Team a Investment Research Challenge

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Student Research

This report is published for educational purposes only by students competing

in the Investment Research Challenge™.

Ticker: OMI: NYSE Recommendation: BUY

Current Price: $41.89 1 Year Price Target: $48.32

Team A

3/19/2008

Highlights

• We are initiating coverage of Owens & Minor (OMI) with a BUY recommendation and a 12 month price

target of $48.32.

• Superior Business Model led by Innovative Technology Solutions: OMI’s unique approach to supply chainmanagement offers a distinct competitive advantage. Cutting edge technology solutions have allowed OMI to

penetrate further down the hospital supply chain and integrate itself more fully into the supply chain management processes.

• Industry Leader in Identifying and Reducing Costs: In an industry plagued by increasing costs, OMI reducescustomer cost while simultaneously increasing earnings by selling higher margin specialty and private label goods.

• Bullish Secular Trends in Healthcare Spending: S&P estimates that revenues in the medical equipment andsupplies industry will increase 12% in 2008. Historically, OMI has presented organic earnings growth nearlytwice that of the industry average. Fueled by improved operating efficiencies and strong top line growth, weexpect this trend to continue.

• Accelerated Earnings Growth: OMI has consistently exhibited accelerated earnings growth. We believe in 2008OMI will fully realize synergies from the 2006 acquisition of McKesson Medical-Surgical, expand margins, andgrow sales at 6-7%. We forecast 27% earnings growth to a record $2.30 EPS over the next twelve months.

Earnings/Share

Mar. Jun. Sept. Dec. Year P/ERatio

2006A $0.42 $0.26 $0.36 $0.18 $1.22 34.3

2007A $0.27 $0.45 $0.53 $0.56 $1.81 23.1

2008E $0.55 $0.56 $0.58 $0.61 $2.30 18.2

2009E $0.60 $0.62 $0.63 $0.66 $2.51 16.7

Market Profile

52 Week Price Range $33.33-$45.85Average Daily Volume (3m) 379,274Beta 0.81Forward Dividend Yield 1.91%Short Interest % of float 9.90%Days to Cover 9.4Shares Outstanding 40.46MMarket Capitalization 1.79B

Institutional Ownership 95.60%Insider Ownership <2%

Book Value Per Share( Q407) $15.04Debt to Equity 0.462Return on Equity (ltm) 11.84%

Owens & Minor Inc.Medical and Surgical Distribution Industry

Source: Team A



Team A 3/19/2008

CFA Virginia Investment Research Challenge Student Research 2 of 21

Investment Summary

Our fundamental outlook of the overall medical distribution industry is positive, particularly for Owens & Minor. Owens &Minor has benefited from a strong secular trend in health care spending, continual improvements in supply chain management,and customer cost containment over the last decade. Customer trends toward outsourcing logistic needs, a superior business

model, an enhanced sales staff, and consistent performance provide the basis for our recommendation that OMI will to continueto outperform. Our valuation models have produced a one-year price target of $48.32, representing a 17% total yield, includingdividends, from the March 14, 2008 market price of $41.89.

Catalysts

Expanding Market Share driven by CostTrack SM

By year-end 2007, 32% of OMI’s customers used the CostTrack SM platform to make purchases. The charges associated withCostTrack SM are not the traditional cost-plus-margin mark-up. Instead, the customer is charged for the actual cost of moving,

procuring, and placing the product in the customer’s facility. Customers are able to outsource a significant portion of their supplychain management process while at the same time reducing their over all costs.

When a customer first transitions to CostTrack SM, OMI’s gross margin for the account initially becomes suppressed. However,Owens & Minor is then able to leverage their efficient distribution network, standardize the inventory of the client, and direct theclient to further reduce costs by buying more through the lowest overall cost provider – Owens & Minor. The long-term result isan increase in OMI’s gross margin for the account above a traditional cost-plus-margin mark-up. We expect OMI will continueto expand market share under this superior business model.

New Contract with PremierWe believe Owens & Minor will renegotiate their distribution agreement with Premier in 2008. Premier represents the fastest-growing Group Purchasing Organization (GPO) customer of OMI. Sales to Premier members totaled 13% of total revenue in2005, 15% in 2006, and 19% in 2007, respectively. Similar to recent years, we expect OMI to be able to negotiate the ability tointroduce higher margin items, such as MediChoice products (OMI’s private label) and technology services, to member hospitals.

Fully Trained McKesson Sales ForceOwens & Minor invests approximately $1,200 annually in training per teammate. The sales force acquired from the McKessonacquisition in 2006 is set to enter the arena after one year of study at Owens & Minor University. A fully trained sales forcecoupled with expanded product offerings will allow OMI to improve sales growth and intensify sales of higher margin goods andservices.

Opportunities for Penetration and GrowthThe Healthcare Financial Management Association estimates that nearly 40% of costs incurred by hospitals are due to supply andlogistics expenses. Through OMI’s superior distribution network and innovative use of technology, they are able to both expandsales and reduce costs for acute care facilities. We see strong potential for OMI to capture further economies of scale, helpclients contain costs, and increase sales revenues.

Strategic Market Targeting

In 2007, OMI’s management indicated the company will strategically pursue non-acute care customers such as free-standingfacilities, long-term care facilities, and individual practices. This represents a transition from a $15 billion market where OMIhas 40% market share, to a $60 billion dollar market. With distribution networks already in place, we see this strategic directionas a strong long-term growth opportunity.



