- Quarterly Report (10-Q)

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 September 28, 2012

¨	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

LOGO

PSS WORLD MEDICAL, INC.

(Exact name of registrant as specified in its charter)


Florida		59-2280364
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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 November 2, 2012 was 50,319,583 shares.

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

SEPTEMBER 28, 2012

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 September 28, 2012 and March 30, 2012		2

	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 28, 2012 and September 30, 2011		3

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 28, 2012 and September 30, 2011		4

	Unaudited Notes to Condensed Consolidated Financial Statements		5

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

3.	Quantitative and Qualitative Disclosures About Market Risk		44

4.	Controls and Procedures		44

	Part II--Other Information

1A.	Risk Factors		44

2.	Unregistered Sales of Equity Securities and Use of Proceeds		45

6.	Exhibits		46

	Signature		47

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 March 30, 2012, Current 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,” “purpose,” “mission,” “believes,” “seeks,” “estimates,” “may,” “could,” 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 will complete the combination with McKesson Corporation under the terms disclosed within the Agreement and Plan of Merger, as discussed in Footnote 15, Subsequent Events ;

•

Management’s expectation that future working capital needs, capital expenditures, and 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, proceeds from the Company’s debt offerings, capital markets, and/or other financing arrangements;

•

Management’s expectation that the reorganization of the Company’s global sourcing subsidiaries will have a sustained positive impact on the Company’s effective tax rate;

•

Management’s estimation and expectation of future payouts of long-term incentive compensation; 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 2012 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 2012 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.

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 28, 2012 AND MARCH 30, 2012

(Dollars in Thousands)


	September 28, 2012		March 30, 2012
ASSETS
Current Assets:
Cash and cash equivalents	$	122,351	$	163,152
Accounts receivable, net of allowance for doubtful accounts of $3,647 and $3,410 as of September 28, 2012 and March 30, 2012, respectively		194,255		189,542
Inventories		165,629		147,198
Prepaid expenses		6,962		4,936
Other current assets		45,762		39,250
Assets held for sale ^(a)		281,163		277,378

Total current assets		816,122		821,456
Property and equipment, net of accumulated depreciation of $145,024 and $134,235 as of September 28, 2012 and March 30, 2012, respectively		84,008		80,151
Other Assets:
Goodwill		142,473		109,457
Intangibles, net of accumulated amortization of $18,168 and $14,037 as of September 28, 2012 and March 30, 2012, respectively		52,802		33,546
Other assets		116,564		111,360

Total assets ^(a)	$	1,211,969	$	1,155,970


LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	132,071	$	118,719
Accrued expenses		36,096		37,436
Other current liabilities		12,635		8,015
Liabilities held for sale ^(a)		47,186		37,640

Total current liabilities		227,988		201,810
Long-term debt, excluding current portion		459,845		454,916
Other noncurrent liabilities		112,937		108,433

Total liabilities ^(a)		800,770		765,159

Commitments and contingencies (Note 13)
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, 50,313,887 and 50,312,323 shares issued and outstanding as of September 28, 2012 and March 30, 2012, respectively		494		495
Retained earnings		407,106		386,633

Total PSS World Medical, Inc. shareholders’ equity		407,600		387,128
Noncontrolling interest		3,599		3,683

Total equity		411,199		390,811

Total liabilities and equity	$	1,211,969	$	1,155,970

(a)	See Footnote 4, Variable Interest Entity , for discussion of the assets and liabilities related to the Company’s consolidated variable interest entities. See Footnote 3, Discontinued Operations , for discussion of assets and liabilities held for sale.

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

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 28, 2012 AND SEPTEMBER 30, 2011

(In Thousands, Except Per Share Data)


	For the Three Months Ended						For the Six Months Ended
	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
Net sales	$	420,798		$	391,710		$	830,187		$	772,201
Cost of goods sold		278,622			261,784			551,722			519,601

Gross profit		142,176			129,926			278,465			252,600

General and administrative expenses		78,270			67,663			157,952			139,611
Selling expenses		36,935			32,219			72,288			62,979

Income from operations		26,971			30,044			48,225			50,010


Other income (expense):
Interest expense		(8,538	)		(4,611	)		(17,042	)		(9,081	)
Interest income		13			17			27			44
Other income, net		243			437			723			969

Other expense, net		(8,282	)		(4,157	)		(16,292	)		(8,068	)


Income from continuing operations before provision for income taxes		18,689			25,887			31,933			41,942
Provision for income taxes		5,896			9,540			10,294			15,439

Income from continuing operations		12,793			16,347			21,639			26,503
Income from discontinued operations, net of taxes		2,604			3,778			4,291			7,767


Net income		15,397			20,125			25,930			34,270
Net income (loss) attributable to noncontrolling interest		127			94			(84	)		49


Net income attributable to PSS World Medical, Inc.	$	15,270		$	20,031		$	26,014		$	34,221


Earnings per common share—Basic:
Continuing operations	$	0.26		$	0.31		$	0.44		$	0.50
Discontinued operations		0.05			0.07			0.09			0.15

Attributable to PSS World Medical, Inc.	$	0.31		$	0.38		$	0.53		$	0.64


Earnings per common share—Diluted:
Continuing operations	$	0.26		$	0.30		$	0.43		$	0.48
Discontinued operations		0.05			0.07			0.09			0.14

Attributable to PSS World Medical, Inc.	$	0.30		$	0.37		$	0.52		$	0.61


Weighted average common shares outstanding:
Basic		49,431			52,309			49,463			53,237
Diluted		50,073			53,956			50,168			55,672

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

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED SEPTEMBER 28, 2012 AND SEPTEMBER 30, 2011

(Dollars in Thousands)


	Six Months Ended
	September 28, 2012			September 30, 2011
Cash Flows From Operating Activities:
Net income	$	25,930		$	34,270
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of taxes		(4,291	)		(7,767	)
Depreciation		11,140			10,443
Provision for deferred income taxes		(4,134	)		(2,402	)
Amortization of debt discount and issuance costs		5,759			4,993
Amortization of intangible assets		4,628			3,234
Noncash compensation expense		2,071			3,714
Provision for doubtful accounts		942			758
Provision for deferred compensation		559			523
Loss on sales of property and equipment		(8	)		(3	)
Changes in operating assets and liabilities, net of effects from business combinations and discontinued operations:
Accounts receivable, net		5,031			(2,494	)
Inventories		(10,189	)		(9,495	)
Prepaid expenses and other current assets		(8,699	)		(7,586	)
Other assets		(3,844	)		12,110
Accounts payable		9,826			16,654
Accrued expenses and other liabilities		1,688			(1,021	)
Net cash provided by operating activities, discontinued operations		12,053			1,552

