UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2012 AND DECEMBER 30, 2011
(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 or PSS). The Company holds an interest in a variable interest entity (VIE) that is 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 unaudited condensed consolidated balance sheet as of March 30, 2012 has been derived from the Companys audited consolidated financial statements for the fiscal year ended March 30,
2012, adjusted for discontinued operations. The financial statements and related notes included in this report should be read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended March 30, 2012 and
are reported as of the most recent quarter end, December 28, 2012, as discussed below and further in Footnote 3,
Discontinued Operations and Plan of Merger.
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 2013 and 2012 each consist of 52 weeks or 253 selling days. The three and nine months ended December 28, 2012 and December 30, 2011 each consist of 62 and 189 selling days, respectively.
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.
On October 24, 2012, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) under which McKesson Corporation will acquire all of PSS World Medical Inc.s outstanding shares for $29.00 per share in cash. The transaction, which has been approved by the boards of directors of both companies, is subject to
customary closing conditions, including the approval of the Companys shareholders. See Footnote 3,
Discontinued Operations and Plan of Merger
, for additional information.
On May 8, 2012, the Companys Board of Directors approved a strategic restructuring plan (the restructuring plan) designed to transform the Company. The restructuring plan included
the sale of two businesses serving skilled nursing facilities within the Extended Care Business and specialty dental practices within the Physician Business. Additionally, the plan included the integration of all distribution operations into one
common distribution infrastructure, and the redesign of the Companys shared services segment. On November 5, 2012, the Company completed the sale of its specialty dental distribution business. As of December 28, 2012, the Company
determined that the business serving skilled nursing facilities met the held for sale criteria, and therefore, its results are presented separately as discontinued operations within the accompanying
Unaudited Condensed Consolidated Balance
Sheets, Unaudited Condensed Consolidated Statements of Operations
, and the
Unaudited Condensed Consolidated Statements of Cash Flows
. See Footnote 3,
Discontinued Operations and Plan of Merger
, for additional information.
As part of the restructuring plan, the previously reported segments, Physician Business and Extended Care Business, have been aligned into
four operating segments: Physician, Laboratory, Dispensing, and Home Care & Hospice, which serve a diverse customer base. A fifth reporting segment, Shared Services, consists of departments that support the operating segments through the
delivery of standardized service.
5
The Physician business provides products and services to primary care and front line caregivers, including
those affiliated with or owned by health systems. The Laboratory business provides laboratory equipment, supplies and services to individual physician office laboratories, clinics and small hospital laboratories. The Dispensing business provides
dispensing solutions to physician business practices which include repackaging of pharmaceutical products, dispensing management solutions, and claims processing services to allow such practices to dispense medical products to their patients
on-site. The Home Care & Hospice business provides products and services to caregivers to allow them to efficiently deliver care to patients in the home or hospice settings.
Reclassification
Certain items previously reported in financial statement captions and in
the unaudited notes to the condensed consolidated financial statements have been reclassified to conform to the current financial statement presentation.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board
(FASB) issued amended guidance to simplify how entities test indefinite-lived intangible assets for impairment. The objective of the amendments in this Accounting Standards Update (ASU) is to reduce the cost and complexity of
performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. This ASU permits an
entity to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The amendments
in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after September 15, 2012, or the Companys fiscal year 2014. Early adoption is permitted. The Company is currently
evaluating the impact of adoption of this update.
During the nine months ended December 28, 2012, the Company adopted an ASU that
provides new guidance on the presentation of comprehensive income and requires changes in stockholders equity to be presented either (i) in a single continuous statement of comprehensive income, or (ii) in two separate consecutive
statements. The ASU requires retrospective application. In December 2011, the FASB indefinitely deferred the effective date for amendments pertaining to the presentation of reclassification adjustments by component. The adoption of this standard did
not have an effect on the Companys statements of financial condition or results of operations, as the Company has no other comprehensive income items to disclose.
During the nine months ended December 28, 2012, the Company adopted an ASU that amends guidance to simplify the method in which entities test goodwill for impairment. This ASU allows an entity to
assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.
Additional disclosure is required by this update, including an explanation of qualitative factors used in the goodwill analysis. The adoption of this standard did not have an effect on the Companys statements of financial condition or results
of operations.
Stock Repurchase Program
From time to time, the Companys 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,
which can be made in the open market, privately negotiated transactions, and other transactions publicly disclosed through filings with the SEC.
6
The following table summarizes the common stock repurchases and Board of Directors authorizations during the
period from March 30, 2012 to December 28, 2012:
|
|
|
|
|
(in thousands)
|
|
Shares
|
|
Shares available for repurchase as of March 30, 2012
|
|
|
437
|
|
Shares repurchased
|
|
|
(385
|
)
|
|
|
|
|
|
Shares available for repurchase as of December 28, 2012
|
|
|
52
|
|
|
|
|
|
|
During the three months ended December 28, 2012, there were no material repurchases of common stock. During the nine
months ended December 28, 2012, the Company repurchased approximately 0.4 million shares of common stock at an average price of $20.27 per common share for $7,803, which reduced common stock and additional paid-in capital by
approximately $4 and $7,799, respectively.
During fiscal year ended March 30, 2012, the Companys additional paid-in capital
balance was reduced to zero as a result of share repurchases. In accordance with ASC 505,
Equity
, retirements of the Companys shares may be recorded to additional paid-in capital to the extent that previous net gains from sales or
retirements of the same class of stock remain, and otherwise should be recorded to retained earnings. As of December 28, 2012 and March 30, 2012, retained earnings was reduced by $3,514 and $7,154, respectively, which represented share
repurchases occurring after the additional paid-in capital balance had been reduced to zero.