Team A 3/19/2008


Valuation

One-Year Price Target: $48.32 Per ShareOur valuation combines three different techniques, discounted cash flow, comparable company multiples, and forward P/Emultiplied by our 2009 EPS estimate, to arrive at a price target of $48.32 per share. We have weighted each method equally.

Discounted Cash Flow AnalysisWe projected an income statement, balance sheet, and statement of cash flows through 2012. Our projections were based upon6-7% revenue growth and conservative margin expansion. We then populated the rest of the items by assuming common sizegrowth as a percentage of revenue, adjusting for improved efficiencies over time.

We took into account the cyclical nature of SG&A expenses related to acquisitions, the paying down of long-term debt, and grossmargin expansion resulting from improved product mix.

We calculated the company’s free cash flow over the next six years. We then calculated OMI’s internal WACC to discount thestream of future cash flows. The terminal value was arrived at using two different methods, each of which was weighted equally.We then used both the Gordon Growth Model and current EV/EBITDA to estimate the value of the firm.

We subtracted net debt to arrive at the equity value of the firm and divided by shares outstanding to arrive at a fair price of $46.61. A 12-month price target was arrived at by assuming appreciation equal to the company’s marginal cost of equity. SeeFigure D for full details.

Comparable Company Analysis

We compared OMI against companies in the medical and surgical distribution industry. Some are direct competitors while othersoperate in different product line segments. Relevant metrics for comparison include P/FE (Price to Forward Earnings),EV/EBITDA, BV/Shares Outstanding, and Cash Flow/Shares Outstanding. OMI currently trades at a premium when comparedto competitors using P/FE. This may be justified by the greater growth opportunities the company possesses relative to its peers.When using the three remaining valuation metrics, OMI appears undervalued. Using the Comparable Company Analysis table,we arrive at a fair price of $42.21. Again, a 12-month price target was arrived at by assuming appreciation equal to thecompany’s marginal cost of equity. See Figure E for full details.

Forward P/E Multiple * 2009 EPS(E)Lastly, we decided to take OMI’s current forward P/E and multiply it by our 2009 Earnings Per Share estimate. Our rationale isthat OMI will continue to trade at its current forward P/E multiple; by multiplying by our 2009 EPS estimate, we can arrive at an

accurate 12 month price target.

Method C urrent F air P ric e Twelve Month Targ et Weig ht

DC F Model $46.61 $51.34 33.33%

C omparable C ompany Analys is $42.21 $46.50 33.33%

P /F E * 2009 E P S N/A $47.12 33.33%

E xpe cted C apita l Ga in Y ie ld 15.35%

Twelve Month P ric e Targ et $48.32 E xpected Dividend Y ield 1.91%

C urrent Market P rice $41.89 Total Y ield 17.26%

Source: Team A

Risks to Price TargetRisks to our price target include contraction of current valuation multiples, unforeseen slowing sales growth, deterioration of margins, and dilutive equity offerings. The most significant risk to our price target is P/FE multiple contraction. Over the pastthree years, OMI has traded in a P/FE channel of 15 to 19 with an average multiple of 17. Currently, P/FE is above its mean at18.2. Given OMI’s future growth prospects, we believe the current premium multiple is warranted.



Team A 3/19/2008


Business Description

BackgroundHeadquartered in Mechanicsville, Virginia, Owens & Minor is a distributor of acute-care medical and surgical supplies, a direct-to-consumer supplier of diabetic supplies, and a supply-chain management company with over 4,800 employees. They service

over 4,000 acute-care hospitals through contracts with Integrated Healthcare Networks (IHNs) and Group PurchasingOrganizations (GPOs). They provide for their customers through a network of 45 distribution centers located throughout thecontinental U.S. and Hawaii. Owens & Minor purchases from over 1,300 suppliers and carries over 170,000 SKUs, includingover 1,400 private label SKUs. Their supply chain management business, OMSolutions SM, offers a variety of logistic solutionsranging from inventory management to business planning.

Products include:

• PANDAC® – Operating room inventory management system

• WISDOM GoldSM – Internet-based decision support system

• QSightTM – Internet-based clinical inventory management system

• SurgiTrack ® – Packaging of surgical supplies based on specific procedures and preferences

• CostTrack SM – Activity-based costing system designed to dynamically adjust pricing

The company has had a steady diet of acquisitions starting in 1954 including the recent purchase of the acute-care supplydistribution business of McKesson Medical-Surgical in 2006. See Figure M for key acquisition history.

Customer Categories

• IHN’s & GPO’s

GPO’s include groups of hospitals, physicians, and other healthcare providers who organize to create bargaining power as well as economies of scale. Integrated Healthcare Networks (IHN’s) offer a wide range of services to a particular market. An IHN will typically include one or more hospitals, private practices, and treatment centers. Sales to member hospitals under IHN and GPO contracts totaled 73% of revenue in 2005, 70% of revenue in 2006, and 71% of revenuein 2007. See Figure G for an analysis of major customers.

• Individual Providers

Individual providers represent small and midlevel medical practices.

• Direct to ConsumerWith the acquisition of Access Diabetic in 2005, Owens & Minor entered the Direct-to-Consumer business. They

provide individuals directly with diabetic diagnostics and treatments.

Geographic Distribution

OMI has 45 distribution centers, 3 service centers, and 1 warehousing agreement. OMI has 23 centers serving the eastern third of the United States and 27 for the remaining two-thirds and Hawaii. Although the numbers favor the eastern third, the centers inthe West have a wide reach. With strategic placement of the centers, OMI has developed a balance between efficiency andflexibility.

