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

Fitch Ratings has affirmed the long-term ratings of Owens & Minor Inc. (OMI) at 'BBB-'. The rating action affects approximately $200 million of debt at Dec. 31, 2011. The Rating Outlook is Stable.

The ratings are supported by OMI's:

--Continued steady operating profile;

--Strong position in the oligopolistic U.S. acute care medical-surgical distribution industry;

--Decent top-line growth despite depressed healthcare utilization;

--Low but stable profit margins with potential support from third-party logistics business in the intermediate-term;

--Consistent and sufficient cash flows; and

--A very low debt balance leading to considerable flexibility at current ratings.

Rating concerns include:

--The expectation for very modest growth in hospital admissions and healthcare utilization overall;

--Higher capital spending forecasts for IT and other investments; and

--The potential for leveraging transactions over the ratings horizon.

RATING ACTION TRIGGERS

A negative rating action could result from a leveraging transaction which pushes leverage to or above 3.0 times (x) to 3.5x with less than compelling evidence of returning to 2.5x or below within 12-18 months. A sizeable acquisition outside the range of OMI's core competencies could also pose a threat to the ratings. Further deteriorating economic conditions leading to depressed consumption of and demand for medical products could potentially add pressure to OMI's ratings as well.

A positive rating action is not anticipated in the near term, although the company currently has financial metrics and a business model that could give support for one. Fitch believes OMI's current 'BBB-' ratings provide adequate flexibility for the potential for leveraging transactions as outlined above and as demonstrated by OMI's 2006 purchase of McKesson Corp.'s acute care distribution business. Fitch anticipates that OMI would reduce leverage in a timely manner if it were to pursue such a large, leveraging acquisition.

STABLE PERFORMANCE THROUGH & SINCE WORST OF ECONOMIC DOWNTURN

Although certainly not immune to the effects of economic pressures, the medical products market is relatively recession-resistant. Nonetheless, volumes have been depressed somewhat due to declining hospital admissions and elective surgery procedures. Fitch believes these declines seem to have bottomed out - pending future macroeconomic developments - and should return to growth, albeit modest, in the intermediate term.

OMI has maintained solid operations despite the severe economic downturn, leading to strong and stable financial performance. Despite decreased utilization of healthcare, OMI has maintained stable EBITDA margins of approximately 2.8%-3% for each of the past four fiscal years. Funds from operations (FFO) has also been steady in the range of $160-$180 million over this same timeframe.

DECENT TOP-LINE GROWTH AND MARGIN SUPPORT

OMI generated good top-line growth of 6.2% in 2011, supported by flatter healthcare utilization trends compared to 2008-2010 and its new third-party logistics (3PL) business brought on in 2010. Fitch anticipates that moderate growth in healthcare utilization and the continued growth of OMI's 3PL business will support organic revenue growth in the mid-single digits over the ratings horizon. Furthermore, the trend of hospital networks acquiring and expanding into adjacent provider markets, such as physician practices and ambulatory surgery centers, provides OMI with a further opportunity for growth.

Margins in the medical products distribution business are inherently low. Fitch expects stable margins with modest support in the intermediate term as the higher-margin 3PL business grows and as the company's investments in product management and sourcing and information technology begin to pay off. Fitch notes that OMI's customers are as cost-conscious as ever in the midst of a healthcare environment that encompasses more rapid provider consolidation, reimbursement pressures, and regulatory uncertainty.

SUFFICIENT CASH FLOWS AND GOOD WORKING CAPITAL MANAGEMENT

Aided by very good working capital management, Fitch expects OMI to generate cash from operations sufficient to fund capital expenditures and the company's dividend. Forecasted FCF for 2012 is below what Fitch deems as a more normal run-rate for OMI due to increased investment in key technology modernizations. OMI has stated that it expects capital expenditures to increase materially in 2012 and 2013, and dividends will likely see modest growth in-line with previous years. Fitch notes that OMI's dividend has increased to 31.5% of FFO in 2011 from 18.2% in 2008. Fitch expects OMI to remain committed to growing its dividend over the ratings horizon.

SOLID LIQUIDITY, CONSIDERABLE FLEXIBILITY AT CURRENT RATINGS

OMI's current credit profile provides a considerable degree of flexibility at the company's current 'BBB-' ratings. Leverage of 0.81x at Dec. 31, 2011 is materially below the 2.0x-2.5x range stated as appropriate for the 'BBB-' ratings. The company's stable EBITDA margins in the face of the economic downturn, in addition to the stability of the medical-surgical distribution industry, contribute to OMI's stable credit profile.

Nevertheless, Fitch believes that OMI's current 'BBB-' ratings provide adequate flexibility in light of weak healthcare utilization trends, a growing dividend payout, and the potential for large, leveraging acquisitions over the ratings horizon.

At Dec. 31, 2011, OMI had approximately $136 million of cash and equivalents and $345 million available (net of $5 million in outstanding letters of credit) under its $350 million revolver due June 2013. The company has $200 million of notes due in 2016.

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-'.

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. 12, 2011);

--'2012 Outlook: U.S. Healthcare' (Dec. 7, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

2012 Outlook: U.S. Healthcare -- Accelerating Regulatory and Fiscal Challenges

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659178

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