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MDM Annual Report Digest

Minor, Cardinal Health and McKesson Medical-Surgical Solutions.

Owens & Minor has implemented margin initiatives to counter ongoing competitive pricing pressures, which management expects will not let up in the near future. Also, as suppliers continue to seek more restrictive agreements with distributors, Owens and Minor has been pursuing fewer alternate sourcing opportunities than in the past, resulting in lower product margins and reduced profitability.

The company is working to counteract the effects of these trends through OMSolutions, the company’s consulting and outsourcing business unit, and MediChoice, the company’s private-label brand of select medical/surgical products. In addition, the company is continuing to offer customers a wide range of value-added services, which result in higher margins for the company. The company continues to work with suppliers on programs to increase gross margin.

On Jan. 31, 2005, Owens and Minor acquired Access, a direct-to-consumer distributor of diabetic supplies and products for other chronic disease categories. The gross margin associated with direct-to-consumer distribution is substantially higher as a percent of revenue than the company’s core medical/surgical supply business.

The significant and ongoing emphasis on cost control in the healthcare industry puts pressure on suppliers, distributors and healthcare providers to manage their inventory more efficiently. Owens and Minor’s response to these challenges has been to develop inventory management capabilities including a highly flexible client/server warehouse management system; standardization of product whenever possible; and collaboration with supply-chain partners on inventory productivity initiatives such as vendor-managed inventory, freight optimization and lead-time reductions.

projects. Despite recent consolidation (including several acquisitions by Beacon), the roofing materials distribution industry remains highly fragmented.

Within the residential roofing market, the re-roofing market is twice the size of the new roofing market, accounting for over 69% of residential roofing demand in 2003 (latest figures available).

Demand for roofing products used on non-residential building is forecast to advance at a faster rate than roofing products used in residential construction, as a result of a rebound in construction activity in the office, commercial and industrial markets. New non-residential roofing is currently the fastest-growing portion of the U.S. roofing market. Improving economic conditions, including a better outlook for business and increased capital spending, are expected to drive expenditures for non-residential roofing. High-margin metal roofing will play an important role in the increased demand.

Beacon reports the demand for complementary building products is also growing, driven by the repair and remodeling market growth as well as the new construction market.

W.W. Grainger
Source: 2005 Annual Report
2005 revenues: $5.526 billion, up 9.4% (2004)
Grainger’s increase in sales was led by strong sales to commercial, government, manufacturing and natural resource sectors. The light and heavy manufacturing customer segments comprised over 25% of Grainger’s 2005 sales. National account sales were up 11.9%.

The company attributes part of its sales increase to the growth of its market expansion program. The first phase of the market expansion program, a multiyear initiative to strengthen the company’s presence in top metropolitan markets and better position itself to serve the local customer, was completed in 2005. The first phase included Atlanta, Denver and Seattle. Sales increase relative to those markets was 10% as compared with the year before. Phases two through four were in progress as of Dec. 31, 2005. Additional phases are scheduled for 2006 and beyond. Overall market expansion contributed about 1 percentage point to the segment sales growth.

Grainger continues to increase its focus on customer buying behavior. Grainger believes customers will continue to focus on reducing their costs of procuring facilities maintenance products. The company is increasing information available to employees for improved service to customers by installing an upgraded SAP branch operating system and replacing its legacy information systems with a new integrated software package also provided by SAP, in the U.S. branch-based businesses.

Capital spending in 2005 related to the market expansion program and SAP initiative was about $88 million, with total capital expenditure of more than $157 million.

Partially offsetting sales improvements was the negative effect of the wind-down of integrated supply and related automotive contracts. This had an approximately 2 percentage point negative effect on sales growth. But gross profit margins were improved due to reduced sales to integrated supply and automotive customers, who carry lower than average gross profit margins.

Grainger says its financial strength, with low debt and strong cash flow, positions it to fund acquisitions and major initiatives.

Owens & Minor
Source: 2005 Annual Report
2005 revenues: $4.82 billion, up 6.6% (2004)
The acute-care, medical/surgical supply distribution industry in the U.S. is highly competitive and consists of three major nationwide distributors: Owens &

It’s that time of year when companies release their 2005 annual reports to the public. We pored through several of them and distilled excerpts from reports we thought might be useful to MDM subscribers. Also, find other public distributors’ annual reports here.

Anixter International
Source: 2005 Annual Report
2005 revenues: $3.8 billion, up 17% (2004)
Raw material prices, especially for copper and petrochemicals, raised the costs of many goods sold. Anixter was able to pass through these higher costs and maintain its gross margins, generating more profit dollars per transaction. In addition, existing inventory purchased at previously lower prices and sold as prices increase, result in a higher gross profit margin.

In its recent first-quarter 2006 earnings report, Anixter expanded on the impact of raw materials pricing on its results. It reported that during the quarter, market-based copper prices averaged about $2.25 per pound, as compared with $1.47 per pound in the year-ago first quarter (2005). Anixter estimated that higher copper prices in the first quarter of 2006 accounted for about $24.2 million of its year-on-year increase in sales.

Anixter saw a continuing rebound in customer capital spending and larger projects. Among them: data center builds in the enterprise cabling market and in the natural resources market within its electrical and electronic wire and cable market.

Anixter also attributes its growth to recent strategic initiatives. For example, to meet customer requirements, the company added new products to its portfolio, including 10-gigabit copper data cabling and connectivity products. The company also continued to pursue the rapidly evolving and growing corporate security marketplace by introducing new products for closed circuit monitoring and access control.

Anixter is working to build its presence in the OEM supply market. To this end, in 2005, Anixter acquired UK-based Infast Group plc (fasteners/small components for OEM), significantly strengthening its presence in Europe and enhancing the company’s ability to compete globally. The company plans to lessen its focus now on acquisitions and increase focus on integration of recent acquisitions. It expects its OEM supply group to generate a greater part of Anixter’s revenues and earnings in years ahead.

Beacon Roofing Supply
Source: 2005 Annual Report
2005 revenues: $850.9 million, up 25% (2004)
Beacon, a building materials distributor, focuses primarily on residential and non-residential roofing materials in the U.S. and Canada. It also distributes complementary building materials, including siding, windows, specialty lumber products and waterproofing systems for residential and non-residential building exteriors. Beacon plans to continue its growth-by-acquisition strategy.

The company sells the majority of its products to roofing contractors involved with the replacement, or re-roofing, component of the roofing industry. Over 70 percent of expenditures in the roofing market are re-roofing projects, with the balance for new construction. Re-roofing projects are considered maintenance and repair expenditures and are less likely than new construction projects to be postponed during recession or slow economic growth.

As a result, demand for roofing products is less volatile than overall demand for construction

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