Management

Owens & Minor’s management team is a blend of top internal and external talent. They have a history of success and effectivelycompliment each other’s skill sets. See Figure L for a description of Key Executives.

Reputation

Owens & Minor recently celebrated 125 years of industry leadership. They are distinguished in customer service excellence, witha customer satisfaction rating over 94% according to customer surveys. True to their business model, their creed is “right

product, right place, right time, and right price.” OMI has extensive relationships in the industry and currently serves nearly twothirds of the acute-care market. Their business decisions are based upon trust, and their average customer has been with OMI for ten years.



Team A 3/19/2008


Industry Overview and Competitive Positioning

OMI is an industry leader, with over 40% of the market, in the $15 billion medical and surgical distribution industry. There arecurrently two titans in the acute care distribution industry, OMI and Cardinal Health (CAH), as well as a smaller, private nationaldistributor, Medline Industries, and small local and regional firms. CAH’s Medical Supply Chain Services segment accounts for

roughly 27% of the market. OMI’s dominant market share was bolstered by their acquisition of McKesson Medical–Surgical in2006. Before the divestiture, McKesson was the third largest competitor in the industry, in terms of sales volume.

Market Growth

Medical and surgical distribution is growing in line with the broad healthcare industry, projected in the mid single digitsannually. This growth is fueled by increases in demand due to innovation in medical practice and technology, as well asdemographic trends in the United States. Healthcare benefits from an aging population since most medical related expendituresoccur at the later stages of life. As the Baby Boomer generation, the largest age demographic in the US numbering 78.2 million,reaches its 60’s, aggregate medical expenses are projected to increase dramatically. See Figures I and J for trends. The industryis resistant to economic cycles because of the non-discretionary nature of demand for health care in general and, in particular,medical and surgical supplies.

Barriers to EntryMedical and surgical distribution is a highly competitive sub-sector of the healthcare industry, with deflationary pricing pressures

due to both competition and cost containment initiatives among acute care providers. Declining margins are the greatestchallenge facing the industry at present. As a result, consolidation among medical and surgical distributors has increased in order to achieve the competitive advantages enjoyed by larger firms: greater economies of scale, more bargaining power, and theability to operate at a national level and develop technology solutions for supply chain management. These consolidations, andthe economies of scale fueling them, are significant barriers to entry into the industry. Other barriers include long-term contracts

between distributors and their clients (3-5 years), extensive government regulation of the industry, and the prevalence of strategicrelationships within the industry.

Combating Margin ErosionIn addition to capturing economies of scale through acquisitions, industry leaders of medical and surgical distribution have foughtdeclining margins through a series of measures:

• Expanding operations within the healthcare industry

• Vertical integration

• Promoting sales of products produced under private labels

• Entry into new markets (direct-to-consumer and non-acute)• Deeper penetration into the acute care market

• Offering technology solutions that help their clients identify and reduce supply chain costs

By expanding their business, OMI is transitioning itself into a supply chain logistics partner and moving into a $60 billionindustry with attractive growth opportunities.

Competitive Advantages

OMI has several important advantages over its competitors:

• Strong Sales Force – the McKesson acquisition was a significant boost to OMI’s sales force. OMI also leads itsindustry in employee training and education.

• Reputation and Culture – OMI has been recognized numerous times for the culture that provides the foundation for

their company: ethics, integrity, open-book policies, teamwork and intense customer-focus. They have developed areputation for dependability, service, and expertise over their 125 years in business. These factors have led to strongrelationships with their clients.

• Industry Leading Technology – OMI has worked with Perot Systems Corporation (PER) to develop a suite of technology solutions aimed towards helping OMI’s clients improve their supply chain management and identify andreduce costs. OMI’s technology development is outsourced to a third party eliminating the costs of research anddevelopment as well as training in software development. This allows OMI to concentrate on serving their customers.The contract between OMI and Perot systems is long-term and will not be up for renewal until 2014.



Team A 3/19/2008


Technology Solutions

Owens & Minor has consistently and profitably introduced technology solutions in their product mix over the past decade.Moving forward, we believe Owens & Minor’s unique competitive positioning in the technology-driven supply chainmanagement business to be accretive to shareholder value. More than simply a “box mover” OMI has integrated further into the

hospitals’ supply chain as a vital partner for identifying and reducing costs. They have developed an innovative suite of technology solutions to accomplish these goals:

• CostTrack SM

CostTrack is an activity-based management process. The customer is charged for the actual cost of moving, procuring,and placing the product in the customer’s facility. OMI also performs an assessment of the customer’s supply chain

process and implements advanced logistic solutions to achieve savings for the client in real time.

• SurgiTrack ®

SurgiTrack is a procedural delivery program that allows clients to have customizable procedural components deliveredto the point of use. OMI handles the inventory from the distribution center to the operating room. This allowsclinicians to focus on patient care and lets OMI employees take care of supply-related tasks.

• WISDOM GoldSM

Wisdom Gold is an internet based data tool that allows customers to access historical purchase information, contractualobligations and requirements, and standardized product reference files. This tool allows hospital staff to consolidateinformation from different systems, identify cost-saving measures, and automate pricing synchronization with materialsmanagement.

• PANDAC®

PANDAC is OMI’s wound closure inventory management program. OMI will evaluate the customer’s physicalinventory and purchasing patterns for no charge and provide a detailed recommendation for stocking locations andshelf sequencing. OMI guarantees 5% savings the first year.

• Bone and Tissue TrackingOMI’s program allows the use of barcode technology to track implant materials, thus enabling clinicians to track expiration dates and recalls to comply with regulatory changes in the implant industry.