Net cash provided by operating activities		48,462			57,483


Cash Flows From Investing Activities:
Payments for business acquisitions, net of cash acquired		(68,738	)		(10,036	)
Capital expenditures		(11,034	)		(9,688	)
Other		(170	)		(48	)
Net cash used in investing activities, discontinued operations		(1,230	)		(1,530	)

Net cash used in investing activities		(81,172	)		(21,302	)


Cash Flows From Financing Activities:
Purchase and retirement of common stock		(7,740	)		(80,905	)
Excess tax benefits from stock-based compensation arrangements		315			1,269
Payment for debt issuance costs		(676	)		—
Proceeds from exercise of stock options		10			337
Proceeds from borrowings on the revolving line of credit		—			131,583
Repayments on the revolving line of credit		—			(81,583	)
Payment of contingent consideration on business acquisitions		—			(1,000	)
Payments under capital lease obligations		—			(360	)
Net cash used in financing activities, discontinued operations		—			(22	)

Net cash used in financing activities		(8,091	)		(30,681	)


Net (decrease) increase in cash and cash equivalents		(40,801	)		5,500
Cash and cash equivalents, beginning of period		163,152			29,348

Cash and cash equivalents, end of period	$	122,351		$	34,848

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

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 28, 2012 AND SEPTEMBER 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”). The Company holds interests 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 unaudited condensed consolidated balance sheet as of March 30, 2012 has been derived from the Company’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2012 and are reported as of the most recent quarter end, September 28, 2012 excluding the impact of the Company’s merger with McKesson Corporation, as discussed below and further in Footnote 15, Subsequent Events.

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 six months ended September 28, 2012 and September 30, 2011 each consisted of 63 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 all necessary regulatory clearances and the approval of the Company’s shareholders. See Footnote 15, Subsequent Events , for additional information.

During the three months ended June 29, 2012, the Company’s Board of Directors approved a strategic restructuring plan (“the restructuring plan”) designed to transform the Company. The restructuring plan includes the sale of two businesses serving skilled nursing facilities within the Extended Care Business and specialty dental practices within the Physician Business. Additionally, the plan includes the integration of all distribution operations into one common distribution infrastructure, and the redesign of the Company’s shared services segment. As of September 28, 2012, the Company determined the two businesses being sold 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 . See Footnote 3, Discontinued Operations , 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.

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 Company’s fiscal year 2014. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this update.

During the six months ended September 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 Company’s statements of financial condition or results of operations, as the Company has no other comprehensive income items to disclose.

During the six months ended September 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 Company’s statements of financial condition or results of operations.

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, which can be made in the open market, privately negotiated transactions, and other transactions publicly disclosed through filings with the SEC.

The following table summarizes the common stock repurchases and Board of Directors authorizations during the period from March 30, 2012 to September 28, 2012:


(in thousands)	Shares

Shares available for repurchase as of March 30, 2012		437

Shares repurchased		(382	)


Shares available for repurchase as of September 28, 2012		55

During the six months ended September 28, 2012, the Company repurchased approximately 0.4 million shares of common stock at an average price of $20.26 per common share for $7,740, which reduced common stock and additional paid-in capital by approximately $4 and $7,736, respectively.

During fiscal year ended March 30, 2012, the Company’s additional paid-in capital balance was reduced to zero as a result of share repurchases. In accordance with ASC 505, Equity , retirements of the Company’s 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 September 28, 2012 and March 30, 2012, retained earnings was reduced by $5,541 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 six months ended September 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 $36,999. The combined purchase price of the 2013 acquisitions was $75,241, of which $3,900 was held in escrow and $6,225 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 $32,740 is tax deductible.

As of September 28, 2012, the purchase accounting for the 2013 acquisitions and acquisitions made during fiscal year 2012 (“the 2012 acquisitions”) had not been finalized. 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 six months ended September 28, 2012, the Company received cash payments of $450 and paid $144 for working capital adjustments related to prior year acquisitions and other acquisition-related adjustments. Additionally, the Company paid $1,000 in contingent consideration during the six months ended September 30, 2011 related to the earn-out component of a purchase agreement executed in fiscal year 2010. There were no contingent consideration payments during the six months ended September 28, 2012.

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 September 28, 2012			Opening Balance Sheet As Adjusted March 30, 2012			Measurement Period Adjustment			Opening Balance Sheet As Adjusted September 28, 2012
Current assets ^(a)	$	20,102		$	(442	)	$	19,660		$	7,188		$	(249	)	$	6,939
Assets held for sale		—			—			—			40,570			144			40,714
Goodwill		35,217			(2,477	)		32,740			22,574			249			22,823
Intangible assets		20,830			2,860			23,690			10,020			—			10,020
Noncurrent assets ^(b)		4,756			—			4,756			4,741			—			4,741
Accounts payable and other current liabilities		(5,664	)		(305	)		(5,969	)		(3,297	)		—			(3,297	)
Liabilities held for sale		—			—			—			(11,755	)		—			(11,755	)
Noncurrent liabilities ^(c)		—			—			—			(406	)		—			(406	)

Net assets acquired	$	75,241		$	(364	)	$	74,877		$	69,635		$	144		$	69,779

(a)

The following represents balances within Current assets as of September 28, 2012: 2013 acquisitions – accounts receivable $10,686, inventory $8,436, and other current assets $538; 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 September 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 September 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 Six Months Ended
(in thousands)	September 28, 2012		September 30, 2011		September 28, 2012		September 30, 2011
Net sales:
PSS World Medical, Inc. (as reported)	$	420,798	$	391,710	$	830,187	$	772,201
Supplemental Net Sales—2013 acquisitions ^(a)		—		32,605		14,261		60,964

Total Pro Forma Net Sales	$	420,798	$	424,315	$	844,448	$	833,165

Net income attributed to PSS World Medical, Inc.:
PSS World Medical, Inc. (as reported)	$	15,270	$	20,031	$	26,014	$	34,221
Supplemental Net Income—2013 acquisitions ^(a)		—		687		209		1,225

Total Pro Forma Net Income	$	15,270	$	20,719	$	26,224	$	35,446

Net income per common share:
Basic	$	0.31	$	0.40	$	0.53	$	0.67
Diluted	$	0.30	$	0.38	$	0.52	$	0.64

(a)

Represents proforma 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 six months ended September 28, 2012 will represent partial periods based on the date of acquisition.

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

During the six months ended September 28, 2012, the Company’s 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 Company’s shared services segment. As of September 28, 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 . See Footnote 15, Subsequent Events , for additional information.

