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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q |
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
For the quarterly period ended March 31, 2009 |
or |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
For the transition period from __________ to __________. |
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Commission File Number 1-8269 |
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OMNICARE, INC. |
(Exact name of registrant as specified in its charter) |
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Delaware |
| 31-1001351 |
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(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
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100 East RiverCenter Boulevard, Covington, Kentucky 41011 |
(Address of principal executive offices) (Zip Code) |
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(859) 392-3300 |
(Registrant’s telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant:
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| 1) | has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and |
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| 2) | has been subject to such filing requirements for the past 90 days. |
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Yesx Noo |
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Yeso Noo |
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Large accelerated filer | x |
| Accelerated filer | o |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
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Yeso Nox |
COMMON STOCK OUTSTANDING
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| Number of |
| Date |
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Common Stock, $1 par value |
| 118,438,584 |
| March 31, 2009 |
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OMNICARE, INC. AND
SUBSIDIARY COMPANIES
FORM 10-Q QUARTERLY REPORT MARCH 31, 2009
INDEX
PART I - FINANCIAL INFORMATION:
ITEM 1. - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(in thousands, except per share data)
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| Three months ended |
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| 2009 |
| 2008 |
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Net sales |
| $ | 1,563,560 |
| $ | 1,558,979 |
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Cost of sales |
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| 1,165,036 |
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| 1,177,763 |
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Heartland matters (Note 11) |
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| 1,102 |
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| 1,574 |
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Gross profit |
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| 397,422 |
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| 379,642 |
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Selling, general and administrative expenses |
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| 225,174 |
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| 236,597 |
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Provision for doubtful accounts |
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| 26,626 |
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| 30,392 |
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Restructuring and other related charges (Note 10) |
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| 6,917 |
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| 6,448 |
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Litigation and other related professional fees (Note 11) |
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| 41,665 |
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| 21,642 |
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Heartland matters (Note 11) |
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| 891 |
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| 319 |
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Acquisition and other related costs (Note 3) |
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| 839 |
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| — |
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Operating income |
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| 95,310 |
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| 84,244 |
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Investment income |
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| 2,407 |
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| 2,611 |
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Interest expense |
|
| (31,292 | ) |
| (36,822 | ) |
Amortization of discount on convertible notes (Note 5) |
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| (6,797 | ) |
| (6,300 | ) |
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Income before income taxes |
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| 59,628 |
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| 43,733 |
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Income tax provision |
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| 28,734 |
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| 17,583 |
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Net income |
| $ | 30,894 |
| $ | 26,150 |
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Earnings per share: |
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Basic |
| $ | 0.27 |
| $ | 0.22 |
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Diluted |
| $ | 0.26 |
| $ | 0.22 |
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Dividends per common share |
| $ | 0.0225 |
| $ | 0.0225 |
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Weighted average number of common shares outstanding: |
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Basic |
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| 116,448 |
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| 119,848 |
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Diluted |
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| 117,341 |
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| 120,538 |
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Comprehensive income |
| $ | 30,675 |
| $ | 35,277 |
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The Notes to Consolidated Financial Statements are an integral part of these statements.
