine months ended December 31, 2010. The Company repurchased approximately 0.9 million shares of common stock at an average price of $20.58 per common share for approximately $19.4 million, during the nine months ended January 1, 2010.

 

   

The Company borrowed and repaid $17.2 million on its revolving line of credit during the nine months ended December 31, 2010 and borrowed $5.4 million during nine months ended January 1, 2010.

 

   

The Company received proceeds from the exercise of stock options of approximately $1.1 million and $2.6 million during the nine months ended December 31, 2010 and January 1, 2010, respectively.

Capital Resources

The Company closely monitors the capital and credit markets. While market conditions have improved, volatility remains that may restrict access to capital and the costs associated with issuing or refinancing may increase relative to the Company’s current position. While the Company believes it is well positioned, there can be no guarantee that disruptions in the capital markets and economic growth will not adversely impact the business and results of operations.

The Company finances its business through cash generated from operations, proceeds from the $230.0 million senior convertible notes offering (“2008 Notes”) 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 than historical 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 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.

 

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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.

Convertible Note Hedge Transactions

In connection with the offering of the 2008 Notes, the Company also entered into convertible note hedge transactions with respect to its common stock (the “purchased options”) with a major financial institution (the “counterparty”). The purchased options cover, subject to anti-dilution adjustments substantially identical to those in the notes, approximately 10.8 million shares of common stock at a strike price that corresponds to the initial conversion price of the notes, also subject to adjustment, and are exercisable at each conversion date of the notes. The purchased options will expire upon the earlier of (i) the last day the notes remain outstanding or (ii) the second scheduled trading day immediately preceding the maturity date of the notes.

The purchased options are intended to reduce the potential dilution upon conversion of the notes in the event that the market value per share of the common stock, as measured under the notes, at the time of exercise is greater than the conversion price of the notes.

The purchased options are separate transactions, entered into by the Company with the counterparty, and are not part of the terms of the notes. Holders of the notes will not have any rights with respect to the purchased options.

Warrant Transactions

The Company also entered into warrant transactions (the “warrants”), whereby the Company sold to the counterparty warrants to acquire, subject to anti-dilution adjustments, up to 10.8 million shares of common stock at a strike price of $28.29 per share of common stock. The warrants will expire after the purchased options in approximately ratable portions on a series of expiration dates commencing on November 3, 2014. The warrants have been accounted for as an adjustment to the Company’s stockholders’ equity.

The warrants are separate transactions, entered into by the Company with the counterparties, and are not part of the terms of the notes. Holders of the notes do not have any rights with respect to the warrants.

The purchased options and warrant contracts will generally have the effect of increasing the conversion price of the 2008 Notes to approximately $28.29 per share, representing a 68.5% premium based on the closing sale price of the Company’s common stock of $16.79 per share on August 4, 2008.

Impact on Diluted Weighted Average Shares

In accordance with accounting guidance for calculating earnings per share, the 2008 Notes will impact diluted earnings per share when the Company’s average common stock price, as defined, exceeds the conversion price of $21.22 per share (the conversion price for the 2008 Notes). See Footnote 6, Earnings Per Share, for further information.

The purchased options are not included in the calculation of diluted earnings per share prior to the conversion of the 2008 Notes, as their effect is considered anti-dilutive. As of December 31, 2010, the purchased options were “in the money” and would have been convertible into approximately 662,000 shares of the Company’s common stock. The exercise of the purchased options is restricted to each conversion date of the 2008 Notes.

 

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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 April 2, 2010.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Critical Accounting Estimates are disclosed in the Annual Report on Form 10-K for the fiscal year ended April 2, 2010 filed on May 26, 2010 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.

Recent Accounting Pronouncements

During fiscal year 2011, the Company adopted a new accounting standard that changes the consolidation model for VIEs. Variable interest entities are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk to finance the entity’s activities without additional subordinated financial support. VIEs are consolidated by the primary beneficiary, defined as the party which (i) has the power to direct those activities that most significantly impact the entity’s economic performance and (ii) has an obligation to absorb an entity’s losses or a right to receive benefits from an entity that could be potentially significant to the entity. The standard requires ongoing reassessments to determine whether an enterprise is the primary beneficiary of a VIE. The standard expands the disclosure requirements for enterprises with a variable interest in a VIE. See Footnote 4, Variable Interest Entity, for additional disclosures.

In October 2009, Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) for multiple deliverable revenue arrangements. The update requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The update eliminates the residual method of revenue allocation and requires revenues to be allocated using the relative selling price method. The Company will adopt this update prospectively for revenue arrangements entered into or materially modified beginning in the first quarter of fiscal year 2012. The Company has evaluated this standard and determined it will not have a material effect on the Company’s statements of financial condition or results of operations.

