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Omnicare Q2 Earnings Beat, Revs up on Strong Segment Sales

Zacks Equity Research

Omnicare Inc. (OCR) posted adjusted earnings per share of 91 cents in the second quarter of 2014, beating the Zacks Consensus Estimate by a penny and above the year-ago level of 85 cents by 7.1%.

Reported net earnings came in at $61.2 million, up 29.5% from $47.3 million in the second quarter of 2013. On a per share basis, reported net earnings augmented 34.9% to 58 cents from 43 cents posted a year ago.

Omnicare, Inc - Quarterly EPS (:BNRI) | FindTheBest

Revenues in the quarter spiked 7.1% to $1,610.6 million from $1,503.1 million a year ago and comfortably surpassed the Zacks Consensus Estimate of $1,585 million.

Segment Results

Revenues from the core Long-Term Care (LTC) Group were $1,190 million, up 2.7% from $1,159 million in the same period last year. Adjusted operating earnings were flat on a year-over-year basis at $160.0 million on modest revenue growth, lower activity levels and prescription volumes.

Revenues from the Specialty Care Group (SCG) rose 22.0% to $420.0 million from $343.0 million in the comparable prior-year period, driven by a combination of prescription value increases and drug price inflation. Operating earnings of $31.1 million increased 15.0% from $27.1 million reported a year ago.

Margins and Expenses

Gross profit declined 1.5% to $354.2 million and gross margin dipped 190 basis points (bps) to 22.0% from 23.9% in the second quarter of 2013. Margins were adversely affected by a revenue mix shift toward lower margin Specialty Pharmacy business, general pricing adjustments with PDPs and other payors as well as robust inflation of high-cost branded drugs.

Selling, general and administrative (SG&A) expenses declined 4.1% to $184.1 million due to increased efficiencies and other standardization initiatives. As a percentage of sales, SG&A expenses improved 140 bps to 11.4% from 12.8% in the year-ago quarter.

Adjusted depreciation and amortization (D&A) expenses declined marginally by 0.6% to $27.1 million for the second quarter of 2014. Adjusted EBITDA increased 4.4% to $176.2 million in the quarter from $168.8 million in the second quarter of 2013.

Financial Position

OCR ended the quarter with cash and cash equivalents of $314.7 million, down 11.6% from $356.0 million as of Dec 31, 2013. Long-term debt (including notes and convertible debentures) declined marginally by 0.1% to $1,417.6 million from $1,418.8 million as of Dec 31, 2013. However, the long-term debt to capitalization ratio increased 120 bps to 35.3% from 34.1% as of Dec 31, 2013 due to a fall in shareholder’s equity.

In the first half of 2014, cash flow from operations totaled $390.2 million, up significantly by 48.6% from the comparable year-ago period. Capital expenditures stood at $48.0 million, up 2.5% from the first half of 2013.

OCR repurchased 1.1 million shares for an aggregate amount of $65 million in the quarter. As of Jun 30, 2014, the company had approximately $340 million worth of shares available under its current share repurchase authorization.

2014 Outlook

OCR reaffirmed its previously announced adjusted earnings and revenue guidance and updated its operating cash flow guidance for 2014. Adjusted earnings per share are anticipated in the range of $3.64 to $3.72, reflecting a 6 to 8% increase over 2013. The Zacks Consensus Estimate of $3.70 lies within the guided range.

Meanwhile, OCR expects revenues between $6.3 and $6.4 billion for 2014, indicating a 5 to 7% rise over 2013. The Zacks Consensus Estimate of $6.4 billion coincides with the upper end of the guided range.

Operating cash flows are expected between $500 and $550 million as against the prior guidance of $475 and $550 million for the year, excluding settlement payments.

Our Take

We are impressed with OCR’s earnings and revenue beat in the second quarter of 2014, with both increasing on year-over-year bases. The company also updated its operating cash flow guidance for 2014 on better-than-expected cash flow in the first half.

OCR delivered an improved operating performance during the quarter, driven by its ability to convert increased sales to operating earnings as well as its strong working capital management. Furthermore, OCR continues to make additional investments in the business.

On the other hand, OCR continues to face robust inflation of high-cost branded drugs and general pricing adjustments. However, with the rapidly changing healthcare environment, OCR is well-positioned to identify new opportunities and generate consistent growth.

Currently, OCR carries a Zacks Rank #2 (Buy). Other stocks worth a look in the medical services industry include PAREXEL International Corporation (PRXL), iKang Healthcare Group, Inc. (KANG) and Quintiles Transnational Holdings Inc. (Q). While PAREXEL International sports a Zacks Rank #1 (Strong Buy), iKang Healthcare Group and Quintiles Transnational Holdings carry the same rank as OCR.

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