3
CONSOLIDATED BALANCE SHEETS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(in thousands, except share data)
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| (UNAUDITED) |
| December 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 215,089 |
| $ | 215,090 |
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Restricted cash |
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| 2,872 |
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| 1,891 |
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Accounts receivable, less allowances of $337,729 (2008-$332,969) |
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| 1,364,836 |
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| 1,367,155 |
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Unbilled receivables, CRO |
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| 23,931 |
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| 22,329 |
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Inventories |
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| 410,043 |
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| 452,748 |
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Deferred income tax benefits |
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| 143,074 |
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| 134,249 |
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Other current assets |
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| 189,357 |
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| 178,231 |
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Total current assets |
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| 2,349,202 |
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| 2,371,693 |
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Properties and equipment, at cost less accumulated depreciation of $350,650 (2008-$346,260) |
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| 222,976 |
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| 219,652 |
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Goodwill |
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| 4,272,741 |
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| 4,252,906 |
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Identifiable intangible assets, less accumulated amortization of $162,155 (2008-$152,405) |
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| 329,352 |
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| 333,769 |
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Rabbi trust assets for settlement of pension obligations |
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| 134,732 |
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| 134,587 |
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Other noncurrent assets |
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| 132,570 |
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| 137,638 |
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Total noncurrent assets |
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| 5,092,371 |
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| 5,078,552 |
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Total assets |
| $ | 7,441,573 |
| $ | 7,450,245 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 276,840 |
| $ | 339,552 |
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Accrued employee compensation |
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| 68,020 |
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| 51,451 |
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Deferred revenue, CRO |
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| 19,986 |
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| 23,227 |
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Current debt |
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| 2,088 |
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| 2,263 |
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Other current liabilities |
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| 275,695 |
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| 224,296 |
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Total current liabilities |
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| 642,629 |
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| 640,789 |
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Long-term debt, notes and convertible debentures (Note 5) |
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| 2,285,743 |
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| 2,352,877 |
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Deferred income tax liabilities |
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| 381,313 |
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| 362,610 |
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Other noncurrent liabilities |
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| 280,336 |
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| 276,284 |
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Total noncurrent liabilities |
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| 2,947,392 |
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| 2,991,771 |
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Total liabilities |
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| 3,590,021 |
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| 3,632,560 |
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Commitments and contingencies (Note 11) |
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Stockholders’ equity: |
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Preferred stock, no par value, 1,000,000 shares authorized, none issued and outstanding |
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| — |
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| — |
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Common stock, $1 par value, 200,000,000 shares authorized, 125,690,600 shares issued (2008-125,583,300 shares issued) |
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| 125,691 |
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| 125,583 |
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Paid-in capital (Note 5) |
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| 2,395,659 |
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| 2,386,945 |
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Retained earnings |
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| 1,526,392 |
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| 1,498,171 |
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Treasury stock, at cost-7,252,000 shares (2008-7,135,300 shares) |
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| (196,135 | ) |
| (193,178 | ) |
Accumulated other comprehensive income |
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| (55 | ) |
| 164 |
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Total stockholders’ equity |
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| 3,851,552 |
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| 3,817,685 |
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Total liabilities and stockholders’ equity |
| $ | 7,441,573 |
| $ | 7,450,245 |
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The Notes to Consolidated Financial Statements are an integral part of these statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(in thousands)
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| Three months ended |
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| 2009 |
| 2008 |
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Cash flows from operating activities: |
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Net income |
| $ | 30,894 |
| $ | 26,150 |
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Adjustments to reconcile net income to net cash flows from operating activities: |
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Depreciation expense |
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| 13,623 |
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| 12,933 |
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Amortization expense |
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| 23,118 |
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| 22,882 |
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Changes in assets and liabilities, net of effects from acquisition of businesses: |
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Accounts receivable and unbilled receivables, net of provision for doubtful accounts |
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| 6,741 |
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| 15,402 |
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Inventories |