2.
|
PURCHASE BUSINESS COMBINATIONS
|
During
the nine months ended December 28, 2012, the Company completed acquisitions that were individually immaterial but material in the aggregate (the 2013 acquisitions). Net sales attributable to the 2013 acquisitions since their
respective acquisition dates were approximately $65,619. The combined purchase price of the 2013 acquisitions was $78,497, of which $3,900 was held in escrow and $6,550 was held by the Company to secure certain potential future adjustments or
claims. Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill related to the 2013 acquisitions in the amount of $33,676
is tax deductible.
As of December 28, 2012, the purchase accounting for the 2013 acquisitions and certain acquisitions made during
fiscal year 2012 (the 2012 acquisitions) had not been finalized, due to pending valuation analysis results and working capital adjustments. Therefore, the fair value of the assets acquired and liabilities assumed as of the acquisition
dates may continue to be adjusted in future periods.
During the nine months ended December 28, 2012, the Company received cash payments
of $450 and paid $2,075 for working capital adjustments related to prior year acquisitions and other acquisition-related adjustments. Additionally, the Company paid $4,000 in contingent consideration during the nine months ended December 30,
2011 related to the earn-out components of purchase agreements executed in fiscal year 2010. There were no contingent consideration payments during the nine months ended December 28, 2012.
7
Opening Balance Sheets
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the dates of the 2013 and 2012 acquisitions, as adjusted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 acquisitions
|
|
|
2012 acquisitions
|
|
(in thousands)
|
|
Opening
Balance
Sheet
|
|
|
Measurement
Period
Adjustment
|
|
|
Opening
Balance
Sheet
As Adjusted
December 28, 2012
|
|
|
Opening
Balance
Sheet
As Adjusted
March 30, 2012
|
|
|
Measurement
Period
Adjustment
|
|
|
Opening
Balance
Sheet
As Adjusted
December 28, 2012
|
|
Current assets
(a)
|
|
$
|
21,057
|
|
|
$
|
(836
|
)
|
|
$
|
20,221
|
|
|
$
|
7,188
|
|
|
$
|
(249
|
)
|
|
$
|
6,939
|
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,570
|
|
|
|
75
|
|
|
|
40,645
|
|
Goodwill
|
|
|
36,971
|
|
|
|
(3,295
|
)
|
|
|
33,676
|
|
|
|
22,574
|
|
|
|
343
|
|
|
|
22,917
|
|
Intangible assets
|
|
|
21,780
|
|
|
|
4,030
|
|
|
|
25,810
|
|
|
|
10,020
|
|
|
|
|
|
|
|
10,020
|
|
Noncurrent assets
(b)
|
|
|
4,756
|
|
|
|
|
|
|
|
4,756
|
|
|
|
4,741
|
|
|
|
|
|
|
|
4,741
|
|
Accounts payable and other current liabilities
|
|
|
(6,067
|
)
|
|
|
(305
|
)
|
|
|
(6,372
|
)
|
|
|
(3,297
|
)
|
|
|
(25
|
)
|
|
|
(3,322
|
)
|
Liabilities held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,755
|
)
|
|
|
|
|
|
|
(11,755
|
)
|
Noncurrent liabilities
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(406
|
)
|
|
|
|
|
|
|
(406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
78,497
|
|
|
$
|
(406
|
)
|
|
$
|
78,091
|
|
|
$
|
69,635
|
|
|
$
|
144
|
|
|
$
|
69,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The following represents balances within
Current assets
as of December 28, 2012: 2013 acquisitions accounts receivable $11,388, inventory $8,225, and
other current assets $608; 2012 acquisitions accounts receivable $3,765, inventory $1,603, current deferred income taxes $675, and other current assets $896.
|
(b)
|
The following represents balances within
Noncurrent assets
as of December 28, 2012: 2013 acquisitions property and equipment $4,721 and other
noncurrent assets $35; 2012 acquisitions property and equipment $40 and other noncurrent assets $4,701.
|
(c)
|
The following represents balances within
Noncurrent liabilities
as of December 28, 2012: 2012 acquisitions noncurrent deferred tax liabilities $380
and other noncurrent liabilities $26.
|
The following table presents unaudited pro forma financial information as if the closing
of the 2013 acquisitions had occurred on the first day of fiscal year 2012 (April 2, 2011) after giving effect to certain purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
(in thousands)
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSS World Medical, Inc. (as reported)
|
|
$
|
433,912
|
|
|
$
|
394,203
|
|
|
$
|
1,264,099
|
|
|
$
|
1,166,404
|
|
Supplemental Net Sales - 2013 acquisitions
(a)
|
|
|
1,709
|
|
|
|
31,200
|
|
|
|
18,512
|
|
|
|
91,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pro Forma Net Sales
|
|
$
|
435,621
|
|
|
$
|
425,403
|
|
|
$
|
1,282,611
|
|
|
$
|
1,257,489
|
|
|
|
|
|
|
Net income attributed to PSS World Medical, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSS World Medical, Inc. (as reported)
|
|
$
|
38,720
|
|
|
$
|
20,132
|
|
|
$
|
64,734
|
|
|
$
|
54,353
|
|
Supplemental Net Income - 2013 acquisitions
(a)
|
|
|
21
|
|
|
|
667
|
|
|
|
140
|
|
|
|
1,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pro Forma Net Income
|
|
$
|
38,741
|
|
|
$
|
20,799
|
|
|
$
|
64,874
|
|
|
$
|
56,162
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.78
|
|
|
$
|
0.41
|
|
|
$
|
1.31
|
|
|
$
|
1.07
|
|
Diluted
|
|
$
|
0.74
|
|
|
$
|
0.40
|
|
|
$
|
1.28
|
|
|
$
|
1.03
|
|
(a)
|
Represents pro forma net sales and net income balances during the period which are not already included in the net sales and net income balances of
PSS World
Medical, Inc. (as reported).
