Fitch Affirms Owens & Minor's Ratings at 'BBB-'; Outlook Stable
CHICAGO -- April 10, 2013
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 care
medical-surgical (med-surg) products distribution market. Fitch believes OMI
is well-positioned to maintain and/or grow market share in light of hospital
consolidation and physician employment trends in the U.S.
--Revenue growth is being constrained by low price inflation and continued
sell-side margin pressure. Fitch forecasts fairly flat EBITDA on low-single
digit revenue growth (mostly from Movianto) in 2013. Some modest volume
benefit 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 $160-$200
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 forecasted
to trend near 3.0x.
--Ratings are constrained by management's stated willingness to materially
increase debt leverage for M&A. OMI's history of relatively conservative
financial management, combined with the limited number of sizeable deals
currently available, mitigate this risk somewhat.
--Though still in the early stages of growing its 3PL business, including the
integration of the 2012 purchase of Movianto, Fitch believes the 3PL business
provides an important strategic opportunity for growth and improved
positioning with its manufacturer customers/suppliers.
A low debt balance, consistent and sufficient cash flows and a good liquidity
profile afford OMI ample headroom at its current 'BBB-' ratings. Maintenance
of OMI's current 'BBB-' rating will require debt leverage generally maintained
at or below 2.5x with funds from operations (FFO) of at least $120 million.
The company's target leverage is 2.0x, which is in line with the criteria for
its 'BBB-' ratings.
M&A that caused leverage to increase to 3.0x-3.5x, in line with OMI's core
competencies, could be appropriate at the current 'BBB-' ratings if Fitch
expected debt leverage to return to 2.5x or lower within 12-18 months. A
downgrade could result from a transformational acquisition that did not fit
OMI's current credit metrics and stable performance could support positive
ratings momentum over the ratings horizon, though margin declines and modestly
pressured core cash flows in 2011 and 2012 pressure the ratings somewhat. An
upgrade may also necessitate a tighter leverage commitment from the company's
management. Fitch believes the current 'BBB-' ratings provide the company
flexibility to consummate appropriate and targeted M&A. Fitch further expects
that OMI would reduce debt in a timely manner if it were to make a large,
leveraging transaction, consistent with the company's history.
STRONG MARKET SHARE, STABLE OPERATIONS
OMI continues to exhibit solid operations despite overarching pressures on
healthcare utilization and pricing. EBITDA margins have remained fairly steady
despite persistently weak hospital volumes and surgery procedures. Some margin
pressure has become evident in 2011 and 2012, with year-over-year
Fitch-calculated EBITDA margin declines of 14 bps in both 2012 and 2011.
Fitch expects these declines to moderate in 2013 and begin to show modest
improvement in 2014 and beyond due to incremental volumes from expanded
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 sourcing
and distribution of private label products and increased penetration of
hospital-acquired physician practices and other customers requiring
low-unit-of-measure (LUM) distribution. OMI's in-process IT overhaul is also
expected to positively affect profitability in the next couple of years.
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 LUM
distribution, and to increase the overall volume of product through its
largely fixed cost operations.
TOP-LINE PRESSURE FROM FLAT VOLUMES, LOW PRICE INFLATION, SELL-SIDE MARGIN
Organic top-line growth in OMI's base distribution business remains soft,
largely due to continued weak healthcare utilization, low product price
inflation, and sell-side margin pressure discussed above. Fitch expects these
trends to continue in 2013, leading to organic top-line growth of
approximately 1-2%, reflective only of low price inflation. Overall revenue
growth, inclusive of Movianto, is expected to be 3-4%. Material upside to
these forecasts could come from new customer wins or better-than-expected
penetration of value-adding services to existing customers during the year.
Some incremental volumes are expected to aid revenues in 2014, but such
benefit will likely be modest.
CONSISTENT CASH FLOWS, GOOD LIQUIDITY
Aided by very good working capital management, Fitch expects OMI to generate
cash from operations sufficient to fund its elevated capital expenditures and
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 the
expectation for increased capex in 2013 ($50 million forecasted for 2013),
Fitch believes that FFO of at least $120 million is necessary to support the
current 'BBB-' ratings.
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. Debt
maturities 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 liquidity
profile provide OMI ample flexibility at its 'BBB-' ratings. Financial
metrics, including debt leverage of 0.8x at Dec. 31, 2012, could imply a
rating higher than OMI's current ratings. OMI's stable operations and the
steady and oligopolistic nature of healthcare distribution could also support
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 the
expectation for continued tepid industry trends, leading to soft top-line
growth, also constrict positive ratings momentum for now.
Fitch believes OMI's 'BBB-' ratings provide flexibility for the company to
consummate sizeable targeted M&A over the ratings horizon. The 'BBB-' ratings
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 has
evidenced 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.
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. 8, 2013.
Applicable Criteria and Related Research
Corporate Rating Methodology
Navigating the Drug Channel -- The ABCs (and Ds) of Drug Pricing
U.S. Healthcare Stats Quarterly -- Third-Quarter 2012
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Jacob Bostwick, CPA, +1 312-368-3169
Fitch Ratings, Inc.
70 W Madison St.
Chicago, IL 60602
Bob Kirby, CFA, +1 312-368-3147
Megan Neuburger, +1 212-908-0501
Brian Bertsch, +1 212-908-0549
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