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| 44,361 |
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| 39,966 |
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Other current and noncurrent assets |
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| (10,809 | ) |
| 23,181 |
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Accounts payable |
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| (61,393 | ) |
| (43,626 | ) |
Accrued employee compensation |
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| 16,902 |
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| 14,109 |
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Deferred revenue |
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| (3,241 | ) |
| (3,289 | ) |
Current and noncurrent liabilities |
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| 60,722 |
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| 34,556 |
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Net cash flows from operating activities |
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| 120,918 |
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| 142,264 |
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Cash flows from investing activities: |
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Acquisition of businesses, net of cash received |
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| (31,710 | ) |
| (35,983 | ) |
Capital expenditures |
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| (8,819 | ) |
| (12,439 | ) |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust |
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| 1,448 |
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| (11,542 | ) |
Other |
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| (2,394 | ) |
| (32 | ) |
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Net cash flows used in investing activities |
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| (41,475 | ) |
| (59,996 | ) |
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Cash flows from financing activities: |
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Net payments on revolving credit facility and term A loan |
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| (75,000 | ) |
| (50,000 | ) |
Payments on long-term borrowings and obligations |
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| (494 | ) |
| (963 | ) |
(Decrease) in cash overdraft balance |
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| (1,403 | ) |
| (857 | ) |
Payments for stock awards and exercise of stock options, net of stock tendered in payment |
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| (1,870 | ) |
| (3,584 | ) |
Excess tax benefits from stock-based compensation |
|
| 438 |
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| 82 |
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Dividends paid |
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| (2,673 | ) |
| (2,746 | ) |
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Net cash flows used in financing activities |
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| (81,002 | ) |
| (58,068 | ) |
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Effect of exchange rate changes on cash |
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| 1,558 |
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| 2,612 |
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Net (decrease) increase in cash and cash equivalents |
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| (1 | ) |
| 26,812 |
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Cash and cash equivalents at beginning of period |
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| 215,090 |
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| 274,448 |
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Cash and cash equivalents at end of period |
| $ | 215,089 |
| $ | 301,260 |
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The Notes to Consolidated Financial Statements are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
Note 1 - Interim Financial Data, Description of Business and Summary of Significant Accounting Policies
Interim Financial Data
The interim financial data is unaudited; however, in the opinion of the management of Omnicare, Inc., the interim data includes all adjustments (which include only normal adjustments, except as described in the “Restructuring and Other Related Charges” and “Commitments and Contingencies” notes) considered necessary for a fair statement of the consolidated results of operations, financial position and cash flows of Omnicare, Inc. and its consolidated subsidiaries (“Omnicare” or the “Company”). These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in Omnicare’s Annual Report on Form 10-K for the year ended December 31, 2008 (“Omnicare’s 2008 Annual Report”) and any related updates included in the Company’s periodic quarterly Securities and Exchange Commission (“SEC”) filings. Certain reclassifications and adjustments (see Note 2) of prior year amounts have been made to conform with the current year presentation.
Description of Business and Summary of Significant Accounting Policies
The Company’s description of business and significant accounting policies have been disclosed in Omnicare’s 2008 Annual Report. As previously disclosed, these financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in Omnicare’s 2008 Annual Report and any related updates contained in the Company’s periodic quarterly SEC filings, including those presented below.
Concentration of Risk
The prescription drug benefit under Medicare Part D (“Part D”) became effective on January 1, 2006. As a result, providers of long-term care pharmacy services, including Omnicare, experienced a significant shift in payor mix beginning in 2006. Approximately 39% of the Company’s revenues in the three months ended March 31, 2009 were generated under the Part D program. The Company estimates that approximately 25% of these Part D revenues during the three months ended March 31, 2009 relate to patients enrolled in Part D prescription drug plans sponsored by UnitedHealth Group, Inc. and its affiliates (“United”). United and a small number of other Part D Plan sponsors and pharmaceutical benefit managers reimburse a significant portion of the Company’s Part D revenues. Prior to the implementation of the Medicare Part D program, most of the Part D residents served by the Company were reimbursed under state Medicaid programs and, to a lesser extent, private pay sources.
Under the Part D benefit, payment is determined in accordance with the agreements Omnicare has negotiated with the Part D Plans. The remainder of Omnicare’s billings are paid or reimbursed primarily by long-term care facilities (including revenues for residents funded under Medicare Part A) and other third party payors, including private insurers, state Medicaid programs, as well as individual residents.
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The Medicaid and Medicare programs are highly regulated. The failure, even if inadvertent, of Omnicare and/or client facilities to comply with applicable reimbursement regulations could adversely affect Omnicare’s reimbursement under these programs and Omnicare’s ability to continue to participate in these programs. In addition, failure to comply with these regulations could subject the Company to other penalties.
As noted, the Company obtains reimbursement for drugs it provides to enrollees of a given Part D Plan pursuant to the agreement it negotiates with that Part D Plan. The Company has entered into such agreements with nearly all Part D Plan sponsors under which it will provide drugs and associated services to their enrollees. The Company continues to have ongoing discussions with Part D Plans and renegotiates these agreements in the ordinary course. Further, the proportion of the Company’s Part D business serviced under specific agreements may change over time based upon beneficiary choice, reassignment of dual eligibles to different Part D Plans or Part D Plan consolidation. As such, reimbursement under these agreements is subject to change. Moreover, as expected in the transition to a program of this magnitude, certain administrative and payment issues have arisen, resulting in higher operating expenses, as well as outstanding gross accounts receivable (net of allowances for contractual adjustments, and prior to any allowance for doubtful accounts), particularly for copays. As of March 31, 2009, copays outstanding from Part D Plans were approximately $17 million relating to 2006 and 2007. The Company is pursuing solutions, including legal actions against certain Part D Plans, to collect outstanding copays, as well as certain rejected claims.