The assets and liabilities of discontinued operations included on the Unaudited Condensed Consolidated Balance Sheets as of September 28, 2012 and March 30, 2012 are as follows:


	September 28, 2012		March 30, 2012
(in thousands)
Accounts receivable, net	$	67,025	$	68,158
Inventories		68,763		66,388
Prepaid and other current assets		8,593		7,068
Property and equipment, net		22,062		20,885
Goodwill		92,464		92,295
Intangibles, net		20,828		21,054
Other noncurrent assets		1,428		1,530

Assets held for sale	$	281,163	$	277,378

Accounts payable	$	32,403	$	27,814
Accrued expenses		8,819		4,317
Other current liabilities		4,659		4,026
Other noncurrent liabilities		1,305		1,483

Liabilities held for sale	$	47,186	$	37,640

The following table summarizes the net sales and total income from discontinued operations for the three and six months ended September 28, 2012 and September 30, 2011:


	For the Three Months Ended				For the Six Months Ended
	September 28,		September 30,		September 28,		September 30,
	2012		2011		2012		2011
(in thousands)
Net sales	$	129,934	$	130,046	$	264,780	$	263,237
Income before provision for income taxes		4,475		6,201		7,203		12,724
Provision for income taxes		1,871		2,423		2,912		4,957

Income from discontinued operations, net of taxes	$	2,604	$	3,778	$	4,291	$	7,767

During the six months ended September 28, 2012, the Company incurred $5,597 of costs associated with the strategic restructuring plan, including retention bonuses for employees and accounting, legal, and other professional fees.

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 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.

During the six months ended September 28, 2012, the Company’s Board of Directors approved a strategic restructuring plan which includes the sale of two business units serving skilled nursing facilities and specialty dental practices. The Company’s variable interest in Pathway has been included in the disposal group as part of the restructuring plan. See Footnote 3, Discontinued Operations , for additional information on the Company’s fiscal year 2013 strategic restructuring plan and corresponding discontinued operations.

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

5.	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 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 six months ended September 28, 2012 and September 30, 2011:


	For the Three Months Ended				For the Six Months Ended
	September 28,		September 30,		September 28,		September 30,
(in thousands)	2012		2011		2012		2011
Denominator-weighted average shares outstanding used in computing basic earnings per common share		49,431		52,309		49,463		53,237
Assumed conversion of the 2008 Notes		249		1,177		268		1,898
Assumed vesting of restricted stock		376		400		420		457
Assumed exercise of stock options ^(a)		17		70		17		80

Denominator-weighted average shares outstanding used in computing diluted earnings per common share		50,073		53,956		50,168		55,672

(a)

Options to purchase approximately 1,475 shares of common stock that were outstanding during the six months ended September 28, 2012 were not included in the computation of diluted earnings per share because the options’ exercise prices exceeded the average fair market value of the Company’s common stock, and, therefore, inclusion would be anti-dilutive. There were no anti-dilutive options outstanding as of September 30, 2011.

The Company included shares underlying its 2008 Notes in its diluted weighted average shares outstanding during the three and six months ended September 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 price of the Company’s 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.

6.	ACCRUED EXPENSES

Accrued expenses from continuing operations as of September 28, 2012 and March 30, 2012 were as follows:


	As of
(in thousands)	September 28, 2012		March 30, 2012
Accrued payroll	$	12,204	$	14,913
Accrued interest		2,212		2,565
Accrued annual incentive compensation		3,145		1,184
Other ^(a)		18,535		18,774

Accrued expenses	$	36,096	$	37,436

(a)	Amounts within the “Other” category of total accrued expenses were not considered individually significant as of September 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 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”).

Fiscal Year 2013 Issuances of Performance-Based Awards

On June 22, 2012, the Company’s 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 Company’s executive officers. These awards were granted under the Company’s 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 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.

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 Company’s 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.

The remaining Performance Shares will be measured based on relative total shareholder return (“TSR”), or the Company’s 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.

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 requisite 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 requisite 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 Company’s 2006 incentive Stock Plan to certain of the Company’s 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.

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 (years)		6.0

Based on these assumptions, the estimated fair value of the options granted during the of six months ended September 28, 2012, was approximately $1,935. As of September 28, 2012, there was $1,778 of unrecognized compensation cost related to the options granted during the six months ended September 28, 2012.

Stock Award Modification

During the six months ended September 28, 2012, the Compensation Committee approved an amendment to the outstanding Performance Shares and PARS Units held by certain of the Company’s executive officers to provide that the calculation of the earnings per share targets and the Company’s 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 six months ended September 28, 2012.

Change in Estimate

During the three and six months ended September 28, 2012, the Company changed its estimate of the number of shares to be earned on its performance based awards. This change reflected a decrease in estimated achievement of performance conditions based on actual and expected future financial performance.

As a result of the change in performance estimate during the three and six months ended September 28, 2012, stock based compensation expenses decreased $1,852 ($1,148, net of tax), or $0.02 per diluted share during the three months ended September 28, 2012 and decreased $1,480 ($918, net of tax), or $0.02 per diluted share during the six months ended September 28, 2012.

Activity for Stock-Based Awards

Outstanding stock-based awards granted under equity incentive plans as of September 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			2		305
Decrease from change in estimate		(221	)		—			—			—		—			—		—
Vested / Exercised		(139	)		(88	)		—			—		(54	)		—		(1	)
Forfeited		(85	)		—			(19	)		—		(12	)		—		—
Expired		—			—			—			—		—			—		—

Balance, September 28, 2012		—			304			467			59		395			10		353

Total stock-based compensation expense included in income from continuing operations during the three months ended September 28, 2012 and September 30, 2011 was approximately $304 and $1,456, respectively, with related income tax benefits of $115 and $553, respectively. Total stock-based compensation expense included in income from continuing operations during the six months ended September 28, 2012 and September 30, 2011 was approximately $1,531 and $3,408, respectively, with related income tax benefits of $582 and $1,295, respectively. No stock-based compensation expense was included in income from discontinued operations.

As of September 28, 2012, there was $13,914 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 4.4 years.

On October 24, 2012, the Company entered into the Merger Agreement under which McKesson Corporation will acquire all of its outstanding shares. See Footnote 15, Subsequent Events , for additional information.

DEBT

Outstanding debt consists of the following, in order of seniority:


	As of
(in thousands)	September 28, 2012		March 30, 2012
2012 Notes	$	250,000	$	250,000
2008 Notes		209,845		204,916

Total debt		459,845		454,916
Less: Current portion of long-term debt		—		—

Long-term debt	$	459,845	$	454,916

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 Company’s 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 Company’s 2012 Notes as of September 28, 2012 and March 30, 2012 was $250,000 and the fair value, which is estimated using a third party valuation model, was approximately $265,950 and $257,500, respectively.

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 Company’s 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 and is dependent on the trading price of the Company’s stock during the last 30 trading days of each quarter (“Contingent Conversion Trigger”). The Contingent Conversion Trigger was not met during the six months ended September 28, 2012; therefore, the notes may not be converted. As of September 28, 2012, the if-converted value did not exceed the principal amount of the 2008 Notes.

