Market Overview

Fitch Affirms Owens & Minor at 'BBB-'; Outlook Stable

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of Owens & Minor, Inc. (NYSE: OMI), including the long-term Issuer Default Rating (IDR), at 'BBB-'. The Rating Outlook is Stable.

A full list of rating actions, which apply to approximately $580 million at Dec. 31, 2015, follows at the end of this release.

KEY RATING DRIVERS

Strong Market Share: OMI holds a strong share of the steady and oligopolistic market for the distribution of medical-surgical (med-surg) products to U.S. acute care providers. Fitch believes OMI's strategy positions it well to maintain and/or grow market share in the long term, particularly in light of ongoing expansion initiatives among large integrated care delivery networks (IDNs) in the U.S.

Low Growth, Margins: Fitch expects stable organic growth in the low-single digits. Inherently low EBITDA margins (3.1% in 2015) are expected to modestly improve in 2016-2017. Growth of value-adding services, such as OMI's 3PL and kitting offerings, should provide an offset to Fitch's expectation for overall margin pressures associated with the growth of OMI's largest customers over the long term.

Steady, Sufficient Cash Generation: Cash flows are consistent and sufficient to fund OMI's capex plans and dividend, though working capital fluctuation can be significant. Free cash flow (FCF) is relatively light, however, and cash flow-based leverage metrics could constrain positive ratings momentum.

Ratings Flexibility: Financial metrics and the stability of OMI's markets are strong for the current 'BBB-' rating. However, ratings are constrained by management's historically stated willingness to considerably increase debt leverage for M&A. OMI's history of relatively conservative financial management, combined with the limited number of sizeable deals currently available, mitigates this risk somewhat.

Good Future Growth Prospects: Fitch believes that OMI's 3PL business, international presence, and kitting and related value-adding offerings provide important strategic growth drivers. Though still in their early stages, these initiatives should help strengthen the company's position with both manufacturer and IDN customers over the medium-to longer-term.

RATING SENSITIVITIES

OMI's current 'BBB-' ratings consider gross debt/EBITDA generally maintained between 2.0x and 2.5x with funds from operations (FFO) of at least $120 million. Moderate debt leverage, consistent and sufficient cash generation, and a solid liquidity profile afford OMI good flexibility at its current 'BBB-' ratings.

OMI's current credit metrics and stable performance could support positive ratings momentum in the next couple of years. A commitment to operating with gross debt/EBITDA around or below 2x, with evidence of sustainable margins and cash flows, could support consideration of an upgrade to 'BBB'. However, cash flow-based and adjusted leverage calculations may hinder any positive momentum. Consideration of an upgrade may also require evidence of strategic successes, including new customers and/or more penetrated relationships with current customers, in light of recent large contract losses. In the meantime, Fitch believes the current 'BBB-' ratings provide OMI flexibility to consummate targeted M&A.

A downgrade is unlikely to result from operational or competitive pressures over the ratings horizon. But downward ratings pressure could occur if an otherwise transformational acquisition or a shift away from OMI's historically conservative financial management strategy was expected to cause gross debt/EBITDA to increase sustainably and materially above 2.5x.

LIQUIDITY & DEBT STRUCTURE

Adequate Liquidity: OMI's liquidity profile comprises $115 million of readily available cash and $445 million available on its $450 million revolver due September 2019. Fitch sees relatively few domestic M&A targets that would exceed OMI's available liquidity but also believes the firm would have adequate access to the capital markets to raise funding, if necessary.

Simple Structure, Manageable Maturities: OMI's capital structure comprises an unsecured revolver and two notes issuances, each $275 million. The company has no material debt due before 2021.

KEY ASSUMPTIONS

Fitch makes the following key assumptions in its ratings case forecast for Owens & Minor, Inc.:

--Revenue growth of 2% in 2016 and -2% in 2017, with underlying growth around 3% offset by the loss of two significant customers;

--Modest EBITDA margin expansion with successful execution of renewed strategy, accelerating somewhat in 2017-2018;

--Stable debt levels with M&A funded using internal liquidity, resulting in gross debt/EBITDA between 1.5x and 2x;

--FFO between $200 million and $220 million; normalized annual FCF approaching $100 million.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

--Long-term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Fitch has moved the senior unsecured bank facility rating at OMI to its wholly-owned subsidiaries - the co-borrowers of the facility - and affirmed it as follows:

Owens & Minor Distribution, Inc.

--Senior unsecured bank facility at 'BBB-' (as co-borrower).

Owens & Minor Medical, Inc.

--Senior unsecured bank facility at 'BBB-' (as co-borrower).

The Rating Outlook is Stable.

Date of Relevant Rating Committee: 21 April 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002992

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002992

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1 312-368-3169
70 W Madison St
Chicago, IL 60602
or
Secondary Analyst
Greg Dickerson
Director
+1 212-908-0220
or
Committee Chairperson
Alex Bumazhny, CFA
Senior Director
+1 212-908-9179
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

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