In July 2010, the FASB issued an ASU which amended accounting guidance for receivables to require further disaggregated disclosures that improve financial statement users’ understanding of (i) the nature of an entity’s credit risk associated with its financing receivables and (ii) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The Company has adopted this standard with no material effect as the Company determined financing receivables subject to disclosure are immaterial.

In December 2010, the FASB issued a new accounting standard that provided guidance on supplementary pro forma information for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. While not impacting the disclosure of pro forma information, the new standard changes the way such information is calculated. Specifically, consolidated revenue and earnings would be determined as if the business combination occurred as of the beginning of the comparable prior annual reporting period. This method is consistent with guidance set forth by the SEC. Additionally, the standard required qualitative disclosures around the nature and amount of material, nonrecurring pro forma adjustments directly attributable to business combinations. The Company has elected to early adopt this standard. See Footnote 3, Purchase Businesses Combinations, for further discussion.

 

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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 Annual Report on Form 10-K for the fiscal year ended April 2, 2010 filed on May 26, 2010.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company‘s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 240.15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report (the “Evaluation Date”). Based on the evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is accumulated and communicated to the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the nine months ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, investors should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, in the Company’s Annual Report Form 10-K for the fiscal year ended April 2, 2010, filed on May 26, 2010. Such factors could have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company has potential exposure to risks other than those described in the Company’s Annual Report on Form 10-K. Additional risks and uncertainties not currently known to management, or risks that management currently deem to be immaterial, could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Except as set forth below, there have been no material changes from the risk factors disclosed in Part I, Item 1A, Risk Factors, in the Company’s Annual Report Form 10-K for the fiscal year ended April 2, 2010.

The viability of the Company’s customers may be threatened by various factors.

The Company has been negatively impacted in the past, and could be negatively impacted in the future, when customers experience disruptions resulting from tighter capital and credit markets or a loss of patient revenue due to changes in the general economy. Customers have, and may continue to modify, delay, or cancel plans to purchase the Company’s products or services. Additionally, if customers’ operating and financial performance deteriorate, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, accounts receivable owed to the Company. Any inability of customers to pay for products and services, may adversely affect the Company’s earnings and cash flow.

The Company’s customers are also impacted by increasing costs of malpractice claims and liability insurance. Insurance rates for customers of the Elder Care and Physician Businesses have greatly increased and many of the Company’s customers may be adversely affected which, in turn, could affect their profitability. As a result, customer financial viability may adversely impact the Company’s financial condition, net sales, results of operations, and cash flows from operations.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Sales and Purchases of Equity Securities

The Company repurchases its common stock under a stock repurchase program authorized by the Company’s Board of Directors. As of April 2, 2010, there were 3.3 million shares available for repurchase under existing stock repurchase program. On August 25, 2010, the Company’s Board of Directors approved a stock repurchase program authorizing the Company, depending on market conditions and other factors, to repurchase up to a maximum of 5% of its common stock, which was approximately 2.8 million common shares. These shares may be purchased in the open market, in privately negotiated transactions, or otherwise. The share repurchase program does not have an expiration date.

The following table summarizes the Company’s repurchase activity during the three months ended December 31, 2010.

 

Period

   Total Number
of Shares
Purchased(a)
     Average Price
Paid per
Share
     Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
     Maximum
Number

of  Shares that
May yet be
Purchased
Under the
Plans or
Programs
 

October 2 - November 1

     133,820       $ 22.31        133,820        3,353,316  

November 2 - December 1

     —           —           —           3,353,316  

December 2 - December 31

     —           —           —           3,353,316  
                       

Total third quarter

     133,820       $ 22.31        133,820        3,353,316  
                       

 

(a) Includes shares repurchased for net share settlement of employee share-based awards.

 

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Table of Contents
ITEM 6. EXHIBITS

(a) Exhibits required by Item 601 of Regulation S-K:

 

Exhibit
Number

  

Description

  31.1    Rule 13a-14(a) Certification of the Chief Executive Officer.
  31.2    Rule 13a-14(a) Certification of the Chief Financial Officer.
  32.1    Section 1350 Certification of the Chief Executive Officer.
  32.2    Section 1350 Certification of the Chief Financial Officer.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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Table of Contents

SIGNATURE

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, in the City of Jacksonville, State of Florida, on February 9, 2011.

 

PSS WORLD MEDICAL, INC.
By:   /s/ David M. Bronson
 

David M. Bronson

Executive Vice President and Chief Financial Officer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

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