Therefore,
Supplemental net sales
and
Supplemental net income
balances during the three and nine months ended December 28, 2012 will represent partial periods based on the date of acquisition.
|
8
Pro forma information is not necessarily indicative of the results of operations that actually would have
resulted had the 2013 acquisitions 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.
3.
|
DISCONTINUED OPERATIONS AND PLAN OF MERGER
|
Discontinued Operations
On May 8,
2012, the Companys Board of Directors approved a strategic restructuring plan designed to transform the Company. The restructuring plan included the sale of two businesses serving skilled nursing facilities and specialty dental practices, the
integration of all distribution operations into one common distribution infrastructure, and the redesign of the Companys shared services segment. As of June 29, 2012, the Company determined that the businesses met the held for sale
criteria, and therefore, the results are presented separately as discontinued operations within the accompanying
Unaudited Condensed Consolidated Balance Sheets, Unaudited Condensed Consolidated Statements of Operations
, and the
Unaudited
Condensed Consolidated Statements of Cash Flows
.
On November 5, 2012, the Company completed the sale of its specialty dental
distribution business to a third party (Buyer), pursuant to an Asset Purchase Agreement dated as of September 26, 2012. Under the Asset Purchase Agreement, the purchase price was $68,000 plus an adjustment for the difference between
the base working capital and the final closing working capital. The cash proceeds received during third quarter of fiscal year 2013 were reduced by approximately $1,467 for transaction costs. Cash proceeds received from the transaction were
approximately $66,533. In connection with the closing of the transaction, the Company and the Buyer entered into a Transition Services Agreement, pursuant to which the Company will provide certain services to the Buyer for a period not to exceed one
year. The incremental costs incurred related to providing services under the transition services agreement are included in general and administrative expenses and the reimbursement for these expenses are included in other income in the accompanying
statements of operations.
The results of operations of the specialty dental distribution business and the estimated gain on sale have been
classified as discontinued operations. The estimated gain on sale is subject to change based on final measurement period adjustments made to the purchase price.
The assets and liabilities of discontinued operations included on the
Unaudited Condensed Consolidated Balance Sheets
as of December 28, 2012 and March 30, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 28,
2012
|
|
|
March 30,
2012
|
|
(in thousands)
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
63,829
|
|
|
$
|
68,158
|
|
Inventories
|
|
|
64,877
|
|
|
|
66,388
|
|
Prepaid and other current assets
|
|
|
6,621
|
|
|
|
7,068
|
|
Property and equipment, net
|
|
|
22,234
|
|
|
|
20,885
|
|
Goodwill
|
|
|
80,514
|
|
|
|
92,295
|
|
Intangibles, net
|
|
|
12,946
|
|
|
|
21,054
|
|
Other noncurrent assets
|
|
|
1,399
|
|
|
|
1,530
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
252,420
|
|
|
$
|
277,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,569
|
|
|
$
|
27,814
|
|
Accrued expenses
|
|
|
9,540
|
|
|
|
4,317
|
|
Other current liabilities
|
|
|
3,343
|
|
|
|
4,026
|
|
Other noncurrent liabilities
|
|
|
1,064
|
|
|
|
1,483
|
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale
|
|
$
|
40,516
|
|
|
$
|
37,640
|
|
|
|
|
|
|
|
|
|
|
9
The following table summarizes the net sales and total income from discontinued operations for the three and
nine months ended December 28, 2012 and December 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
121,908
|
|
|
$
|
133,492
|
|
|
$
|
386,689
|
|
|
$
|
396,729
|
|
Income from discontinued operations before provision for income taxes
(a)
|
|
|
45,527
|
|
|
|
6,768
|
|
|
|
52,730
|
|
|
|
19,491
|
|
Provision for income taxes
|
|
|
17,414
|
|
|
|
2,461
|
|
|
|
20,326
|
|
|
|
7,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
$
|
28,113
|
|
|
$
|
4,307
|
|
|
$
|
32,404
|
|
|
$
|
12,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
For the three and nine months ended December 28, 2012, amount includes a gain on sale of $41,745.
|
During the nine months ended December 28, 2012, the Company incurred $7,306 of costs associated with the strategic restructuring plan, including
retention bonuses for employees and accounting, legal, and other professional fees.
Plan of Merger
On October 24, 2012, the Company entered into the Merger Agreement with McKesson Corporation, a Delaware corporation (Parent) and Palm
Merger Sub, Inc., a Florida corporation and a direct wholly owned Subsidiary of Parent (together with Parent, the Acquiring Parties) under which the Acquiring Parties will acquire all of the Companys outstanding shares for $29.00
per share in cash. The transaction, which has been approved by the boards of directors of both companies, is subject to customary closing conditions, including the approval of the Companys shareholders.
During the nine months ended December 28, 2012, the Company incurred $4,726 of costs associated with the planned merger, including retention bonuses
for employees and accounting, legal, and other professional fees.
Debt Agreements
If a change in control of the Company occurs, each holder of the 2012 Notes will have the right to require the Company to repurchase all or part of their
outstanding notes for cash at 101% of the aggregate principal amount of the securities repurchased plus accrued and unpaid interest. On January 25, 2013, the Company provided a conditional notice to the holders of the 2012 Notes that the
Company has elected to redeem all of the 2012 Notes outstanding on February 25, 2013 (the Redemption Date). On the Redemption Date, the 2012 Notes will be redeemed at a redemption price equal to 100% of the principal amount plus a
redemption premium and accrued and unpaid interest. The redemption is contingent upon the completion of the merger with McKesson.
