Lincare Holdings (LNCR), a leading provider of oxygen and respiratory therapies, posted second-quarter fiscal 2011 earnings per share of 45 cents, below the Zacks Consensus Estimate of 51 cents and the year-ago earnings of 47 cents. Profit slid 7.9% year over year to $42.8 million as higher cost of sales more than neutralized the increase in revenues.
Revenues climbed 7.3% year over year to $449 million, matching the Zacks Consensus Estimate. Sales included an unfavorable impact of $21 million associated with Medicare payment changes. Such changes resulted in, among others, lower Medicare payment rates for respiratory medications and new payment rates across specific markets.
Operating income fell roughly 6% year over year to $80 million with operating margin declining to 17.8% from 20.4% a year ago. Consolidated cost and expenses rose 11% year over year to $369 million. The rise is primarily attributable to higher cost of sales which surged 25% in the quarter.
Lincare generated $131.8 million (down 7.2% year over year) in cash from operation during first-half 2011 and spent $57.7 million and $73 million as net capital expenditures and for business acquisitions, respectively. Cash and investments fell 2.4% year over year to $122.1 million while total long-term debt increased 7.5% to $532.8 million. The company bought back 1.7 million shares during the first half for $50 million.
Florida-based Lincare is a leading provider of oxygen and other respiratory therapy services to patients at home. The company offers services and equipment to more than 790,000 customers across the U.S. through 1,106 local centers (with 13 centers added in the second quarter).
Lincare remains committed to boosting sales through its leadership in respiratory therapy services and expansion of product range. In an effort to diversify, the company, in February 2011, spent $20.6 million to purchase a specialty pharmacy business with annual sales of $82 million. Moreover, Lincare noted that demand for its anti-coagulation testing business is strong and roughly 10,000 customers are currently using this service.
Lincare derives a major portion of its revenue from government sources and is therefore vulnerable to reimbursement rate cuts. Centers for Medicare and Medicaid Services (“CMS”) has launched a new “Competitive Bidding Program” for items of durable medical equipment (“DME”) including home oxygen. The bidding is aimed at determining the reimbursement rates offered by Medicare for DME in these markets.
Lincare is well placed to be a winner in the home oxygen space in the long run. However, the CMS bidding program represents a major headwind for the company as it may substantially affect its oxygen business resulting from the cap on reimbursement rates.
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