OWENS & MINOR, INC.
Fitch Ratings has affirmed the Long-Term (LT) Issuer Default Ratings (IDR) at 'BB-' of
The Rating Outlook is Stable. The ratings apply to approximately
The affirmation of the OMI's ratings reflects the complementary nature of
Key Rating Drivers
Integration of
Favorable Outlook for Home Health Care: The outlook for increased demand of products and services in the home health care market represents an opportunity for continued growth and the
Operating Performance Pandemic Tailwinds: Fitch anticipates the increased demand for personal protective equipment (PPE) driven by the coronavirus pandemic will benefit OMI over the near to medium term. OMI has established a significant level of vertical integration between manufacturing and distribution operations within its Global Products segment to provide supply chain resilience that serves acute care customers and, therefore, creates revenue stability. Additional direct costs from supply chain challenges may create some downward pressure on EBITDA margins over the near to medium term, but are expected to be manageable.
Competitive Environment: The med-surg supply distribution industry in the
OMI's success depends on its ability to compete on price, product availability, delivery times and ease of doing business, while managing internal costs and expenses. OMI's focus on customer service has helped it improve retention levels and prevent additional contract losses, as seen in prior years.
Customer Concentration: OMI's 2020 10-K stated that its top-10 customers in the
The termination of a relationship with a given GPO would not necessarily result in the loss of all of the member hospitals as customers, but the termination of a GPO relationship, or a significant individual health care provider customer relationship, could adversely affect OMI's debt-servicing capabilities.
Derivation Summary
OMI's 'BB-' LT IDR reflects its competitive position, gross debt/EBITDA, which is generally expected to remain between 3.0x and 4.0x over the medium term. Fitch estimates the gross debt/EBITDA for on a pro forma basis following the acquisition of
For purposes of the Parent-Subsidiary Linkage, Fitch has consolidated the IDR across the entire capital structure to reflect the cross-default provisions between the company's credit agreement, 2024 notes, 2029 notes and an accounts receivable securitization facility.
OMI's smaller scale in an industry with high fixed costs, where scale influences leverage with suppliers and customers leads Fitch to rate the company below
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Pro forma revenues increase approximately at a 3% CAGR over the forecast period through 2025 driven by solid demand for PPE products among health care systems and expansion of the home health segment from
Operating EBITDA margins are expected to increase to a pro forma range of 5% as a result of continued benefits from higher product demand, growth in higher-margin, home health care products and services, better absorption of overhead and customer stability;
Debt balances peak at FYE 2022 and decline at approximately
Working capital investment creates a demand on cash in order to meet increased product demand, but is manageable without a sustained increase in borrowing;
Fitch's estimates sustainable FCF/debt will be sustained above 5.0% on a pro forma basis; common stock dividends are not assumed to increase and there is no assumption for share repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Continued reduced dependence on short-term borrowing for working capital needs;
Top line growth sustained at 4% or higher balanced across segments and geographies, supported by consistent service levels and customer persistency;
Debt/EBITDA sustained below 3.0x and FCF/debt above 12.5%.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Substantial dependence on external liquidity facilities for working capital needs;
Increased level of debt for shareholder returns (dividend or share repurchases) or highly leveraged acquisitions that are expected to raise business and financial risks without sufficient returns;
Loss of health care provider customers or Group Purchasing Organizations that cause a material loss of revenues and EBITDA;
Debt/EBITDA sustained above 4.0x and FCF/debt sustained below 5%.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Good Liquidity: OMI has good sources of liquidity that are derived from cash flow from operations, an accounts receivable securitization program (up to
Favorable Maturity Profile: Following the acquisition of
Issuer Profile
Summary of Financial Adjustments
Historical and projected EBITDA is adjusted principally for nonrecurring expenses, including acquisition related and exit and realignment costs.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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