As of September 28, 2012 and March 30, 2012, the fair value of the 2008 Notes was approximately $284,050 and $302,174, respectively.

The principal balances, unamortized discounts and net carrying amounts of the liability components and the equity components for the Company’s 2008 Notes as of September 28, 2012 and March 30, 2012 are as follows:


	Liability Component							Equity Component
(in thousands)	Principal		Unamortized			Net Carrying		Carrying Amount
2008 Notes	Balance		Discount			Amount		Pretax ^(a)
As of September 28, 2012	$	230,000	$	(20,155	)	$	209,845	$	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.

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 15, Subsequent Events , 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 Company’s 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 bank’s 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 Company’s common stock, and the issuance of letters of credit, if necessary.

The Company had no outstanding borrowings under the RLOC as of September 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 $272.7 million under the RLOC. During the six months ended September 28, 2012, the Company had no borrowings under the RLOC, and as a result, had no average daily interest rate for the period.

During the six months ended September 28, 2012, the Company’s Board of Directors approved a strategic restructuring plan. The restructuring plan will include the sale of two businesses serving skilled nursing facilities and specialty dental practices. The sale of the businesses are expected to increase the Company’s available cash balances, while reducing the Company’s assets used to calculate its borrowing base under the RLOC. The Company estimates availability under the RLOC would be approximately $201.8 million as of September 28, 2012 as adjusted for the sale of these two businesses.

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 liability’s 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.

As of September 28, 2012 and March 30, 2012, the fair value of the Company’s financial assets and/or liabilities are measured using Level 1 or Level 3 inputs. The following table presents the Company’s assets and liabilities which are measured at fair value on a recurring basis as of September 28, 2012 and March 30, 2012, by level within the fair value hierarchy:


(in thousands)
September 28, 2012	Level 1		Level 3		Total
Assets:
Conversion option on VIE convertible note ^(a)	$	—	$	623	$	623

Liabilities:
Deferred compensation ^(b)	$	100,182	$	—	$	100,182
Contingent consideration ^(c)		—		409		409

Total liabilities	$	100,182	$	409	$	100,591


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 Company’s conversion option to acquire 73% of the outstanding common stock in the Company’s consolidated variable interest entity (“VIE”), which is located in Assets held for sale 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. 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 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. 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 Company’s 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 six months ended September 28, 2012:


(in thousands)	Level 3 Instruments
Assets:
Balance as of March 30, 2012	$	701
Fair value adjustment included in earnings		(78	)

Balance as of September 28, 2012	$	623


Liabilities:
Balance as of March 30, 2012	$	493
Settlement adjustment		(133	)
Fair value adjustment included in earnings		49

Balance as of September 28, 2012	$	409

The carrying amounts of the Company’s 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 Company’s supplemental disclosures for the six months ended September 28, 2012 and September 30, 2011 are as follows:


	For the Six Months Ended
(in thousands)	September 28, 2012		September 30, 2011
Cash paid for:
Interest	$	12,256	$	3,988
Income taxes, net	$	14,836	$	21,364

During the six months ended September 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 six months ended September 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 six months ended September 28, 2012 and September 30, 2011, the Company had no material non-cash transactions.

11.

SEGMENT INFORMATION

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.

During the six months ended September 28, 2012, the Company’s Board of Directors approved a strategic restructuring plan designed to transform the Company. The restructuring plan includes the sale of two businesses serving skilled nursing facilities within the Extended Care Business and specialty dental practices within the Physician Business. 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.

The following tables present financial information about the business segments:


	For the Three Months Ended						For the Six Months Ended
(in thousands)	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
Net Sales:
Physician	$	256,651		$	251,601		$	510,849		$	497,072
Laboratory		115,712			94,263			221,178			183,949
Dispensing		23,874			19,612			46,399			39,226
Home Care & Hospice		24,272			25,585			51,124			50,858
Shared Services		289			649			637			1,096

Total net sales	$	420,798		$	391,710		$	830,187		$	772,201


Income (Loss) from Operations: ^(a)
Physician	$	22,969		$	24,862		$	43,334		$	44,765
Laboratory		10,813			9,878			19,331			18,426
Dispensing		475			2,645			832			2,632
Home Care & Hospice		2,422			2,658			4,608			5,207
Shared Services		(9,708	)		(9,999	)		(19,880	)		(21,020	)

Total income from operations		26,971			30,044			48,225			50,010

Interest expense		(8,538	)		(4,611	)		(17,042	)		(9,081	)
Interest income		13			17			27			44
Other income, net		243			437			723			969

Income from Continuing Operations Before Provision for Income Taxes:	$	18,689		$	25,887		$	31,933		$	41,942


Depreciation and Amortization: ^(b)
Physician	$	2,689		$	2,443		$	5,303		$	4,840
Laboratory		755			367			1,323			732
Dispensing		1,657			1,106			3,132			2,165
Home Care & Hospice		215			253			430			506
Shared Services		2,799			2,772			5,580			5,434

Total depreciation and amortization	$	8,115		$	6,941		$	15,768		$	13,677


	As of
	September 28, 2012			March 30, 2012
Total Assets:
Operating segments	$	709,456		$	610,859
Shared Services		221,350			267,733
Assets held for sale		281,163			277,378

Total assets	$	1,211,969		$	1,155,970

(a)	Operating income includes an allocation of costs of healthcare distribution services as defined above.

(b)	Depreciation and amortization is 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. The Company is not able to specifically allocate such assets to the operating segments.

12.

INCOME TAXES

The Company’s provision for income taxes and effective tax rate for the six months ended September 28, 2012 and September 30, 2011 are presented in the following table:

For the Three Months Ended

For the Six Months Ended

September 28,
2012

September 30,
2011

September 28,
2012

September 30,
2011

(dollars in millions)

Amount

Effective
Rate

Amount

Effective
Rate

Decrease

Amount

Effective
Rate

Amount

Effective
Rate

Decrease

Total Company

5.9

31.5

9.5

36.9

(3.6

)

10.3

32.2

15.4

36.8

(5.1

)

The effective rate for the three and six months ended September 28, 2012 and September 30, 2011 was partially impacted by a reorganization of the Company’s 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 Company’s taxable earnings originating outside the U.S. favorably impacts the effective tax rate.

13.

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, 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 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 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 six months ended September 28, 2012, the Company amended the employment agreements of certain executive officers. The amendments to the employment agreements are included as exhibits to this report.

If a supply agreement related to the Company’s 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 September 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.

14.

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The 2012 Notes of the Company (the “Parent”) are fully and unconditionally guaranteed on a joint and several senior unsecured basis by certain of its domestic subsidiaries (the “Guarantor Subsidiaries”). The guarantees made by the Guarantor Subsidiaries will rank senior in right of payment to all of their existing and future obligations expressly subordinated or junior in right of payment to the notes, equal with all of their existing and future unsecured unsubordinated obligations, and will be effectively subordinated to any of their existing and future secured obligations to the extent of the value of the assets securing such obligations.