On July 11, 2007, the Company commenced legal action against a group of its customers for, among other things, the collection of past-due receivables that are owed to the Company. Specifically, approximately $93 million (excluding interest) is owed to the Company by this group of customers as of March 31, 2009, of which approximately $87 million is past-due based on applicable payment terms (a significant portion of which is not reserved based on the relevant facts and circumstances).
Until these administrative and payment issues relating to the Part D Drug Benefit as well as the aforementioned legal action against a group of Omnicare’s customers are fully resolved, there can be no assurance that these matters will not adversely impact the Company’s results of operations, financial position or cash flows.
7
Accumulated Other Comprehensive Income (Loss)
The accumulated other comprehensive income (loss) balances at March 31, 2009 and December 31, 2008, net of aggregate applicable tax benefits of $3.2 million and $2.5 million, respectively, by component and in the aggregate, follow (in thousands):
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| March 31, |
| December 31, |
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Cumulative foreign currency translation adjustments |
| $ | 5,027 |
| $ | 4,112 |
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Unrealized gain on fair value of investments |
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| 6,052 |
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| 7,340 |
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Pension and postemployment benefits |
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| (11,134 | ) |
| (11,288 | ) |
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Total accumulated other comprehensive loss adjustments, net |
| $ | (55 | ) | $ | 164 |
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Noncontrolling Interests
Effective January 1, 2009, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS 160 is effective for the first annual reporting period beginning after December 15, 2008. The first quarter 2009 adoption of SFAS 160 had an immaterial effect on the Company’s consolidated results of operations, financial position and cash flows.
Income Taxes
The effective income tax rate was 48.2% for the three months ended March 31, 2009, as compared to the first quarter of 2008 rate of 40.2%. The year-over-year increase in the effective tax rate is primarily attributable to certain nondeductible litigation costs recognized in the 2009 period. The effective tax rates in 2009 and 2008 are higher than the federal statutory rate largely as a result of the impact of state and local income taxes and various nondeductible expenses (including a portion of the aforementioned litigation costs in 2009).
Recently Issued Accounting Standards
In December 2008, the FASB issued FASB Staff Position (FSP) No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). Among other items, FSP FAS 132(R)-1 requires increased disclosures about plan assets in an employer’s defined benefit pension or other postretirement plans such as how investment allocation decisions are made; major categories of plan assets; inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and significant concentrations of risk within plan assets. The disclosures about plan assets required by FSP FAS 132(R)-1 shall be provided for fiscal years ending after December 15, 2009. The Company is evaluating the impact of this recently issued standard on its disclosures.
Note 2 – Change in Method of Accounting for Convertible Debt
Effective January 1, 2009, the Company retrospectively adopted the provisions of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). Among other items, FSP APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that reflects the entity’s calculated
8
nonconvertible debt borrowing rate when the debt was issued. Comparative financial statements of prior years have been adjusted to apply the new method retrospectively. The following financial statement line items for the periods ending March 31, 2008 and as of December 31, 2008 were affected by this accounting change (in thousands):
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Income Statement |
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| As Computed |
| As Reported |
| Effect |
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Amortization of discount on convertible notes (Note 5) |
| $ | (6,300 | ) | $ | — |
| $ | (6,300 | ) |
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Interest expense |
|
| (36,822 | ) |
| (37,056 | ) |
| 234 |
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Income before income taxes |
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| 43,733 |
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| 49,799 |
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| (6,066 | ) |
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Income tax provision |
|
| 17,583 |
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| 19,855 |
|
| 2,272 |
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Net income |
| $ | 26,150 |
| $ | 29,944 |
| $ | (3,794 | ) |
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Earnings per share: |
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Basic |