• OMDirectSM

OMDirect is a free service provided to allow clients to purchase quickly and efficiently. Customers have electronicaccess to OMI’s database of products and can customize their own catalog.

All of these services help member hospitals reduce costs, and these reductions lead to increased revenue for OMI. Often theservices OMI provides will indicate the need for standardization and centralization of supplies. This means that the customer canreduce costs by purchasing more through Owens & Minor. These solutions help OMI integrate further into acute care facilities,thus becoming regarded as a partner for cost reduction, rather than solely a distributor. Once partnerships have formed, they

become long-standing. The average OMI customer has been with the company for 10 years



Team A 3/19/2008


Financial Analysis

RevenueWe expect revenues to be driven by penetration of existing member hospitals, increased use of technology solutions, andexpansion into the non-acute care market. We estimate revenues will grow by 6.4% to $7.2B in FY 2008.

Drivers

• In 2008, the renewal of contracts with Premier, representing 19% of revenues generated in 2007, offers further opportunities to increase revenues through expanded product offerings.

• OMI should attract new sales by providing value through automation of inventory management processes and businessfunction outsourcing.

• It is anticipated that the company will begin to target mid-level medical practices and small networks of healthcare providers for new means of revenue growth in 2009.

• In 2008, the expanded sales force from McKesson acquisition is expected to be fully trained after one year of study atOMI University, and should serve to increase sales of the higher margin goods and services within OMI’s portfolio.

Earnings GrowthWe project total earnings growth for OMI in FY 2008 to be 30.4% to $94.8M. Q1 2008 earnings are projected to grow by111.8%, from $10.82M in Q1 2007 to $22.91M in Q1 2008. Exceptional earnings performance in Q1 2008 may be attributed to

synergies developed from the McKesson merger resulting in reductions in COGS and SG&A as a percentage of sales from89.64% in Q1 2007 to 89.35% in Q1 2008, and from 8.46% in Q1 2007 to 7.7% in Q1 2008, respectively. See Figure B for fulldetails. We forecast earnings growth of 27.4%, 10.6%, and 12.2% in Q2, Q3, and Q4, respectively.

Balance SheetOwens & Minor has done an exceptional job actively managing Accounts Receivable. We expect that the company will continueto practice superior inventory management through close relationships with its suppliers and customers. OMI also activelymanages its interest rate risk through on-balance sheet interest rate swaps. Of the $200 million of debt issued at 6.35% in 2006,$100 million was effectively converted to LIBOR plus a percentage through contractual swap agreements. OMI does not keepsignificant cash assets, reflecting superior cash flow management. See Figure C for full Details.

Cash Flows

Free cash flow in FY 2008 is expected be $132.5M, which is a reduction from 2007 calculated free cash flows. This may beattributed to the unsustainably high cash flows generated in 2007 from year-over-year reduction in current assets and currentliabilities. A/R and inventory were also reduced from abnormally high levels after the McKesson acquisition. This trend in

reduction in Net Working Capital is expected to continue throughout the forecasted periods as current liability growth is expectedto outpace growth of current assets resulting in increased free cash flows.

Margins

We expect that OMI will continue their efforts to reduce SG&A expenses and COGS as a percentage of sales. As a result, weexpect margins to expand from 2.11% in 2007 to 2.42% in FY2008. The gross margin for FY 2008 is projected to be 10.65%,which represents an increase from the 2007 gross margin of 10.51%. We estimate SG&A as a percentage of sales will declinefrom 8.02% in 2007 to 7.73% in FY2008.

Drivers

• The continued development of synergies associated with the McKesson acquisition are expected to strengthenoperating margins.

• The promotion of automated ordering systems through OMDirectSM is anticipated to increase efficiencies and reduceSG&A costs.

• Increased use of CostTrack SM is expected to yield prolonged gross margin expansion. 32% of all Revenues in 2007

were generated through OMI’s CostTrack SM system. OMI continues to actively promote the use of CostTrack SM for new and existing clients.

• There are plans to increase Owens and Minor’s MediChoice product line which currently contains approximately1500 SKUs. The sales from this private product line produce higher margins for the company.

• Optimization of delivery schedules will minimize costs associated with product delivery and drive SG&A leverage.



Team A 3/19/2008


We expect margins to revert to normalized levels in FY2008 and improve sequentially as OMI achieves additional economies of scale. SG&A expenses are predicted to be reduced as unlocked synergies associated with the McKesson acquisition are fullyrealized. It should also be noted that a number of the mispriced contracts obtained through the acquisition were not converteduntil late 2007. The number of pricing files that were converted is not available, but we believe their resolution should lead to anuptick in OMI’s gross margins. We also look for gross margins to expand as OMI’s product mix consists of fewer items

purchased through suppliers and more produced under its private label, along with increased revenues from their supply chainmanagement services.

Ratio Analysis

• ProfitabilityIn 2008, the forecasted net profit margin is anticipated to return to pre-McKesson acquisition levels at 1.31%, which isan increase from 0.88% in 2006, and 1.07% in 2007. We project ROA to increase from 5% in 2007 to 6% in FY 2008.Additionally, ROE is projected to increase from 12% in 2007 to 14% in FY2008. ROA improvements reflect excesscapacity created through the restructuring of warehouses in over the last two years.

• Asset TurnoverOMI continues to set the benchmark for accounts receivable turnover within the industry. Our calculations for 2007generated Day Sales Outstanding of 24 days. In FY 2008, DSO are expected remain strong at 27.