The following tables present the condensed consolidating financial information of the Parent, the Guarantor Subsidiaries, and the subsidiaries that are not guarantors (the “Non-Guarantor Subsidiaries”) as of September 28, 2012 and March 30, 2012 and for the years ended September 28, 2012 and September 30, 2011.

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 28, 2012

(Dollars in Thousands)


	Parent		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	47,515	$	18,087		$	56,749		$	—		$	122,351
Accounts receivable, net		133,691		60,564			—			—			194,255
Inventories		120,559		44,813			257			—			165,629
Intercompany receivable (payable)		369,087		(337,760	)		(23,111	)		(8,216	)		—
Prepaid expenses and other current assets		47,374		4,647			703			—			52,724
Assets held for sale		27,911		253,886			2,080			(2,714	)		281,163

Total current assets		746,137		44,237			36,678			(10,930	)		816,122
Property and equipment, net		38,427		45,491			90			—			84,008
Other Assets:
Goodwill		33,101		109,372			—			—			142,473
Intangibles, net		9,883		42,919			—			—			52,802
Investment in subsidiaries		169,019		32,846			—			(201,865	)		—
Other assets		100,202		16,326			36			—			116,564

Total assets	$	1,096,769	$	291,191		$	36,804		$	(212,795	)	$	1,211,969

LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	107,440	$	24,201		$	430		$	—		$	132,071
Accrued expenses		17,455		18,596			45			—			36,096
Other current liabilities		1,957		10,692			(14	)		—			12,635
Liabilities held for sale		5,468		43,214			3,308			(4,804	)		47,186

Total current liabilities		132,320		96,703			3,769			(4,804	)		227,988

Revolving line of credit and long-term debt, excluding current portion		459,845		—			—			—			459,845
Other noncurrent liabilities		93,405		19,532			—			—			112,937

Total liabilities		685,570		116,235			3,769			(4,804	)		800,770

Equity:
PSS World Medical Inc. shareholders’ equity:
Total PSS World Medical, Inc. shareholders’ equity		411,199		174,406			33,035			(211,040	)		407,600
Noncontrolling interest		—		550			—			3,049			3,599

Total equity		411,199		174,956			33,035			(207,991	)		411,199

Total liabilities and equity	$	1,096,769	$	291,191		$	36,804		$	(212,795	)	$	1,211,969

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 30, 2012

(Dollars in Thousands)


	Parent		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	117,448	$	13,529		$	32,175		$	—		$	163,152
Accounts receivable, net		137,214		22,591			29,737			—			189,542
Inventories		113,635		33,310			253			—			147,198
Intercompany receivable (payable)		290,404		(253,925	)		(37,043	)		564			—
Prepaid expenses and other current assets		39,483		4,590			113			—			44,186
Assets held for sale		26,975		250,522			2,526			(2,645	)		277,378

Total current assets		725,159		70,617			27,761			(2,081	)		821,456
Property and equipment, net		39,854		40,189			108			—			80,151
Other Assets:
Goodwill		31,319		78,138			—			—			109,457
Intangibles, net		10,435		23,111			—			—			33,546
Investment in subsidiaries		184,218		23,942			—			(208,160	)		—
Other assets		95,951		15,373			36			—			111,360

Total assets	$	1,086,936	$	251,370		$	27,905		$	(210,241	)	$	1,155,970

LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	122,254	$	(4,121	)	$	586		$	—		$	118,719
Accrued expenses		20,211		17,176			49			—			37,436
Other current liabilities		2,667		5,348			—			—			8,015
Liabilities held for sale		4,025		36,456			3,095			(5,936	)		37,640

Total current liabilities		149,157		54,859			3,730			(5,936	)		201,810
Revolving line of credit and long-term debt, excluding current portion		454,916		—			—			—			454,916
Other noncurrent liabilities		92,052		16,381			—			—			108,433

Total liabilities		696,125		71,240			3,730			(5,936	)		765,159

Equity:
PSS World Medical Inc. shareholders’ equity:
Total PSS World Medical, Inc. shareholders’ equity		390,811		179,536			24,175			(207,394	)		387,128
Noncontrolling interest		—		594			—			3,089			3,683

Total equity		390,811		180,130			24,175			(204,305	)		390,811

Total liabilities and equity	$	1,086,936	$	251,370		$	27,905		$	(210,241	)	$	1,155,970

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2012

(Dollars in Thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	298,495		$	120,368		$	30,331		$	(28,396	)	$	420,798
Cost of goods sold		209,910			67,339			23,629			(22,256	)		278,622

Gross profit		88,585			53,029			6,702			(6,140	)		142,176
General and administrative expenses		51,038			26,073			1,159			—			78,270
Selling expenses		27,254			9,681			—			—			36,935
Equity earnings of subsidiaries		10,490			5,584			—			(16,074	)		—

Income from operations		20,783			22,859			5,543			(22,214	)		26,971

Other income (expense):
Interest expense		(8,531	)		(7	)		—			—			(8,538	)
Interest income		351			(338	)		—			—			13
Other income, net		83			161			(1	)		—			243

Other expense, net		(8,097	)		(184	)		(1	)		—			(8,282	)

Income from continuing operations before provision for income taxes		12,686			22,675			5,542			(22,214	)		18,689
(Benefit) provision for income taxes		(7,694	)		13,590			—			—			5,896

Income from continuing operations		20,380			9,085			5,542			(22,214	)		12,793
Income from discontinued operations, net of taxes		1,152			1,405			42			5			2,604

Net income		21,532			10,490			5,584			(22,209	)		15,397
Net (loss) income attributable to noncontrolling interest		—			(29	)		—			156			127

Net income attributable to PSS World Medical, Inc.	$	21,532		$	10,519		$	5,584		$	(22,365	)	$	15,270

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

(Dollars in Thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	293,019		$	95,681		$	3,010		$	—		$	391,710
Cost of goods sold		208,033			53,129			622			—			261,784

Gross profit		84,986			42,552			2,388			—			129,926
General and administrative expenses		47,286			19,394			983			—			67,663
Selling expenses		25,130			7,089			—			—			32,219
Equity earnings of subsidiaries		7,184			1,483			—			(8,667	)		—

Income from operations		19,754			17,552			1,405			(8,667	)		30,044

Other income (expense):
Interest expense		(4,483	)		(128	)		—			—			(4,611	)
Interest income		324			(307	)		—			—			17
Other income, net		295			146			(4	)		—			437

Other expense, net		(3,864	)		(289	)		(4	)		—			(4,157	)

Income from continuing operations before provision for income taxes		15,890			17,263			1,401			(8,667	)		25,887
(Benefit) provision for income taxes		(3,272	)		12,812			—			—			9,540