| $ | 0.22 |
| $ | 0.25 |
| $ | (0.03 | ) |
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Diluted |
| $ | 0.22 |
| $ | 0.25 |
| $ | (0.03 | ) |
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Comprehensive income |
| $ | 35,277 |
| $ | 39,071 |
| $ | (3,794 | ) |
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Balance Sheet |
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| As Computed |
| As Reported |
| Effect |
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Other noncurrent assets |
| $ | 137,638 |
| $ | 147,111 |
| $ | (9,473 | ) |
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Total noncurrent assets |
|
| 5,078,552 |
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| 5,088,025 |
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| (9,473 | ) |
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Total assets |
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| 7,450,245 |
|
| 7,459,718 |
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| (9,473 | ) |
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Long-term debt, notes and convertible debentures (Note 5) |
|
| 2,352,877 |
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| 2,731,163 |
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| (378,286 | ) |
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|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
| 362,610 |
|
| 390,098 |
|
| (27,488 | ) |
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities |
|
| 2,991,771 |
|
| 3,397,545 |
|
| (405,774 | ) |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
| 3,632,560 |
|
| 4,038,334 |
|
| (405,774 | ) |
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital (Note 5) |
|
| 2,386,945 |
|
| 1,945,627 |
|
| 441,318 |
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
| 1,498,171 |
|
| 1,543,188 |
|
| (45,017 | ) |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
| 3,817,685 |
|
| 3,421,384 |
|
| 396,301 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
| 7,450,245 |
|
| 7,459,718 |
|
| (9,473 | ) |
9
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
|
| As Computed |
| As Reported |
| Effect |
| |||
|
|
|
|
| ||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 26,150 |
| $ | 29,944 |
| $ | (3,794 | ) |
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
| 22,882 |
|
| 16,582 |
|
| 6,300 |
|
|
|
|
|
|
|
|
|
|
|
|
Change in other current and noncurrent assets |
|
| 23,181 |
|
| 23,415 |
|
| (234 | ) |
|
|
|
|
|
|
|
|
|
|
|
Change in current and noncurrent liabilities |
|
| 34,556 |
|
| 36,828 |
|
| (2,272 | ) |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
| 142,264 |
|
| 142,264 |
|
| — |
|
Note 3 – Acquisitions
Since 1989, the Company has been involved in a program to acquire providers of pharmaceutical products and related pharmacy services to long-term care facilities and their residents as well as patients in other care settings. The Company’s strategy has included the acquisition of freestanding institutional pharmacy businesses as well as other assets, generally insignificant in size, which have been combined with existing pharmacy operations to augment their internal growth. From time-to-time the Company may acquire other businesses, such as pharmacy consulting companies, specialty pharmacy companies, medical supply and service companies, hospice pharmacy companies and companies providing distribution and product support services for specialty pharmaceuticals, as well as contract research organizations, which complement the Company’s core businesses.
Effective January 1, 2009, the Company adopted the provisions of SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) as amended by FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” (“FSP FAS 141(R)-1”). SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction at fair value; and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including earn-out provisions. The first quarter 2009 implementation resulted in acquisition and other related costs of approximately $0.8 million pretax during the three months ended March 31, 2009, which were primarily related to professional fees for acquisitions completed during the quarter.
During the first three months of 2009, Omnicare completed three acquisitions of businesses in the Pharmacy Services segment, none of which were, individually or in the aggregate, significant to the Company. Acquisitions of businesses required outlays of $31.7 million (including amounts payable pursuant to acquisition agreements relating to pre-2009 acquisitions) in the three months ended March 31, 2009. The impact of these aggregate acquisitions on the Company’s overall goodwill balance has been reflected in the disclosures at the “Goodwill and Other Intangible Assets” note. The Company continues to evaluate the tax effects, identifiable
10
intangible assets and other pre-acquisition contingencies relating to certain acquisitions. Omnicare is in the process of completing its allocation of the purchase price for certain acquisitions and, accordingly, the goodwill and other identifiable intangible assets balances are preliminary and subject to change. The net assets and operating results of acquisitions have been included in the Company’s consolidated financial statements from their respective dates of acquisition.