Additionally, upon the occurrence of a change in control, each holder of the 2008 Notes will have the opportunity to exchange all or part of their
outstanding notes for cash at a price determined under the related indenture. On February 1, 2013, the Company provided notice to the holders of the 2008 Notes that the planned merger with McKesson would constitute a fundamental change as
defined by the related indenture, and that on or around the date of the planned merger, the holders of common stock of the Company shall be entitled to receive consideration for each share of common stock owned. This entitlement is contingent upon
the completion of the merger with McKesson.
Incentive Compensation
Additionally, upon the occurrence of a change in control (i) all outstanding employee options shall become fully exercisable, (ii) time-based vesting restrictions on all outstanding restricted
stock awards shall lapse, and (iii) the target payout opportunities attainable under all outstanding performance-based equity and cash-based awards shall be deemed to have been fully earned as of the date of the change in control based upon an
assumed achievement of all relevant performance goals at the target level.
10
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 extended care market, under which the Company purchased a $3,300 convertible note issued by
Pathway. The note may be converted, at the Companys discretion, into 73% of Pathways common stock. The Company also acquired a call option and issued a put option for Pathways 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 Pathways 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 Companys financial position,
operating results, or cash flows. Pathways assets cannot be used to settle the Companys obligations and Pathways creditors have no recourse to the general credit of the Company.
On May 8, 2012, the Companys Board of Directors approved a strategic restructuring plan which included the sale of two business units serving
skilled nursing facilities and specialty dental practices. The Companys variable interest in Pathway has been included in the disposal group as part of the restructuring plan. See Footnote 3,
Discontinued Operations and Plan of Merger
,
for additional information on the Companys fiscal year 2013 strategic restructuring plan and corresponding discontinued operations.
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 Companys 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 Companys 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 dilutive effect of outstanding convertible senior notes. Common equivalent shares are excluded from
the computation in periods in which they have an anti-dilutive 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 28, 2012 and December 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
(in thousands)
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
Denominator-weighted average shares outstanding used in computing basic earnings per common share
|
|
|
49,466
|
|
|
|
51,308
|
|
|
|
49,464
|
|
|
|
52,594
|
|
Assumed conversion of the 2008 Notes
|
|
|
2,241
|
|
|
|
648
|
|
|
|
926
|
|
|
|
1,482
|
|
Assumed vesting of restricted stock
|
|
|
527
|
|
|
|
419
|
|
|
|
455
|
|
|
|
444
|
|
Assumed exercise of stock options
(a)
|
|
|
18
|
|
|
|
60
|
|
|
|
18
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator-weighted average shares outstanding used in computing diluted earnings per common share
|
|
|
52,252
|
|
|
|
52,435
|
|
|
|
50,863
|
|
|
|
54,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
There were no anti-dilutive options outstanding as of December 28, 2012 and December 30, 2011.
|
The Company included shares underlying its 2008 Notes in its diluted weighted average shares outstanding during the three and nine months ended
December 28, 2012. 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.
If the average price of the Companys common stock exceeds $28.29 per share, additional potential shares that
may be issued related to outstanding warrants, using the treasury stock method, will also be included. Prior to conversion, certain outstanding purchased options are not considered for purposes of the dilutive earnings per share calculation as their
effect is considered to be anti-dilutive.
11
Accrued expenses from
continuing operations as of December 28, 2012 and March 30, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in thousands)
|
|
December 28,
2012
|
|
|
March 30,
2012
|
|
Accrued payroll
|
|
$
|
23,796
|
|
|
$
|
14,913
|
|
Accrued interest
|
|
|
8,227
|
|
|
|
2,565
|
|
Accrued annual incentive compensation
|
|
|
5,318
|
|
|
|
1,184
|
|
Other
(a)
|
|
|
18,551
|
|
|
|
18,774
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
55,892
|
|
|
$
|
37,436
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts within the Other category of total accrued expenses were not considered individually significant as of December 28, 2012 and March 30,
2012.
|
7.
|
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
Companys 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 recipients 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).
Fiscal Year 2013 Issuances of Performance-Based Awards
On June 22, 2012, the Companys Compensation Committee of the Board of Directors (the Compensation Committee)
approved awards of performance-accelerated restricted stock units (PARS Units) and performance-based restricted stock units (Performance Shares) to certain of the Companys executive officers. These awards were granted
under the Companys 2006 Incentive Plan.
PARS Units
The 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 income from continuing operations target, excluding the effect of any restructuring charges and exit costs and the impact of any changes 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. Additionally, PARS Units will vest upon a change in control, as discussed in Footnote 3,
Discontinued Operations and Plan of Merger
.
Performance Shares
The Performance Shares, which are denominated in terms of a target number of shares, may vest after three years in an amount up to 250% of
the target number of shares for exceptional performance, but will be forfeited if performance falls below a designated threshold. A portion of the award will be measured on the Companys net income from continuing operations, excluding the
effect of any restructuring charges and exit costs and the impact of any changes in generally accepted accounting principles promulgated by standard setting bodies. The ultimate number of shares delivered to recipients and the related
compensation cost recognized as expense will be based on actual performance.
12
The remaining Performance Shares will be measured based on relative total shareholder return
(TSR), or the Companys stock price return as compared to companies in the Midcap 400 Index as of the beginning of the 3-year period running from fiscal year 2013 to fiscal year 2015. Upon a change in control, Performance Shares
will vest at the target, as discussed in Footnote 3,
Discontinued Operations and Plan of Merger
.
The fair value of the
TSR awards is calculated using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized over the derived service periods using the straight-line method regardless of the outcome of the market conditions, so long as the
award holder remains an employee through the derived service period.
