Provider of drugs to long-term care facilities and nursing homes, Omnicare Inc. ( OCR - Snapshot Report ) posted third quarter 2012 adjusted (excluding one-time expenses) earnings per share of 86 cents surpassing the Zacks Consensus Estimate of 80 cents.

Reported net income in the reported quarter more than doubled from the year-ago quarter to $61.4 million (or 55 cents per share).

Revenues

Net sales decreased 2.8% year over year to $1,501.3 million in the third quarter, trailing the Zacks Consensus Estimate of $1,536 million. The decline in the scripts volume and introduction of lower costs generics hampered growth in company-wide revenues.

Net sales of the Long Term Care Group were $1,166 million in the quarter, down 8% year over year. The decrease in prescription volumes led to the decline in segment revenues. Omnicare also initiated the restructuring of the Long Term Care segment in the reported quarter.

Net sales of the Specialty Care Group were $333 million, up 21.3% year over year. Growth across all specialty platforms accounted for the year-over year sales growth. Moreover, the segment continues to gain from its limited distribution network for its specialty pharmacy platform.

Margins

Gross margin improved 232 basis points year over year to 24.7% in the third quarter. Operating margin increased 130 basis points on a year-over-year basis to 8.9% in the quarter. Adjusted EBITDA from continuing operations stood at $172 million, up 9.6% year over year.

Adjusted operating income from continuing operations for Long Term Care Group improved 10% year over to $154.4 million while the same for Specialty Care Group jumped 25.5% to $33.2 million in the quarter.

Balance Sheet, Cash Flow and Other

Omnicare exited the third quarter with cash and cash equivalents of $647.4 million, down 5% year over year. Long-term debt (including notes and convertible debentures) declined 4.1% year over year but still remained sizeable at $2,029.7 million.

Cash flow from continuing operations climbed 17.4% year over year to $196 million. The improvement in the company’s cash position made possible the deployment of capital to increase shareholder value via dividend hikes and share repurchases.

Omnicare repurchased about 0.9 million shares in the third quarter for $31 million. The company had $498 million available under its recent share repurchase authorization, as of September 30, 2012.

Outlook

For 2012, Omnicare continues to anticipate revenues between $6.1 billion and $6.2 billion. However, the company has raised its forecast for adjusted earnings per share (from continuing operations) in a range of $3.30 to $3.36 compared with $3.22 to $3.28 earlier. The upward revision was based on the branded generic conversion wave and robust growth of the company’s Specialty Care Group.

Omnicare also increased its expected cash flows (from continuing operations) to the range of $500 million to $550 million, compared to the earlier range of $425 million to $525 million.

Omnicare is a market leading provider of long-term care pharmacy services and health care environment for individuals directly and indirectly, through subsidiaries, across North America. It competes with PharMerica Corporation ( PMC - Snapshot Report ) and National Healthcare Corp. ( NHC ) in certain niche segments.

Omnicare currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We currently have a long-term ‘Neutral’ recommendation on the stock. In addition, Omnicare has shown significant improvement in margins, attributable to new generics introductions and cost containment efforts.

Moreover, generic launches in the next few quarters present a major opportunity due to Omnicare’s direct access to manufacturers and current greater exposure to the institutional pharmacy channel than in the past couple of years. Operational synergies from the buyout of Five Star’s pharmacy business are also expected to materialize in 2013. However, the company continues to rely on Medicare and Medicaid programs for a major share of its revenues.