Inventory turnover is another key metric OMI’s management has targeted. We anticipate that OMI will continue tosee improvements in this metric as sales volume increases. Inventory turnover is estimated to increase from 11.69 in2007 to 12.82 in FY2008. This can be attributed to inventory management initiatives and more effective use of technology solutions for managing the supply chain.

• Liquidity

In FY 2008, Current Ratio and Quick Ratio are expected to remain at similar levels to 2007. We do not expectchanges in OMI’s capital structure. See Figure C in Appendix.

• Financial Leverage

Debt and Net Debt-to-Equity ratios are expected to drop as OMI continues to pay back long-term debt associated withthe McKesson acquisition. This should reduce debt over to next five years to only $200 million in outstanding bondsmaturing in 2016. In 2007, the Net Debt to Equity ratio was .46; it is projected to drop to .33 in FY 2008.

Seasonality

There were no seasonal trends detected in OMI’s sales.

AcquisitionsGiven the need to combat price increases with bulk purchases, the medical distribution industry is currently undergoing a phaseof consolidation. It is anticipated that OMI will continue to grow its business through acquisitions of smaller regionaldistributors. Owens & Minor has made acquisitions in three of the last four years. We have chosen not to model any acquisitionsdue to the inherent uncertainty of purchase size and timing.



Team A 3/19/2008


Investment Risks

Loss of GPO/Network ContractsWe view this risk as negligible. Owens & Minor generates a significant amount of revenue through contracts with GPOs andIHNs. Sales to members under GPO contracts amounted to 71%, 70%, and 73% of revenue in 2007, 2006, and 2005,

respectively. Although losing a contract with a GPO would not necessitate the loss of all member hospitals within that GPO, itwould still represent a significant loss in revenue. However, OMI has consistently delivered reductions in operating costs to their clients. The relationship is beneficial to both parties as well as the individual members within the GPO.

Lower Reimbursement RatesA number of medical insurance companies are seeking mergers as a way to increase value. These merged companies wouldrepresent a decrease in overall competition and could lead to lower reimbursement rates as a way to increase revenues.Companies with a direct-to-consumer interest could face a reduction in current revenue.

Legal Environment

Owens & Minor must adhere to the security and operating standards set forth by the Food and Drug Administration, theOccupational Safety and Health Administration, and state boards of pharmacy. Each of OMI’s distribution centers is licensed todistribute surgical and medical supplies. Changes in regulatory law could require changes in current procedures and temporarilyincrease operating costs while efficiencies are developed. Most changes should be anticipated, eliminating any surprises.

Lawmakers are currently trying to enact regulations that would restrict Medicaid payments to the cost of care. Hospitals andother providers argue that these changes would make it harder to provide care to the uninsured. The government estimates asavings of $3.8 billion over 5 years. Hospitals claim it would result in a reduction of revenue of up to 20%. A lawsuit has beenfiled to prevent the enactment of the legislation. A reduction in hospital revenue has the potential to impact the sales of OMI.With litigation expected to last years, we view this as an insignificant short-term threat.

Tightening Credit Markets

M&A activity has been an integral component in the long-term growth of OMI. The company has funded the majority of theseacquisitions through debt. Owens & Minor has made acquisitions in three of the past four years.

We expect the company’s focus in 2008 to remain on SG&A reduction and the full realization of the McKesson acquisition.However, we believe moving forward beyond 2008, O&M must continue to acquire companies in other industries as the acutecare supply industry enters maturity. A prolonged lack of liquidity in the debt markets would increase the cost of capital andrender some investment decisions infeasible. We believe this would drive down OMI’s premium multiple and result in a decline

in share price.

Margin Stagnation

By year-end 2007, 32% of customers used OMI’s CostTrack SM platform to make purchases. The charges associated withCostTrack SM are not the traditional cost-plus-margin mark-up. Instead, the customer is charged for the actual cost of moving,

procuring, and placing the product in the customer’s facility. While we believe this model is superior to its competitors, a surgein customers using CostTrack SM would result in an initial reduction in gross margins. While this is positive long run, initialreductions or stagnation in gross margins as a result of increased CostTrack SM activity may be viewed negatively in the shortterm.



Team A 3/19/2008


Appendix

Figure A: Five Year Chart with Commentary

Oct. 15, 2003 – abnormal healthcarecosts in Q3 and Q4 are expected to

bring results in at low end of EPS

guidance

Sep. 2006 – OMI acquires

McKesson

Feb. 2007 – Newcontract with

Broadline begins

Feb. 2008 – Shares of Owens& Minor rise on

4Q results

Source: Reuters





Team A 3/19/2008


Figure C: Consolidated Balance Sheet

For Periods Ending 12/31

Owens & Minor

Year 2003(A) 2004(A) 2005(A) 2006(A) 2007(A) 2008 (E) 2009 (E) 2010 (E) 2011 (E)

ASSETSCash & Equivalents 16.34 55.80 71.90 5.09 2.13 1.76 4.93 7.14 4.43

Total Receivables, Net 353.43 344.64 353.10 539.18 462.39 543.65 562.62 592.21 618.04

Total Inventory 384.27 435.67 439.89 666.53 581.57 564.35 586.28 615.07 633.50

Other Current Assets 27.34 28.37 29.67 55.98 43.77 45.12 37.00 35.40 36.00

Total Current Assets 781.38 864.48 894.56 1266.78 1089.86 1154.88 1190.83 1249.82 1291.97

Property/Plant/Equipment, Total - Net 21.08 27.16 51.94 70.85 76.12 80.94 68.47 71.14 72.60