Income from continuing operations		19,162			4,451			1,401			(8,667	)		16,347
Income from discontinued operations, net of taxes		958			2,733			82			5			3,778

Net income		20,120			7,184			1,483			(8,662	)		20,125
Net income attributable to noncontrolling interest		—			84			—			10			94

Net income attributable to PSS World Medical, Inc.	$	20,120		$	7,100		$	1,483		$	(8,672	)	$	20,031

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED SEPTEMBER 28, 2012

(Dollars in Thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	596,655		$	220,580		$	53,475		$	(40,523	)	$	830,187
Cost of goods sold		421,217			118,713			42,323			(30,531	)		551,722

Gross profit		175,438			101,867			11,152			(9,992	)		278,465
General and administrative expenses		105,331			50,347			2,274			—			157,952
Selling expenses		53,711			18,577			—			—			72,288
Equity earnings of subsidiaries		16,452			8,860			—			(25,312	)		—

Income from operations		32,848			41,803			8,878			(35,304	)		48,225

Other income (expense):
Interest expense		(17,024	)		(18	)		—			—			(17,042	)
Interest income		705			(678	)		—			—			27
Other income, net		378			347			(2	)		—			723

Other expense, net		(15,941	)		(349	)		(2	)		—			(16,292	)

Income from continuing operations before provision for income taxes		16,907			41,454			8,876			(35,304	)		31,933
(Benefit) provision for income taxes		(16,698	)		26,992			—			—			10,294

Income from continuing operations		33,605			14,462			8,876			(35,304	)		21,639
Income (loss) from discontinued operations, net of taxes		2,307			1,990			(16	)		10			4,291

Net income		35,912			16,452			8,860			(35,294	)		25,930
Net loss attributable to noncontrolling interest		—			(44	)		—			(40	)		(84	)

Net income attributable to PSS World Medical, Inc.	$	35,912		$	16,496		$	8,860		$	(35,254	)	$	26,014

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011

(Dollars in Thousands)


	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	579,863		$	185,977		$	6,361		$	—		$	772,201
Cost of goods sold		413,832			104,537			1,232			—			519,601

Gross profit		166,031			81,440			5,129			—			252,600
General and administrative expenses		98,259			39,444			1,908			—			139,611
Selling expenses		48,967			14,012			—			—			62,979
Equity earnings of subsidiaries		11,194			3,347			—			(14,541	)		—

Income from operations		29,999			31,331			3,221			(14,541	)		50,010

Other income (expense):
Interest expense		(8,807	)		(274	)		—			—			(9,081	)
Interest income		667			(623	)		—			—			44
Other income, net		608			373			(12	)		—			969

Other expense, net		(7,532	)		(524	)		(12	)		—			(8,068	)

Income from continuing operations before provision for income taxes		22,467			30,807			3,209			(14,541	)		41,942
(Benefit) provision for income taxes		(9,716	)		25,155			—			—			15,439

Income from continuing operations		32,183			5,652			3,209			(14,541	)		26,503
Income from discontinued operations, net of taxes		2,077			5,542			138			10			7,767

Net income		34,260			11,194			3,347			(14,531	)		34,270
Net loss attributable to noncontrolling interest		—			55			—			(6	)		49

Net income attributable to PSS World Medical, Inc.	$	34,260		$	11,139		$	3,347		$	(14,525	)	$	34,221

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED SEPTEMBER 28, 2012

(Dollars in Thousands)


	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net cash (used in) provided by operating activities	$	(79,189	)	$	103,101		$	24,472		$	78		$	48,462

Cash Flows From Investing Activities:
Payments for business combinations, net of cash acquired		(2,509	)		(66,229	)		—			—			(68,738	)
Capital expenditures		(1,749	)		(9,284	)		(1	)		—			(11,034	)
Other		(28	)		(142	)		—			—			(170	)
Net cash used in investing activities, discontinued operations		(37	)		(1,218	)		25			—			(1,230	)

Net cash used in investing activities		(4,323	)		(76,873	)		24			—			(81,172	)

Cash Flows From Financing Activities:
Purchase and retirement of common stock		(7,740	)		—			—			—			(7,740	)
Excess tax benefits from stock-based compensation arrangements		315			—			—			—			315
Payment for debt issuance costs		(676	)		—			—			—			(676	)
Proceeds from exercise of stock options		10			—			—			—			10
Intercompany dividend		21,670			(21,670	)		—			—			—
Net cash (used in) provided by financing activities, discontinued operations		—			—			78			(78	)		—

Net cash provided by (used in) financing activities		13,579			(21,670	)		78			(78	)		(8,091	)

Net (decrease) increase in cash and cash equivalents		(69,933	)		4,558			24,574			—			(40,801	)
Cash and cash equivalents, beginning of period		117,448			13,529			32,175			—			163,152

Cash and cash equivalents, end of period	$	47,515		$	18,087		$	56,749		$	—		$	122,351

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011

(Dollars in Thousands)


	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net cash provided by (used in) operating activities	$	12,283		$	45,018		$	148		$	34		$	57,483

Cash Flows From Investing Activities:
Payments for business combinations, net of cash acquired		(334	)		(9,702	)		—			—			(10,036	)
Capital expenditures		(1,458	)		(8,227	)		(3	)		—			(9,688	)
Other		(48	)		—			—			—			(48	)
Net cash used in investing activities, discontinued operations		(23	)		(1,476	)		(31	)		—			(1,530	)

Net cash used in investing activities		(1,863	)		(19,405	)		(34	)		—			(21,302	)

Cash Flows From Financing Activities:
Purchase and retirement of common stock		(80,905	)		—			—			—			(80,905	)
Excess tax benefits from stock-based compensation arrangements		1,269			—			—			—			1,269
Proceeds from exercise of stock options		337			—			—			—			337
Proceeds from borrowings on the revolving line of credit		131,583			—			—			—			131,583
Repayments on the revolving line of credit		(81,583	)		—			—			—			(81,583	)
Payment of contingent consideration on business acquisitions		—			(1,000	)		—			—			(1,000	)
Payments under capital lease obligations		(18	)		(342	)		—			—			(360	)
Intercompany dividend		19,200			(19,200	)		—			—			—
Net cash used in financing activities, discontinued operations		—			(22	)		34			(34	)		(22	)

Net cash (used in) provided by financing activities		(10,117	)		(20,564	)		34			(34	)		(30,681	)

Net (decrease) increase in cash and cash equivalents		303			5,049			148			—			5,500
Cash and cash equivalents, beginning of period		13,901			3,568			11,879			—			29,348

Cash and cash equivalents, end of period	$	14,204		$	8,617		$	12,027		$	—		$	34,848

15.

SUBSEQUENT EVENTS

Agreement and 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 Company’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 all necessary regulatory clearances and the approval of the Company’s shareholders.