The Monte Carlo simulation model utilized the following
inputs and assumptions:
|
|
|
|
|
|
|
As of
|
|
|
|
June 29, 2012
|
|
Term of award (in years)
|
|
|
3
|
|
Volatility
|
|
|
28.1
|
%
|
Risk-free interest rate
|
|
|
0.4
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
Actual TSR
|
|
|
(18.9
|
)%
|
Stock beta
|
|
|
0.7
|
|
Fair value
|
|
$
|
24.63
|
|
Stock Options
On July 2, 2012, the Company granted 305,185 stock options under the Companys 2006 incentive Stock Plan to certain of the Companys executive officers. The stock options are exercisable on
or after the third anniversary date provided the closing price at the time of exercise is at least $27.05. Additionally, the stock options will vest upon a change in control, as discussed in Footnote 3,
Discontinued Operations and Plan of
Merger
.
The fair value of stock options granted was estimated as of the date of grant using a Black-Scholes option-pricing model with the
following weighted-average assumptions:
|
|
|
|
|
|
|
As of
|
|
|
|
July 2, 2012
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
Volatility
|
|
|
30.0
|
%
|
Risk-free interest rate
|
|
|
0.85
|
%
|
Expected life (in years)
|
|
|
6.0
|
|
Based on these assumptions, the estimated fair value of the options granted during the nine months ended
December 28, 2012, was approximately $1,935. As of December 28, 2012, there was $1,617 of unrecognized compensation cost related to the options granted during the nine months ended December 28, 2012.
Stock Award Modification
During the
nine months ended December 28, 2012, the Compensation Committee approved an amendment to the outstanding Performance Shares and PARS Units held by certain of the Companys executive officers to provide that the calculation of the earnings
per share targets and the Companys level of achievement of such targets will be based on earnings per share from continuing operations, excluding the effect of any restructuring charges and exit costs. The earnings per share growth rates that
must be achieved in order to earn the awards were not changed.
Based on the revised performance targets, stock based compensation expenses
decreased $901 ($559, net of tax), or $0.01 per diluted share during the nine months ended December 28, 2012.
13
Change in Estimate
During the three and nine months ended December 28, 2012, the Company changed its estimate of the number of shares to be earned on its performance based awards.
During the three months ended December 28, 2012, the Company did not recognize stock-based compensation expense as a result of the change in
performance estimate on TSRs. During the nine months ended December 28, 2012, stock based compensation expenses related to performance shares decreased $1,480 ($918, net of tax), or $0.02 per diluted share.
Activity for Stock-Based Awards
Outstanding stock-based awards granted under equity incentive plans as of December 28, 2012 and March 30, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based Awards
|
|
|
Time-Based Awards
|
|
|
Stock
Options
|
|
|
|
Performance
Shares
|
|
|
PARS
|
|
|
TSR
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Units
|
|
|
Units
|
|
|
Shares
|
|
|
Units
|
|
|
Shares
|
|
|
Deferred
Units
|
|
|
Shares
|
|
Balance, March 30, 2012
|
|
|
301
|
|
|
|
274
|
|
|
|
471
|
|
|
|
|
|
|
|
302
|
|
|
|
8
|
|
|
|
49
|
|
Granted
|
|
|
144
|
|
|
|
118
|
|
|
|
15
|
|
|
|
59
|
|
|
|
159
|
|
|
|
3
|
|
|
|
305
|
|
Increase (decrease) from change in estimate
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested / Exercised
|
|
|
(139
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
(8
|
)
|
Forfeited
|
|
|
(85
|
)
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 28, 2012
|
|
|
|
|
|
|
304
|
|
|
|
467
|
|
|
|
118
|
|
|
|
382
|
|
|
|
11
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense included in income from continuing operations during the three months ended
December 28, 2012 and December 30, 2011 was approximately $1,634 and $1,949, respectively, with related income tax benefits of $621 and $741, respectively. Total stock-based compensation expense included in income from continuing
operations during the nine months ended December 28, 2012 and December 30, 2011 was approximately $3,164 and $5,357, respectively, with related income tax benefits of $1,202 and $2,036, respectively. No stock-based compensation expense was
included in income from discontinued operations.
As of December 28, 2012, there was $12,587 of unrecognized compensation cost related to
non-vested restricted stock and restricted stock units granted under the stock incentive plans. If the merger with McKesson should not be completed, the compensation cost related to these non-vested awards would be recognized over a weighted average
period of 4.2 years.
Outstanding debt consists of the
following, in order of seniority:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in thousands)
|
|
December 28,
2012
|
|
|
March 30,
2012
|
|
2012 Notes
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
2008 Notes
|
|
|
212,387
|
|
|
|
204,916
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
462,387
|
|
|
|
454,916
|
|
Less: Current portion of long-term debt
|
|
|
212,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
250,000
|
|
|
$
|
454,916
|
|
|
|
|
|
|
|
|
|
|
14
2012 Notes
On February 24, 2012, the Company issued $250.0 million aggregate principal 6.375% senior notes, which mature on March 1, 2022 (the 2012 Notes). Interest on the notes is payable
semi-annually in arrears on March 1 and September 1, beginning September 1, 2012. The 2012 Notes are fully and unconditionally guaranteed on a joint and several basis by certain of the Companys domestic subsidiaries (the
Guarantor Subsidiaries). Refer to Footnote 14,
Condensed Consolidating Financial Information
, for further information regarding the Guarantor Subsidiaries.
The gross carrying value of the Companys 2012 Notes as of December 28, 2012 and March 30, 2012 was $250,000 and the fair value, which is estimated using a third party valuation model, was
approximately $295,000 and $257,500, respectively.
Refer to Footnote 3,
Discontinued Operations and Plan of Merger,
for information
related to the Company pending merger with McKesson.