Goodwill, Net 198.06 200.47 242.62 259.67 271.70 271.70 271.70 271.70 271.70

Intangibles 0.00 0.00 18.38 52.77 32.52 48.08 109.41 159.01 190.53

Other Long Term Assets, Total 45.22 38.05 32.35 35.69 44.89 61.16 78.67 95.67 125.00

Total Assets 1045.74 1130.16 1239.85 1685.76 1515.09 1616.76 1719.08 1847.34 1951.80

LIABILITIES

Accounts Payable 314.72 336.33 387.83 542.55 469.10 481.21 509.88 556 587.34

Accrued Expenses 56.91 60.62 70.59 80.35 99.36 102.09 114.67 138.05 175.19

Deferred Income Tax - Current Liability 24.00 33.58 30.44 47.61 0.00 52.83 58.74 59.83 64.55

Total Current Liabilities 395.63 430.53 488.86 670.51 568.46 636.14 683.29 754.27 827.09

Long Term Debt 209.50 207.48 204.42 433.13 283.85 226.01 208.07 202.50 200.78Deferred Income Tax - LT Liability 2.35 0.45 0.00 2.47 0.00 0.00 0.00 0.00 0.00

Deferred Income Tax 2.35 0.45 0.00 2.47 0.00 0.00 0.00 0.00 0.00

Other Liabilities 27.91 31.43 34.57 32.19 48.41 60.02 50.30 28.31 18.06

Total Liabilities 635.39 669.89 727.85 1138.30 900.72 922.17 941.66 985.08 1045.92

EQUITY

Common Stock 77.96 79.04 79.78 80.52 81.75 82.40 84.00 84.60 85.20

Additional Paid-In Capital 118.84 126.63 133.65 143.56 161.98 172.44 185.07 196.65 207.17

Accumulated Retained Earnings 220.47 263.65 307.35 332.01 377.91 439.75 508.35 581.02 613.52

Other Equity, Total -6.91 -9.06 -8.79 -8.63 -7.28 0.00 0.00 0.00 0.00

Total Equity 410.36 460.26 511.99 547.46 614.36 694.59 777.42 862.27 905.88

Total Liabilities and Equity 1045.74 1130.16 1239.85 1685.76 1515.09 1616.76 1719.08 1847.34 1951.80

values in millions

Key Metrics 2003 2004 2005 2006 2007 2008 (E) 2009 (E) 2010 (E) 2011 (E)

Cash as % of Sales 0.39% 1.23% 1.49% 0.09% 0.03% 0.02% 0.06% 0.09% 0.05%

Recievables as % of Sales 8.33% 7.62% 7.32% 9.74% 6.80% 7.52% 7.31% 7.24% 7.10%

Inventory as % of Sales 9.05% 9.63% 9.12% 12.04% 8.55% 7.80% 7.62% 7.52% 7.28%

Net PPE as % of Sales 0.50% 0.60% 1.08% 1.28% 1.12% 1.12% 0.89% 0.87% 0.83%

AP as % of Sales 7.42% 7.43% 8.04% 9.80% 6.90% 6.65% 6.63% 6.80% 6.75%

Accruals as % of Sales 1.34% 1.34% 1.46% 1.45% 1.46% 1.41% 1.49% 1.69% 2.01%

Key Ratios 2003 2004 2005 2006 2007 2008(E) 2009(E) 2010(E) 2011(E)

Current Ratio 1.98 2.01 1.83 1.89 1.92 1.82 1.74 1.66 1.56

Quick Ratio 1.00 1.00 0.93 0.90 0.89 0.93 0.88 0.84 0.80

DSO 30.40 27.80 26.73 35.56 24.82 27.43 26.69 26.42 25.92

Inventory Turnover 11.04 10.39 10.96 8.30 11.69 12.82 13.12 13.30 13.74

Fixed Asset turnover 16.05 17.03 13.97 13.21 15.99 15.66 14.56 13.69 13.19

Total Asset Turnover 4.06 4.00 3.89 3.28 4.49 4.47 4.48 4.43 4.46

Debt Ratio 0.58 0.56 0.56 0.65 0.56 0.53 0.52 0.52 0.53

Debt to Equity Ratio 0.51 0.45 0.40 0.79 0.46 0.33 0.27 0.23 0.22

Times Interest Earned 8.30 10.18 11.52 8.82 7.62 10.22 10.57 10.64 10.75Cash Coverage 9.41 11.39 13.15 10.76 9.00 11.97 12.32 12.39 12.50

Return on Assets 5.13% 5.35% 5.20% 2.89% 4.80% 5.86% 6.14% 6.13% 6.25%

Return on Equity 13.07% 13.14% 12.58% 8.91% 11.84% 13.65% 13.58% 13.14% 13.48%

Source: Company Documents & Team A



Team A 3/19/2008


Figure D: Discounted Cash Flow Model

Owens & Minor

Year 2003(A) 2004(A) 2005(A) 2006(A) 2007(A) 2008(E) 2009(E) 2010(E) 2011(E) 2012(E) 2013(E) Terminal Y

Revenues 4244.07 4525.11 4822.41 5533.74 6800.47 7232.98 7693.00 8182.27 8702.66 9137.80 9594.69 9882.53Cost of Revenue 3807.67 4061.81 4306.30 4936.94 6085.48 6462.67 6866.00 7301.04 7762.78 8150.92 8558.46

SGA 319.80 340.99 380.51 471.99 545.27 559.10 594.66 632.48 672.70 706.34 741.66

Net Other Operating Exp -1.07 -2.44 -1.08 7.72 -5.32 0.00 0.00 0.00 0.00 0.00 0.00