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. 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.

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 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.

Sale of Business

On November 5, 2012, the Company completed the sale of its specialty dental distribution business to a third party for a sale price of $68,000. The assets and liabilities of this business were classified as held for sale as of September 28, 2012 and March 30, 2012.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE COMPANY

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

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

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

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

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

EXECUTIVE OVERVIEW

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

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

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

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

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

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

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

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

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

Acquisitions

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

Restructuring Plan

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

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

NET SALES

The following table summarizes net sales period over period:


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

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

Physician

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


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

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

Selling days		63		63					127		127

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

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

(c)	Equipment from branded manufacturers.

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

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

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

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

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

Laboratory

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


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

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

Selling days		63		63					127		127

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

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

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

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

Dispensing

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


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

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

Selling days		63		63					127		127

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

Home Care & Hospice

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


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

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

Selling days		63		63					127		127

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

GROSS PROFIT

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

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

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

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

GENERAL AND ADMINISTRATIVE EXPENSES


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

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

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

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

Physician

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

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

Laboratory

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

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

Dispensing

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

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

Home Care & Hospice

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

Shared Services

General and administrative expenses decreased $1.2 million during the six months ended September 28, 2012, when compared to the same period in the prior fiscal year. This decrease was attributable to a decrease in incentive and stock-based compensation expense of $2.6 million related to a change in estimated payouts of performance incentives and the modification of the Performance Shares for certain of the Company’s executive officers, partially offset by an increase in overall medical expenses of $2.3 million.

SELLING EXPENSES

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


	For the Three Months Ended												For the Six Months Ended
	September 28, 2012					September 30, 2011							September 28, 2012					September 30, 2011
(dollars in millions)	Amount		% of Net Sales			Amount		% of Net Sales			Increase		Amount		% of Net Sales			Amount		% of Net Sales			Increase
Physician	$	23.2		9.1	%	$	21.5		8.5	%	$	1.7	$	45.6		8.9	%	$	41.5		8.4	%	$	4.1
Laboratory		9.9		8.6			8.0		8.5			1.9		19.0		8.6			15.7		8.5			3.3
Dispensing		3.0		12.5			1.9		9.9			1.1		6.0		12.9			4.2		10.6			1.8
Home Care & Hospice		0.8		3.3			0.8		3.1			—		1.7		3.3			1.6		3.1			0.1

Total	$	36.9		8.8	%	$	32.2		8.2	%	$	4.7	$	72.3		8.7	%	$	63.0		8.2	%	$	9.3

Selling expenses are principally driven by commission expenses, which are generally paid to sales representatives based on gross profit dollars, gross margin, and other measures of profitability. The change in selling expenses for the Physician, Laboratory, Dispensing, and Home Care & Hospice businesses was relatively consistent with the change in gross profit dollars and gross margin during the three and six months ended September 28, 2012. In addition, the Company continues to expand its sales force and add health systems sales personnel, which contributed to increased selling expenses.

PROVISION FOR INCOME TAXES

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

For the Three Months Ended

For the Six Months Ended

September 28,
2012

September 30,
2011

September 28,
2012

September 30,
2011

(dollars in millions)

Amount

Effective
Rate

Amount

Effective
Rate

Decrease

Amount

Effective
Rate

Amount

Effective
Rate

Decrease

Total Company

5.9

31.5

9.5

36.9

(3.6

)

10.3

32.2

15.4

36.8

(5.1

)

The effective rate for the three and six months ended September 28, 2012 was partially impacted by a reorganization of the Company’s non-U.S. global sourcing subsidiaries. This reorganization, completed during the third quarter of fiscal year 2012, increased 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 Company’s taxable earnings originating outside the U.S. favorably impacts the effective tax rate. The Company expects this global reorganization to continue to have a sustained positive impact on its effective tax rate; however, the Company cannot determine what impact, if any, the strategic restructuring plan may have on the tax rate in future periods.

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
	September 28, 2012			September 30, 2011
Days Sales Outstanding: ^(a)
Consolidated		41.6			41.4

Days On Hand: ^(b)
Consolidated		55.4			54.9

Days in Accounts Payable: ^(c)
Consolidated		42.8			41.2

Cash Conversion Days: ^(d)
Consolidated		54.2			55.2

Inventory Turnover: ^(e)
Consolidated		6.5			6.6

Return on Committed Capital ^(f)
Consolidated		38.1	%		46.4	%

(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 plus (i) provision for income taxes, (ii) amortization, and (iii) interest expense; less interest income for the current quarterly period. Average committed capital is calculated as total assets, less (i) cash, (ii) goodwill and intangibles, and (iii) liabilities, excluding current and long-term debt, for the current and previous quarterly periods, divided by two.

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


	As of
(dollars in millions)	September 28, 2012				March 30, 2012
Capital Structure:
2012 Notes ^(a)		$	250.0			$	250.0
2008 Notes ^(a)			209.8				204.9
Cash and cash equivalents			(122.4	)			(163.2	)


Net debt			337.4				291.7
Total equity			411.2				390.8


Total Capital		$	748.6			$	682.5


Operating Working Capital:
Accounts receivable, net		$	194.3			$	189.5
Inventories			165.6				147.2
Accounts payable			(132.1	)			(118.7	)

Operating Working Capital		$	227.8			$	218.0

(a)	Outstanding debt is presented in order of seniority.

Cash Flows from Operating Activities

Net cash provided by operating activities was $48.5 million and $57.5 million for the six months ended September 28, 2012 and September 30, 2011, respectively. The decline in cash provided by operating activities was the result of an increase in operating working capital of $9.8 million.

As of September 28, 2012, the Company has a deferred income tax liability of $17.3 million (tax-effected) related to interest deductions taken for tax purposes on its 2004 Notes. The liability will be fully deferred for the next two 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 $81.2 million and $21.3 million during the six months ended September 28, 2012 and September 30, 2011, respectively, and included the following:

•

Capital expenditures totaled $11.0 million and $9.7 million during the six months ended September 28, 2012 and September 30, 2011, respectively, of which approximately $8.9 million and $8.1 million, respectively, related primarily to the development and enhancement of the Company’s ERP and supply chain systems, electronic commerce platforms, and internal productivity software. Capital expenditures related to distribution center expansions and enhancements were approximately $0.9 million and $0.6 million during the six months ended September 28, 2012 and September 30, 2011, respectively.

•

Payments for business acquisitions, net of cash acquired, were $68.7 million and $10.0 million during the six months ended September 28, 2012 and September 30, 2011, respectively. See Footnote 2, Purchase Business Combinations , for additional information.

