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Omnicare Earnings Rise but Miss Estimates

Zacks Equity Research

The provider of drugs to long-term care facilities and nursing homes, Omnicare Inc. (OCR) posted an 8.75% rise in 2013-fourth quarter adjusted net earnings per share to 87 cents from 80 cents in the year-ago quarter but missed the Zacks Consensus Estimate by 3 cents.

The company has considered end-of-life hospice pharmacy and certain retail operations as discontinued operations in the quarter. Following the earnings release, shares of the company slipped 5.5% to $60.98.

The increase in earnings can be mainly attributable to the 5.1% rise in revenues to $1,536.2 million and 5.8% fall in selling, general and administrative (SG&A) expenses to $190.9 million. However, revenues for the quarter fell short of the Zacks Consensus Estimate of $1,589 million.

The increase in revenues was driven by rapid growth of OCR’s Specialty Care Group segment and drug price inflation, both of which more than offset the lower scripts volumes. The improvement in SG&A expenses was attributable to the disposition of certain non-core ancillary business in 2013, increased efficiencies and impact of other cost-reduction measures.

For full year 2013, adjusted net earnings per share grew 9.9% to $3.43 from $3.12 a year ago, also lagging the Zacks Consensus Estimate of $3.61. Revenues in the year escalated 2.3% to $6,013.4 million, also missing the Zacks Consensus Estimate of $6,267 million.


Gross profit in the quarter increased 1.2% to $359.7 million driven by gains from operational efficiency, improvements in strategic sourcing, and growth in Specialty Care Group segment, all of which more than offset lower script volume and normal pricing adjustments for payers.

However, gross margin dipped 90 basis points (bps) to 23.4% from 24.3% in the fourth quarter of 2012 due to a revenue mix shift towards lower margin Specialty Pharmacy business and general pricing adjustments with PDPs and other payers, partially offset by higher purchasing efficiencies.

Adjusted income from operations rose 12.3% to $73.2 million in the quarter. Adjusted EBITDA increased 12.3% to $171.7 million in the quarter and rose 6.9% to $673.5 million in 2013.  

Segment Results

Revenues from the core Long-Term Care (LTC) Group were almost flat at $1,169 million as drug price inflation offset lower script volume. Adjusted operating profit rose 3.5% to $160.4 million while adjusted operating income per script increased 6.0% to $5.75, driven by increased efficiencies.

Revenues from the Specialty Care Group (SCG) jumped 26% to $367 million as all the four platforms under the segment generated top line growth in the quarter. Adjusted operating profit rose 15.9% to $31.2 million with the mix shift towards Specialty pharmacy platform.

Financial Position

OCR exited the year with cash and cash equivalents of $356.0 million, down 19.9% from $444.6 million as of Dec 31, 2012. Long-term debt (including notes and convertible debentures) declined 5.4% to $1,946.0 million from $2,057.7 million as of Dec 31, 2012. However, long-term debt to capitalization ratio increased 450 bps to 41.5% from 37.0% as of Dec 31, 2012 due to a fall in shareholder’s equity.

In the year, cash flow from operations was $479.5 million and capital expenditures were $95.0 million. OCR repurchased $130 million in common shares during the quarter for an average price of $56.25. At the year-end, the company had $500 million in remaining repurchase authorization.

OCR also increased its quarterly dividend by 43% in the quarter to 20 cents per share. Overall, the company paid $150 million in share repurchases and dividends paid during the 2013-fourth quarter.

2014 Outlook

For 2014, OCR expects revenues between $6.3 and $6.4 billion, indicating a 5% to 7% rise over 2013. However, it is lower than the Zacks Consensus Estimate of $6.6 billion.

Adjusted earnings per share are anticipated in the range of $3.64 to $3.72, reflecting a 6% to 8% increase over 2013. It is also lower than the Zacks Consensus Estimate of $3.82.

Operating cash flows are expected between $475 and $550 million for the year, excluding settlement payments.

Our Take

Despite reporting higher earnings and revenues, we are disappointed about the results because none of them met the Zacks Consensus Estimate. The guided figures for earnings and revenues are also lower than the Zacks Consensus Estimate.

OCR currently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical services industry include BioTelemetry, Inc. (BEAT), Quintiles Transnational Holdings Inc. (Q), and Covance Inc. (CVD). Both BioTelemetry and Quintiles Transnational carry a Zacks Rank #1 (Strong Buy), while Covance carries a Zacks Rank #2 (Buy).

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