Note 4 - Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the three months ended March 31, 2009, by business segment, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Pharmacy |
| CRO |
| Total |
| |||
|
|
|
|
| ||||||
Balance as of December 31, 2008 |
| $ | 4,162,893 |
| $ | 90,013 |
| $ | 4,252,906 |
|
Goodwill acquired in the three months ended March 31, 2009 |
|
| 14,096 |
|
| — |
|
| 14,096 |
|
Other |
|
| 4,967 |
|
| 772 |
|
| 5,739 |
|
|
|
|
|
| ||||||
Balance as of March 31, 2009 |
| $ | 4,181,956 |
| $ | 90,785 |
| $ | 4,272,741 |
|
|
|
|
|
|
The “Other” caption above includes the settlement of acquisition matters relating to prior-year acquisitions (including, where applicable, payments pursuant to acquisition agreements such as deferred payments, indemnification payments and payments originating from earnout provisions, as well as adjustments for the finalization of purchase price allocations, including identifiable intangible asset valuations). “Other” also includes the effect of adjustments due to foreign currency translations, which relate primarily to the Contract Research Organization (“CRO”) Services segment, as well as one pharmacy located in Canada which is included in the Pharmacy Services segment.
The decrease in the March 31, 2009 net carrying amount of the Company’s other identifiable intangible assets of approximately $4 million from December 31, 2008 primarily relates to amortization expense recorded during the three-month period, partially offset by increases due primarily to customer relationship assets and non-compete agreements associated with recent acquisitions, which have a weighted-average life of approximately 10 years.
11
Note 5 - Debt
A summary of debt follows (in thousands):
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
| ||
|
|
|
| ||||
Revolving loans, due 2010, $800 million |
| $ | — |
| $ | — |
|
Senior term A loan, due 2010 |
|
| 325,000 |
|
| 400,000 |
|
6.125% senior subordinated notes, due 2013 |
|
| 250,000 |
|
| 250,000 |
|
6.75% senior subordinated notes, due 2013 |
|
| 225,000 |
|
| 225,000 |
|
6.875% senior subordinated notes, due 2015 |
|
| 525,000 |
|
| 525,000 |
|
4.00% junior subordinated convertible debentures, due 2033 |
|
| 345,000 |
|
| 345,000 |
|
3.25% convertible senior debentures, due 2035 |
|
| 977,500 |
|
| 977,500 |
|
Capitalized lease and other debt obligations |
|
| 4,418 |
|
| 4,913 |
|
|
|
|
| ||||
Subtotal |
|
| 2,651,918 |
|
| 2,727,413 |
|
Add interest rate swap agreement |
|
| 7,402 |
|
| 6,013 |
|
(Subtract) unamortized debt discount |
|
| (371,489 | ) |
| (378,286 | ) |
(Subtract) current portion of debt |
|
| (2,088 | ) |
| (2,263 | ) |
|
|
|
| ||||
Total long-term debt, net |
| $ | 2,285,743 |
| $ | 2,352,877 |
|
|
|
|
|
The Company’s debt instruments, including related terms and certain financial covenants as well as a description of Omnicare’s Credit Agreement, have been disclosed in further detail at the “Debt” note of the Notes to Consolidated Financial Statements in Omnicare’s 2008 Annual Report.
At March 31, 2009, there was no outstanding balance under the Company’s $800 million revolving credit facility, maturing on July 28, 2010 (“Revolving Loans”), and $325 million outstanding under the Company’s senior term A loan facility, maturing on July 28, 2010 (the “Term Loans”). The Company repaid $75 million on the Term Loans during the three months ended March 31, 2009. The interest rate on the Term Loans was 2.31% at March 31, 2009. As of March 31, 2009, the Company had approximately $26 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals. The Company amortized to expense approximately $1.8 million of deferred debt issuance costs during the three months ended March 31, 2009 and 2008.
The estimated floating interest rate on the interest rate swap agreement was 3.98% at March 31, 2009.
