(The following statement was released by the rating agency)
CHICAGO, April 10 (Fitch) Fitch Ratings has affirmed the ratings
of Owens &
Minor, Inc. (OMI) at 'BBB-'. The Rating Outlook is Stable. A
full list of rating
actions follows at the end of this release.
KEY RATING DRIVERS
--OMI holds a strong share of the steady and oligopolistic acute
medical-surgical (med-surg) products distribution market. Fitch
believes OMI is
well-positioned to maintain and/or grow market share in light of
consolidation and physician employment trends in the U.S.
--Revenue growth is being constrained by low price inflation and
sell-side margin pressure. Fitch forecasts fairly flat EBITDA on
digit revenue growth (mostly from Movianto) in 2013. Some modest
is expected in 2014 due to the anticipated increase in the
number of insured
individuals in the U.S., but pricing pressure will persist.
--Cash flows are consistent and sufficient to fund OMI's
elevated capex plans
and dividend. Fitch forecasts funds from operations (FFO) to be
million per year over the ratings horizon. Liquidity is solid.
--A very low debt balance provides the company ample flexibility
at its current
ratings. Debt leverage (total debt/EBITDA) is expected to be
sustained at or
below 0.8x over the ratings horizon. FFO adjusted leverage is
trend near 3.0x.
--Ratings are constrained by management's stated willingness to
increase debt leverage for M&A. OMI's history of relatively
financial management, combined with the limited number of
currently available, mitigate this risk somewhat.
--Though still in the early stages of growing its 3PL business,
integration of the 2012 purchase of Movianto, Fitch believes the
provides an important strategic opportunity for growth and
with its manufacturer customers/suppliers.
A low debt balance, consistent and sufficient cash flows and a
profile afford OMI ample headroom at its current 'BBB-' ratings.
OMI's current 'BBB-' rating will require debt leverage generally
or below 2.5x with funds from operations (FFO) of at least $120
company's target leverage is 2.0x, which is in line with the
criteria for its
M&A that caused leverage to increase to 3.0x-3.5x, in line with
competencies, could be appropriate at the current 'BBB-' ratings
expected debt leverage to return to 2.5x or lower within 12-18
downgrade could result from a transformational acquisition that
did not fit
OMI's current credit metrics and stable performance could
ratings momentum over the ratings horizon, though margin
declines and modestly
pressured core cash flows in 2011 and 2012 pressure the ratings
upgrade may also necessitate a tighter leverage commitment from
management. Fitch believes the current 'BBB-' ratings provide
flexibility to consummate appropriate and targeted M&A. Fitch
that OMI would reduce debt in a timely manner if it were to make
leveraging transaction, consistent with the company's history.
STRONG MARKET SHARE, STABLE OPERATIONS
OMI continues to exhibit solid operations despite overarching
healthcare utilization and pricing. EBITDA margins have remained
despite persistently weak hospital volumes and surgery
procedures. Some margin
pressure has become evident in 2011 and 2012, with
Fitch-calculated EBITDA margin declines of 14 bps in both 2012
Fitch expects these declines to moderate in 2013 and begin to
improvement in 2014 and beyond due to incremental volumes from
insurance coverage and a growing 3PL business. Profit margins
may also be aided
in the near-to-intermediate term by an increased focus on the
distribution of private label products and increased penetration
hospital-acquired physician practices and other customers
low-unit-of-measure (LUM) distribution. OMI's in-process IT
overhaul is also
expected to positively affect profitability in the next couple
In general, Fitch believes OMI's strategy of achieving growth
with large and
growing integrated delivery networks (IDNs) is sound and will
position OMI to
benefit from overall healthcare consolidation trends now
underway in the U.S.
and abroad. This strategy is likely to result in slightly lower
margins on its
base distribution services to these larger customers. However,
it also gives OMI
the opportunity to sell other value-adding services, including
and to increase the overall volume of product through its
largely fixed cost
TOP-LINE PRESSURE FROM FLAT VOLUMES, LOW PRICE INFLATION,
Organic top-line growth in OMI's base distribution business
largely due to continued weak healthcare utilization, low
inflation, and sell-side margin pressure discussed above. Fitch
trends to continue in 2013, leading to organic top-line growth
1-2%, reflective only of low price inflation. Overall revenue
of Movianto, is expected to be 3-4%. Material upside to these
come from new customer wins or better-than-expected penetration
services to existing customers during the year. Some incremental
expected to aid revenues in 2014, but such benefit will likely
CONSISTENT CASH FLOWS, GOOD LIQUIDITY
Aided by very good working capital management, Fitch expects OMI
cash from operations sufficient to fund its elevated capital
its dividend. Fitch expects FFO to approximate $160 million in
2013 and 2014.
Cash flows have been under some modest pressure in 2011 and 2012
due to the
trends cited above. FFO was approximately $160 million in both
2011 and 2012.
Given OMI's commitment to its dividend ($56 million in 2012) and
for increased capex in 2013 ($50 million forecasted for 2013),
that FFO of at least $120 million is necessary to support the
OMI's liquidity profile is solid, consisting of $98 million of
cash on hand at
Dec. 31, 2012 - even after consummating the $157 million
Movianto acquisition -
and an undrawn $350 million unsecured revolver due June 2017.
are very manageable, with only one $200 million issuance due in
AMPLE FLEXIBILITY AT CURRENT RATINGS
A very low debt balance, solid and steady cash flows, and a good
profile provide OMI ample flexibility at its 'BBB-' ratings.
including debt leverage of 0.8x at Dec. 31, 2012, could imply a
than OMI's current ratings. OMI's stable operations and the
oligopolistic nature of healthcare distribution could also
Fitch notes that adjusted leverage metrics are more indicative
of the current
'BBB-' ratings, as FFO adjusted leverage has trended up to 3.0x
at Dec. 31, 2012
from 2.6x at Dec. 31, 2009. Somewhat strained profit margins and
for continued tepid industry trends, leading to soft top-line
constrict positive ratings momentum for now.
Fitch believes OMI's 'BBB-' ratings provide flexibility for the
consummate sizeable targeted M&A over the ratings horizon. The
could sustain debt leverage up to 3.5x, so long as it was
anticipated that this
figure would moderate to 2.5x or lower within 12-18 months. OMI
its commitment to rapidly repaying debt after large M&A deals in
the past, and
Fitch would expect this commitment to be maintained.
Fitch has affirmed the ratings of OMI as follows:
--Issuer default rating at 'BBB-';
--Senior unsecured bank facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.
Jacob Bostwick, CPA
Fitch Ratings, Inc.
70 W Madison St.
Chicago, IL 60602
Bob Kirby, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
The ratings above
were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Navigating the Drug Channel - The ABCs (and Ds) of Drug
Pricing', July 25,
--'U.S. Healthcare Stats Quarterly - Third Quarter 2012', Jan.
Applicable Criteria and Related Research
Corporate Rating Methodology
Navigating the Drug Channel -- The ABCs (and Ds) of Drug Pricing
U.S. Healthcare Stats Quarterly â€” Third-Quarter 2012
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