2008 Notes
In August 2008, the Company issued $230.0 million principal amount 3.125% senior convertible notes, which mature on August 1, 2014 (the 2008 Notes). Interest on the notes is
payable semi-annually in arrears on February 1 and August 1 of each year. The notes will be convertible into cash up to the principal amount of the notes and shares of the Companys common stock for any conversion value in excess of
the principal amount under certain circumstances. The ability of note holders to convert is assessed on a quarterly basis. Conversion may be triggered during any calendar quarter in which the closing sale price of the Companys common stock for
at least 20 of the 30 consecutive trading days ending the day prior to such quarter is greater than $27.59 per share or, as defined, 130% of the applicable conversion price of $21.22 per share (Contingent Conversion Trigger). The
Contingent Conversion Trigger was met during the nine months ended December 28, 2012 and the notes may be converted into cash and common stock. As of December 28, 2012, the if-converted value exceeded the principal amount of the 2008
Notes by $82,976. Accordingly, the Company reclassified the net book value of the 2008 Notes from
Long-term debt, excluding current portion
to
Current portion of long-term debt
on the
Unaudited Condensed Consolidated Balance
Sheets
. See Footnote 5,
Earnings Per Share
, for additional information.
Refer to Footnote 3,
Discontinued Operations and Plan
of Merger,
for information related to the Company pending merger with McKesson.
As of December 28, 2012 and March 30,
2012, the fair value of the 2008 Notes was approximately $324,645 and $302,174, respectively.
The principal balances, unamortized discounts
and net carrying amounts of the liability components and the equity components for the Companys 2008 Notes as of December 28, 2012 and March 30, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Component
|
|
|
Equity Component
|
|
(in thousands)
2008 Notes
|
|
Principal
Balance
|
|
|
Unamortized
Discount
|
|
|
Net Carrying
Amount
|
|
|
Carrying Amount
Pretax
(a)
|
|
|
|
|
|
|
As of December 28, 2012
|
|
$
|
230,000
|
|
|
$
|
(17,613
|
)
|
|
$
|
212,387
|
|
|
$
|
55,636
|
|
|
|
|
|
|
As of March 30, 2012
|
|
$
|
230,000
|
|
|
$
|
(25,084
|
)
|
|
$
|
204,916
|
|
|
$
|
55,636
|
|
(a)
|
The Company recognized a deferred tax liability of $20,523 related to the issuance of the 2008 Notes.
|
15
Under the terms of the 2008 Notes agreement, certain events are triggered upon a change in control of the
Company. On October 24, 2012, the Company entered into the Merger Agreement under which McKesson Corporation will acquire all of its outstanding shares. See Footnote 3,
Discontinued Operations and Plan of Merger
, for additional
information.
Revolving Line of Credit
The Company maintains an asset-based revolving line of credit (the RLOC) under a credit agreement (the Credit Agreement) with the following features and key terms: (i) a
five-year term, maturing on November 16, 2016; (ii) a facility size of $300.0 million, with increased borrowing capacity of up to $100.0 million via an accordion feature; and (iii) conditional covenants based on the Companys
borrowing availability and fixed charge coverage ratio requirements. Availability depends on a borrowing base calculation consisting of accounts receivable and inventory, subject to satisfaction of certain eligibility requirements, and certain other
reserves. Borrowings under the RLOC bear interest at the banks base rate or at LIBOR plus applicable margins. Additionally, the RLOC incurs fees at a fixed rate of 0.25% for any unused portion of the facility.
Under the RLOC, the Company and certain of its subsidiaries are subject to certain covenants, including but not limited to, limitations on:
(i) selling or transferring assets, (ii) making certain permitted investments, and (iii) incurring additional indebtedness and liens. However, these covenants may not apply if the Company maintains sufficient Availability under the
credit facility and satisfies fixed charge coverage ratios.
Borrowings under the RLOC are anticipated to fund future requirements for working
capital, capital expenditures, acquisitions, repurchases of the Companys common stock, and the issuance of letters of credit, if necessary.
The Company had no outstanding borrowings under the RLOC as of December 28, 2012 and March 30, 2012. After reducing availability for outstanding borrowings and letter of credit commitments, the
Company has sufficient assets based on eligible accounts receivable and inventory to borrow $279.5 million under the RLOC. During the nine months ended December 28, 2012, the Company had no borrowings under the RLOC, and as a result, had
no average daily interest rate for the period.
On May 8, 2012, the Companys Board of Directors approved a strategic restructuring
plan. The sale of the business serving skilled nursing facilities was expected to increase the Companys available cash balances, while reducing the Companys assets used to calculate its borrowing base under the RLOC. If the merger with
McKesson should not be completed, the Company estimates availability under the RLOC would be approximately $210.2 million as of December 28, 2012, as adjusted for the assumed sale of the skilled nursing facility business.
9.
|
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 liabilitys fair value is defined as the estimate 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.
|
16
As of December 28, 2012 and March 30, 2012, the fair value of the Companys financial assets
and/or liabilities are measured using Level 1 or Level 3 inputs. The following table presents the Companys assets and liabilities which are measured at fair value on a recurring basis as of December 28, 2012 and March 30, 2012, by
level within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
December 28, 2012
|
|
Level 1
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion option on VIE convertible note
(a)
|
|
$
|
|
|
|
$
|
583
|
|
|
$
|
583
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
(b)
|
|
$
|
103,493
|
|
|
$
|
|
|
|
$
|
103,493
|
|
Contingent consideration
(c)
|
|
|
|
|
|
|
415
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
103,493
|
|
|
$
|
415
|
|
|
$
|
103,908
|
|
|
|
|
|
March 30, 2012
|
|
Level 1
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion option on VIE convertible note
(a)
|
|
$
|
|
|
|
$
|
701
|
|
|
$
|
701
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
(b)
|
|
$
|
94,394
|
|
|
$
|
|
|
|
$
|
94,394
|
|
Contingent consideration
(c)
|
|
|
|
|
|
|
493
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
94,394
|
|
|
$
|
493
|
|
|
$
|
94,887
|
|
(a)
|
Represents the Companys conversion option to acquire 73% of the outstanding common stock in the Companys consolidated variable interest entity
(VIE), which is located in
Assets held for sale
on the Companys
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. Significant
increases (decreases) in any of those inputs would result in a significantly lower (higher) fair value measurement. The unobservable inputs are not considered to be interrelated. The remaining investment in Pathway has been eliminated in
consolidation.