Cash Flows from Financing Activities

Net cash used in financing activities was $8.1 million and $30.7 million during the six months ended September 28, 2012 and September 30, 2011, respectively, and was impacted by the following factors:

•

The Company repurchased approximately 0.4 million shares of common stock at an average price of $20.26 per common share for approximately $7.7 million, during the six months ended September 28, 2012. The Company repurchased approximately 3.1 million shares of common stock at an average price of $26.34 per common share for approximately $80.9 million, during the six months ended September 30, 2011.

•

The Company recognized excess tax benefits from stock-based compensation arrangements of approximately $0.3 million and $1.3 million during the six months ended September 28, 2012 and September 30, 2011, respectively.

•

The Company paid debt issuance costs of approximately $0.7 million during the six months ended September 28, 2012. The Company did not pay debt issuance costs during the six months ended September 30, 2011.

•

The Company did not borrow on its RLOC during the six months ended September 28, 2012. The Company borrowed $131.6 million and repaid $81.6 million on its RLOC resulting in an outstanding balance of $50.0 million during the six months ended September 30, 2011.

•

There were no contingent consideration payments made during the six months ended September 28, 2012. The Company paid $1.0 million in contingent consideration during the six months ended September 30, 2011 related to an earn-out from a prior period acquisition.

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 debt may increase relative to the Company’s current position. While the Company believes it is well positioned, there can be no guarantee the recent disruptions in the overall economy and the financial markets will not adversely impact the business and results of operations.

The Company finances its business through cash from operating activities, the proceeds from the 2012 Notes and 2008 Notes offerings, and the $300.0 million RLOC. The ability to generate sufficient cash from operating activities is dependent on the continued demand for the Company’s products and services and its access to those products and services from suppliers. The Company’s capital structure provides the financial resources to support the Company’s core business strategies and revenue growth. The RLOC, 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 its capital include programs to grow sales, make fold-in and strategic acquisitions, and repurchase of its common stock.

As the Company’s business grows, its cash and working capital requirements are expected to increase. The Company expects the overall growth in the business will be funded through a combination of cash flows from operating activities, borrowings under the RLOC, proceeds from the issuance of its 2012 Notes, capital markets, and/or other financing arrangements.

During the six months ended September 28, 2012, the Company’s Board of Directors approved a strategic restructuring plan. The restructuring plan will include the sale of two businesses serving skilled nursing facilities within the Extended Care Business and specialty dental practices within the Physician Business. The sale of the

businesses are expected to increase the Company’s available cash balances, while reducing the Company’s assets used to calculate its borrowing base under the RLOC. The Company estimates availability under the RLOC would be approximately $201.8 million as of September 28, 2012 as adjusted for the sale of these two businesses.

As of September 28, 2012, the Company has not entered into any material working capital commitments that require funding, other than the items discussed below and the obligations included in the future contractual obligations table included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2012.

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 equity or debt 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 Company paid an aggregate amount of $54.1 million to the counterparty for the purchased options. 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 in an aggregate amount of $25.4 million 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, also subject to adjustment. 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 are separate transactions, entered into by the Company with the counterparties, and are not part of the terms of the 2008 Notes. Holders of the 2008 Notes do not have any rights with respect to the warrants.

The combination of the purchased options and warrants 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 ASC 260, Earnings Per Share , and the Company’s stated policy of settling the principal amount in cash, the Company was required to include shares underlying the 2008 Notes in its diluted weighted average shares outstanding since the average stock price per share for the period exceeded $21.22 (the conversion price for the senior convertible notes). Only the number of shares that would be issuable under the treasury stock method of accounting for share dilution was included, which was based upon the amount by which the average stock price exceeded the conversion price. If the average stock price of the Company’s common stock exceeds $28.29 per share as outlined in the terms of the agreement, it will also include the effect of the additional potential shares that may be issued related to the warrants, which may negatively impact the Company’s diluted weighted average shares and diluted earnings per share.

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 September 28, 2012, the purchased options were “in the money” and would have been convertible into approximately 0.7 million shares of the Company’s common stock. The exercise of the purchased options is restricted to each conversion date of the 2008 Notes.

Change in Control

If a change in control of the Company occurs, as discussed in Footnote 15, Subsequent Events , 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. 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.

Additionally, upon the occurrence of a change in control (i) all outstanding options shall become fully exercisable, (ii) time-based vesting restrictions on all outstanding awards shall lapse, and (iii) the target payout opportunities attainable under all outstanding performance-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.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Critical Accounting Estimates are disclosed in the Annual Report on Form 10-K for the fiscal year ended March 30, 2012 filed on May 29, 2012 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

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 March 30, 2012 filed on May 29, 2012.

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 six months ended September 28, 2012 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 on Form 10-K for the fiscal year ended March 30, 2012, filed on May 29, 2012. 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.

The Company believes there have been no material changes from the risk factors disclosed in Part I, Item 1A, Risk Factors , in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2012, other than those noted below:

Risks Related to the Planned Merger:

The merger with McKesson Corporation is subject to customary closing conditions.

The merger with McKesson Corporation is subject to customary closing conditions, including all necessary regulatory clearances and the approval of the Company’s shareholders. The timing of the merger is subject to factors beyond the Company’s control. While the Company expects to complete the merger shortly following a special shareholder meeting, the merger may not be completed by such time or at all.

Failure to complete the merger could negatively impact the market price of the Company’s common stock and the Company’s future business and financial results.

Failure to complete the merger with McKesson Corporation could negatively impact the market price of the Company’s common stock to the extent that the current market price reflects an assumption that the merger will be completed. In addition, such failure could negatively impact the Company’s future business and financial results because of, among other things, the disruption that could occur as a result of uncertainties relating to a failure to complete the merger and the potential inability to recover certain transaction costs related to the merger. In addition, the attention of the Company’s management will have been diverted to the merger instead of the Company’s operations and pursuit of other opportunities that could have been beneficial to the Company.

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 March 30, 2012, there were 0.4 million shares available for repurchase under the existing stock repurchase program. 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 September 28, 2012:


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
June 30 - July 28		—	$	—		—		67,355
July 29 - August 28		9,696		21.63		9,696		57,659
August 29 - September 28		2,502		22.61		2,502		55,157

Total second quarter		12,198	$	21.83		12,198		55,157

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

ITEM 6.

EXHIBITS

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


Exhibit Number		Description

2.1		Agreement and Plan of Merger, dated as of October 24, 2012, among PSS World Medical, Inc., McKesson Corporation and Palm Merger Sub, Inc. (1)

10.1		Form of Nonstatutory Stock Option Certificate.

10.2		Amendment to Employment Agreement, dated as of September 14, 2012, by and between the Company and Joshua H. DeRienzis.

10.3		Amendment to Employment Agreement, dated as of September 13, 2012, by and between the Company and Mark E. Steele.

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.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Footnote Reference

(1)	Incorporated by Reference to the Company’s Current Report on Form 8-K, filed October 25, 2012.

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 November 7, 2012.


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)