Depreciation/Amortization 15.72 14.88 19.25 25.73 31.82 36.15 38.44 40.89 43.49 45.66 47.95

EBIT 101.95 109.87 117.43 91.36 143.22 175.07 193.89 207.86 223.69 234.88 246.62 296.48

EBIAT or NOPAT 62.19 67.02 71.63 55.73 87.36 106.79 118.28 126.80 136.45 143.28 150.44 180.85

Fixed Asset End 65.21 84.29 106.54 121.01 142.10 147.14 166.81 197.60 215.00 237.00

Fixed Asset Begin 66.30 65.21 84.29 106.54 121.01 142.10 147.14 166.81 197.60 215.00

Gross Fixed Asset Expenditures -1.09 19.08 22.25 14.47 21.09 5.04 19.67 30.79 17.40 22.00 44.80

Change in Current Assets 83.1 30.08 372.22 -176.92 65.02 35.95 59.00 42.15 36.90 33.26

Change in Current Liabilities 34.9 58.33 181.65 -102.05 67.68 47.16 70.98 72.82 54.65 64.57

Change in NWC 48.2 -28.25 190.57 -74.87 -2.65 -11.21 -11.98 -30.67 -17.75 -31.31 0.00Depreciation/Amortization 14.88 19.25 25.73 31.82 36.15 38.44 40.89 43.49 45.66 47.95 44.80

FCF 34.79 100.05 -131.36 179.58 124.50 162.89 160.00 179.82 189.29 207.70 180.85

Discounted FCF -- -- -- -- -- 114.70 138.25 125.10 129.53 125.62 126.98

Year -- -- -- -- -- 1 2 3 4 5 6

values in millio

Growth = 3%

TV*11.77

EV/EBITDA

Multiple

Beta (S&P) 0.81 Year 2012 and 2013 Terminal Value 2116.18 2128.61

Market Return 11.70% Revenue Growth 5.00% PV of TV 1404.38 1412.63

Risk-Free Rate-10 year Treasury 3.60% EBIT margin 3.00%

Required Rate of Return, Equity 10.16% D&A Growth 3.00% EV of Firm 2164.58 2172.82

Required Rate of Return, Debt 6.65% Less:Net Debt 283 283

WACC 8.55% Long term growth rate 3.00% Equity value of firm 1881.58 1889.82

capex/D&A ratio 1 Shares outstanding 40.46 40.46

WACC/Discount Rate 8.55% Fair Value $46.50 $46.71

Fair Value, as an equal weight $46.61

Price Target and Expected Yield

MethodCurrent Fair

Price

Twelve

Month TargetWeight

DCF Model $46.61 $51.34 33.33%

Comparable Company Analysis $42.21 $46.50 33.33%

P/FE * 2009 EPS N/A $47.12 33.33%

Expected

Capital Gain

Yield 15.34%

Twelve Month Price Target $48.32

Expected

Dividend

Yield 1.91%

Current Market Price $41.89 Total Yield 17.25%

Source: Team A

WACC Calculation Assumptions Results



Team A 3/19/2008


Figure E: Comparable Company Analysis

As of 3/14/08

Owens & Minor

Ticker OMI CAH PDCO PSSI HSIC MCK ABC

Price (as of 3/14/08) $41.89 $50.32 $34.35 $15.54 $56.48 $52.89 $39.18

Market Cap 1.79B 21.92B 4.81B 1.12B 5.49B 17.18B 7.09B

Average Implied P

P/FE 18.37 12.33 18.47 16.02 19.08 14.45 13.15 15.98 $36.44

EV/EBITDA (ttm) 11.77 13.33 12.98 11.40 15.26 11.10 7.83 11.95 $42.53

BV/Shares outstanding 15.04 20.04 9.89 5.85 18.70 22.53 17.75 15.69 $43.69

CashFlow/Shares outstanding (ttm) 2.56 3.22 1.81 1.14 3.39 4.41 3.24 2.82 $46.21

Fair Price Today $42.21

Comparable Data

Company Ticker Price EV EBITDA FE SOwens and Minor OMI OMI $41.89 2,061 175 2.28 6,800 (millions

Cardinal Health CAH CAH $50.32 23,706 1,778 4.08 23,282

Patterson Companies PDCO PDCO $34.35 4,931 380 1.86 776

PSS World Medical PSSI PSSI $15.54 1,199 105 0.97 465

Henry Schein HSIC HSIC $56.48 5,630 369 2.96 1,505

McKesson MCK MCK $52.89 17,298 1,559 3.66 26,494

Amerisourcebergen ABC ABC $39.18 7,123 910 2.98 17,372




Team A 3/19/2008


Figure F: Owens & Minor and Competitor Ratios

LTM

Ratios

/YRevenue

Growth

Return on

Assets

Return on

Equity

Inventory

Turnover

Gross

Margin

Operating

Margin DSO's**

Net Profit

Margin

OMI 22.89% 4.80% 11.84% 11.69 10.51% 1.77% 24.48 1.07%

CAH 6.18% 3.62% 10.75% 12.12 6.09% 1.59% 18.99 9.60%

PDCO 7.44% 11.72% 16.98% 10.25 34.44% 11.97% 44.62 7.49%

PSSI 4.83% 6.50% 14.20% 8.42 29.27% 4.84% 44.74 2.94%

HSIC 17.27% 8.15% 14.46% 8.88 29.02% 6.52% 43.07 4.26%

MCK 8.77% 3.93% 14.93% 12.22 4.83% 1.37% 23.72 0.94%

ABC 5.45% 3.75% 14.11% 16.27 3.36% 1.21% 18.74 7.20%

*Source: Reuters**Based on a 360 day year



Team A 3/19/2008


Figure G: Major Customers and Suppliers

Major Customers and Suppliers

Supplier

Name

% of Total

Revenue

(2007)