|
(b)
|
Represents the Companys obligation to pay benefits under its non-qualified deferred compensation plans, which is included in
Other noncurrent liabilities
on the Companys
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 Companys 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 participants view of the risk associated with the obligation. Significant increases (decreases) to values of the unobservable inputs would result in a significantly lower (higher) fair value measurement. The unobservable inputs are not
considered to be interrelated. The liabilities are included in
Liabilities held for sale
on the Companys
Unaudited Condensed Consolidated Balance Sheets
, depending on the period of expected payout.
|
The following table summarizes the change in the fair value for Level 3 instruments for the nine months ended December 28, 2012:
|
|
|
|
|
(in thousands)
|
|
Level 3
Instruments
|
|
Assets:
|
|
|
|
|
Balance as of March 30, 2012
|
|
$
|
701
|
|
Fair value adjustment included in earnings
|
|
|
(118
|
)
|
|
|
|
|
|
Balance as of December 28, 2012
|
|
$
|
583
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Balance as of March 30, 2012
|
|
$
|
493
|
|
Settlement adjustment
|
|
|
(133
|
)
|
Fair value adjustment included in earnings
|
|
|
55
|
|
|
|
|
|
|
Balance as of December 28, 2012
|
|
$
|
415
|
|
|
|
|
|
|
17
The carrying amounts of the Companys current financial instruments, including cash and cash
equivalents, short-term trade receivables, and accounts payable, approximate fair value due to the short-term nature of these assets and liabilities.
10.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
The
Companys supplemental disclosures for the nine months ended December 28, 2012 and December 30, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
(in thousands)
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
12,445
|
|
|
$
|
4,338
|
|
Income taxes, net
|
|
$
|
22,561
|
|
|
$
|
35,911
|
|
During the nine months ended December 28, 2012, the amount of cash paid for income taxes decreased primarily due to
the carryover of residual payments made during fiscal year 2012.
During the nine months ended December 28, 2012, the amount of cash paid
for interest increased primarily due to the first semi-annual payment made on the 2012 Notes.
During the nine months ended December 28,
2012 and December 30, 2011, the Company had no material non-cash transactions.
The Company goes to
market through strategic businesses that offer products and services to customers within the healthcare industry. The reportable segments are determined based on the factors management utilizes to regularly evaluate the performance of the Company.
The reportable segments are managed separately based on the distinct customers and the product and service offerings required by the markets they serve. The Company evaluates the operating performance of its segments based on a number of financial
measures, including net sales and income from operations before interest, income taxes and results of discontinued operations.
On May 8,
2012, the Companys Board of Directors approved a strategic restructuring plan designed to transform the Company. The restructuring plan included the sale of two businesses serving skilled nursing facilities within the Extended Care Business
and specialty dental practices within the Physician Business. As part of the restructuring plan, the previously reported Physician Business and Extended Care Business segments have been realigned into four strategic business segments including:
Physician, Laboratory, Dispensing, and Home Care & Hospice. Each of the segments serve a distinct customer base or provide a distinct product and service offering to the same customer base.
The Company allocates certain components of net sales, cost of goods sold and operating expenses to each of the reportable segments. These allocated
components represent specific revenues or costs not specifically identifiable to an individual reportable segment. Management determined the methodology utilized to allocate these items to be reasonable and consistently applied for each period
presented, based on inputs and cost drivers common to each reportable segment.
The strategic business segments share healthcare distribution
services infrastructure and support costs. The costs of shared healthcare distribution services infrastructure and support are charged to each segment directly, if specifically identifiable, or allocated to each segment based on methodologies
reasonably determined by management.
Shared Services includes expenses associated with corporate functions that support the segments through
the development of strategic solutions and the delivery of standardized service and transaction processing. Shared Services allocates a portion of its costs to the segments to the extent the segments use the support services provided, based on an
estimation of the direct costs attributable to those services. For those operating segments that use Shared Services, the allocation of shared operating costs is generally proportionate to the revenues of the respective segment.