% of Total

Revenue

(2006)

% of Total

Revenue

(2005)

Additional Information

Johnson &Johnson

11% 11% 12%O&M works with their largest suppliersto create operating efficiencies in thesupply chain through productstandardization and consolidation

Covidien 13% N/A N/A

Tyco N/A 13% 14%

GPO

% of Total

Revenue

(2007)

% of Total

Revenue

(2006)

% of Total

Revenue

(2005)

Contract

Information Description

Novation 40% 43% 47%

In 2006, thecompany executed anew five−year agreement with

Novation

Novation represents the purchasing interests of more than 2,500 healthcareorganizations.

Broadline 12% 12% 13%

In 2006, O&Mexecuted a new fiveyear agreement withBroadlane, whichwas effective

February 2007

Broadlane, is a GPO providing nationalcontracting for more than915 acute care hospitalsand more than 2,600 sub-

acute care facilities,including Tenet HealthcareCorporation, one of thelargest for-profit hospitalchains in the nation.

Premier 19% 15% 13%

In 2005, O&Mentered into adistributionagreement withPremier

Contract is up for renewal in 2008

Premier is a strategicalliance representing morethan 1,500 hospitals.Premier provides resourcesto support healthcareservices, including group

purchasing activities.




Team A 3/19/2008


Figure H: OMI versus Industry

Source: BigCharts



Team A 3/19/2008


Figures I &J: Age Demographic Trends

Source: US Census Bureau and Team A

Source: US Census Bureau and Team A



Team A 3/19/2008


Figure K: National Health Expenditures

Source: Kaiser Family Foundation



Team A 3/19/2008


Figure L: Key Executives

Mr. Craig R. Smith – CEO

Mr. Smith joined the company in 1989 and has held a number of positions including division vice president; group vice president; senior

vice president of distribution and information systems; and executive vice president and chief operating officer. Named CEO in 2005.

Mr. Charles C. Colpo – Sr. VP of Operations

Mr. Colpo joined Owens & Minor in 1981 and has served in current position since 1999. During his tenure, Mr. Colpo has also heldthe positions of VP of Operations and Technology; Vice President, Operations; and Vice President, Supply Chain Process.

Ms. Grace R. den Hartog – Sr. VP, Corporate Secretary and General CounselMs. Den Hartog was previously a partner in the law firm McGuireWoods since 1990, and joined Owens & Minor in February 2003.Ms. Den Hartog is considered one of the top product liability defense trial attorneys in the nation.

Mr. Mark A. van Sumeren – Sr. VP- Strategic Planning and Business DevelopmentMr. van Sumeren joined Owens & Minor in 2003, Mr. van Sumeren was a partner at Ernst & Young where he created CGEY’s HealthProvider Supply Chain practice. He was responsible for redesigning the organizational processes of their healthcare clients. He alsoserved as Sr. VP of OMSolutions from 2003 to 2006.

Mr. James L. Bierman – Chief Financial OfficerMr. Bierman joined Owens & Minor in June 2007. He previously held the position of CFO and Executive VP with QuintilesTransnational Corporation from 2000 to 2004 and served as Sr. VP of Corporate Development from 1998 to 2000. Prior to 1998,Mr.Bierman worked in the healthcare and financial markets for Arthur Anderson.

Management Summary

The management team is a blend of top internal and external talents. Mr. Smith and Mr. Colpo have firm roots with the company and are positioned to insure that the culture of Owens & Minor endures. With the addition of Mr. van Sumeren, the company recognizes the needfor an entrepreneurial spirit and innovative approach to drive the technological solutions for the business and their clients.

Figure M: Key Acquisitions

Bodeker Drug Company – 1954 A&J Surgical Supply – 1965

A&J Surgical Supply – 1967 Marks Surgical – 1970 Murray Drug – 1972 White Surgical - 1974

Southern Hospital - 1976 Medical Supply – 1980 Florida Hospital – 1984

National Healthcare -1989

Stuart Medical – 1994 Healthcare Logistics Services – 2004

Access Diabetic – 2005

McKesson Medical–Surgical Inc. – 2006



Team A 3/19/2008


Disclosures:

Ownership and material conflicts of interest:The authors, or a member of their household, of this report hold no financial interest in the securities of this company.

The authors, or a member of their household, of this report knows of the existence of no conflicts of interest that might bias the content or publication of this report.

Receipt of compensation: Compensation of the authors for this report is not based on investment banking revenue.Position as a officer or director: The authors, or a member of their household, do not serve as an officer, director or advisory boardmember of the subject company.

Market making: The authors do not act as a market maker in the subject company’s securities.

Ratings key: Banks rate companies as either a BUY, HOLD, or SELL. A BUY rating is given when the security is expected to deliver absolute returnsof 15% or greater over the next 12 month period, and recommends that investors take a position above the securities weight in the S&P500, or any other relevant index. A SELL rating is given when the security is expect to deliver negative returns over the next twelvemonths, while a HOLD rating implies flat returns over the next twelve months.

Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to

be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. Theinformation is not intended to be used as the basis of any investment decisions by any person or entity. This information does notconstitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be consideredto be a recommendation by any individual affiliated with the CFA Virginia Investment Research Challenge with regard to this company’sstock.