18
The following tables present financial information about the business segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
(in thousands)
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physician
|
|
$
|
255,066
|
|
|
$
|
248,862
|
|
|
$
|
765,915
|
|
|
$
|
745,934
|
|
Laboratory
|
|
|
135,597
|
|
|
|
96,434
|
|
|
|
356,775
|
|
|
|
280,383
|
|
Dispensing
|
|
|
21,231
|
|
|
|
22,695
|
|
|
|
67,630
|
|
|
|
61,921
|
|
Home Care & Hospice
|
|
|
21,652
|
|
|
|
25,773
|
|
|
|
72,776
|
|
|
|
76,631
|
|
Shared Services
|
|
|
366
|
|
|
|
439
|
|
|
|
1,003
|
|
|
|
1,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
433,912
|
|
|
$
|
394,203
|
|
|
$
|
1,264,099
|
|
|
$
|
1,166,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations:
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physician
|
|
$
|
25,693
|
|
|
$
|
23,936
|
|
|
$
|
69,026
|
|
|
$
|
68,701
|
|
Laboratory
|
|
|
13,295
|
|
|
|
9,838
|
|
|
|
32,626
|
|
|
|
28,265
|
|
Dispensing
|
|
|
(1,211
|
)
|
|
|
2,740
|
|
|
|
(379
|
)
|
|
|
5,372
|
|
Home Care & Hospice
|
|
|
2,348
|
|
|
|
2,430
|
|
|
|
6,956
|
|
|
|
7,637
|
|
Shared Services
|
|
|
(16,118
|
)
|
|
|
(11,006
|
)
|
|
|
(35,997
|
)
|
|
|
(32,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
|
24,007
|
|
|
|
27,938
|
|
|
|
72,232
|
|
|
|
77,949
|
|
|
|
|
|
|
Interest expense
|
|
|
(8,778
|
)
|
|
|
(4,784
|
)
|
|
|
(25,820
|
)
|
|
|
(13,864
|
)
|
Interest income
|
|
|
16
|
|
|
|
15
|
|
|
|
43
|
|
|
|
59
|
|
Other income, net
|
|
|
415
|
|
|
|
596
|
|
|
|
1,138
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations Before Provision for Income Taxes:
|
|
$
|
15,660
|
|
|
$
|
23,765
|
|
|
$
|
47,593
|
|
|
$
|
65,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physician
|
|
$
|
2,582
|
|
|
$
|
2,501
|
|
|
$
|
7,885
|
|
|
$
|
7,342
|
|
Laboratory
|
|
|
773
|
|
|
|
381
|
|
|
|
2,097
|
|
|
|
1,113
|
|
Dispensing
|
|
|
1,928
|
|
|
|
1,216
|
|
|
|
5,060
|
|
|
|
3,381
|
|
Home Care & Hospice
|
|
|
215
|
|
|
|
257
|
|
|
|
645
|
|
|
|
763
|
|
Shared Services
|
|
|
2,814
|
|
|
|
2,795
|
|
|
|
8,392
|
|
|
|
8,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
8,312
|
|
|
$
|
7,150
|
|
|
$
|
24,079
|
|
|
$
|
20,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 28,
2012
|
|
|
March 30,
2012
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
Operating segments
|
|
$
|
741,489
|
|
|
$
|
610,859
|
|
Shared Services
|
|
|
312,907
|
|
|
|
267,733
|
|
Assets held for sale
|
|
|
252,420
|
|
|
|
277,378
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,306,816
|
|
|
$
|
1,155,970
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Operating income includes an allocation of costs of healthcare distribution services as defined above.
|
(b)
|
Depreciation and amortization includes an allocated cost of healthcare distribution services as defined above.
|
Total assets are not disclosed by operating segment as certain assets are shared amongst the segments, such as inventory and accounts receivable. It is
not practicable to specifically allocate such assets to the operating segments.
19
The Companys
provision for income taxes and effective tax rate for the three and nine months ended December 28, 2012 and December 30, 2011 are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
|
|
|
|
December 28,
2012
|
|
|
December 30,
2011
|
|
|
|
|
(dollars in millions)
|
|
Amount
|
|
|
Effective
Rate
|
|
|
Amount
|
|
|
Effective
Rate
|
|
|
Decrease
|
|
|
Amount
|
|
|
Effective
Rate
|
|
|
Amount
|
|
|
Effective
Rate
|
|
|
Decrease
|
|
Total Company
|
|
$
|
5.1
|
|
|
|
32.7
|
%
|
|
$
|
7.9
|
|
|
|
33.4
|
%
|
|
$
|
(2.8
|
)
|
|
$
|
15.4
|
|
|
|
32.4
|
%
|
|
$
|
23.4
|
|
|
|
35.6
|
%
|
|
$
|
(8.0
|
)
|
The effective rate for the three and nine months ended December 28, 2012 and December 30, 2011 was impacted by
a reorganization of the Companys non-U.S. global sourcing subsidiaries. This reorganization increased the responsibilities and contributions of the non-U.S. subsidiaries, proportionally increasing their income and reducing the income of
the U.S. subsidiaries. As the non-U.S. subsidiaries are generally subject to tax at rates lower than the U.S. subsidiaries, an increase in the proportion of the Companys taxable earnings originating outside the U.S. favorably impacts the
effective tax rate.
13.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation
On December 5, 2012, a
putative class action complaint was filed on behalf of an alleged public stockholder of PSS. The lawsuit, Baltimore County Employees Retirement System v. Gary A. Corless, et al., Case No. 16-2012-CA-013015-XXXX-MA, was filed in the
Circuit Court of the Fourth Judicial Circuit in and for Duval County, Florida. The defendants in the lawsuit include PSS, members of the Companys board of directors, McKesson, The Goldman Sachs Group, Inc., and Goldman, Sachs & Co.
The lawsuit alleges, among other things, that PSS directors breached their fiduciary duties in connection with the proposed merger by failing to maximize stockholder value and by failing to disclose material information in the November 16, 2012
Preliminary Proxy Statement, and that McKesson and the Goldman Sachs entities aided and abetted the various breaches of fiduciary duty. In addition to monetary damages in an unspecified amount and other remedies, the lawsuit seeks to enjoin PSS and
its directors from consummating the merger. The lawsuit is in its preliminary stage. The Company believes this lawsuit is without merit, and intends to vigorously defend against the action. The Company believes that the lawsuit will not delay the
planned merger with McKesson.
The Company is party to other various legal and administrative proceedings and claims arising in the normal
course of business. While any litigation contains an element of uncertainty, the Company, after consultation with legal counsel, believes that the outcome of such other proceedings or claims which are pending or known to be threatened will not have
a material adverse effect on the Companys 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 to two times their 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 one and one-half to three times their 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 twelve months to two years.
During the nine months ended December 28, 2012, the Company amended the employment agreements of certain executive officers. The amendments to the employment agreements were included as exhibits to
reports previously filed with the SEC.
20
If a supply agreement related to the Companys store brands, including Select Medical Products and
other specialty brand products (collectively known as store brand or store brands) between a vendor and the Company were to be terminated, then the Company may be required to purchase from the vendor all remaining finished
and unfinished products and product-materials ordered or held by the vendor. As of December 28, 2012, 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 store brand products to the Company.