The Company has two convertible debentures, the Series B 4.00% junior subordinated convertible debentures, due 2033 (the “New 4.00% Debentures”) and its 3.25% convertible senior debentures, due 2035 (“3.25% Convertible Debentures”). For further description of the Company’s convertible debt see the “Debt” note of the “Notes to Consolidated Financial Statements” in Omnicare’s 2008 Annual Report. Effective January 1, 2009, the Company retrospectively adopted the provisions of FSP APB 14-1 (see additional information at the “Change in Method of Accounting for Convertible Debt” note). Among other items, FSP APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion
12
(including partial cash settlement) should separately account for the liability and equity components in a manner that reflects the entity’s calculated nonconvertible debt borrowing rate when the debt was issued. The effect of this accounting change on the carrying amounts of the Company’s debt and equity balances, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
| ||
|
|
|
| ||||
Carrying value of equity component |
| $ | 441,318 |
| $ | 441,318 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
Principal amount of convertible debt |
| $ | 1,322,500 |
| $ | 1,322,500 |
|
Unamortized debt discount |
|
| (371,489 | ) |
| (378,286 | ) |
|
|
|
| ||||
Net carrying value of convertible debt |
| $ | 951,011 |
| $ | 944,214 |
|
|
|
|
|
As of March 31, 2009, the remaining amortization period for the debt discount was approximately 24 and 7 years for the New 4.00% Debentures and 3.25% Convertible Debentures, respectively.
The effective interest rates for the liability components of the New 4.00% Debentures and the 3.25% Convertible Debentures were 8.01% and 7.625%, respectively. The impact of this accounting change for the three months ended March 31, 2009 and 2008 was a non-cash increase in pretax interest expense of approximately $6.8 million and $6.3 million ($4.2 million and $3.9 million aftertax), respectively.
Note 6 - Fair Value
On January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines a hierarchy which prioritizes the inputs in fair value measurements. “Level 1” measurements are measurements using quoted prices in active markets for identical assets or liabilities. “Level 2” measurements use significant other observable inputs. “Level 3” measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions. In recording the fair value of assets and liabilities, companies must use the most reliable measurement available. The impact to the Company’s consolidated results of operations, financial position and cash flows upon adoption of SFAS 157 was not material. The assets, as further described in detail at the “Fair Value” note of the Notes to the Consolidated Financial Statements in Omnicare’s 2008 Annual Report, measured at fair value as of March 31, 2009 were as follows:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Based on |
| ||||||||
|
|
|
|
| |||||||||
|
| Fair Value |
| Quoted Prices |
| Other |
| Unobservable |
| ||||
|
|
|
|
|
| ||||||||
Rabbi trust assets |
| $ | 134,732 |
| $ | 134,732 |
| $ | — |
| $ | — |
|
Interest rate swap agreement - fair value hedge |
|
| 7,402 |
|
| — |
|
| 7,402 |
|
| — |
|
Derivatives |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
| ||||||||
Total |
| $ | 142,134 |
| $ | 134,732 |
| $ | 7,402 |
| $ | — |
|
|
|
|
|
|
|
Note 7 - Stock-Based Compensation
At March 31, 2009, the Company had four stock-based employee compensation plans under which incentive awards were outstanding, which are described in further detail at the “Stock-Based Compensation” note of the Notes to Consolidated Financial Statements in Omnicare’s 2008 Annual Report. Omnicare believes that the incentive awards issued under these plans serve to better align the interests of its employees with those of its stockholders. As further described in Omnicare’s 2008 Annual Report, non-vested stock awards are granted to key employees at the discretion of the Compensation and Incentive Committee of the Board of Directors.
Total pretax stock-based compensation expense recognized in the Consolidated Statement of Income as part of S,G&A expense for stock options and stock awards for the three months ended March 31, 2009 and 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
|
| |||||
|
| 2009 |
| 2008 |
| ||
|
|
|
| ||||
Stock awards |
| $ | 5,515 |
| $ | 5,695 |
|
Stock options |
|
| 1,317 |
|
| 1,031 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
| $ | 6,832 |
| $ | 6,726 |
|
|
|
|
|
The assumptions used to value stock options granted during the periods ended March 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| ||
|
|
|
| ||||
Expected volatility |
|
| 35.7 | % |
| 29.7 | % |
Risk-free interest rate |
|
| 2.0 | % |
| 2.7 | % |
Expected dividend yield |
|
| 0.3 | % |
| 0.4 | % |
Expected term of options (in years) |
|
| 4.7 |
|
| 4.7 |
|
Weighted average fair value per option |
| $ | 9.19 |
| $ | 6.36 |
|
14
A summary of stock option activity under the plans for the three months ended March 31, 2009, is presented below (in thousands, except exercise price and term data):
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
| Weighted- |
| Weighted- |
| Aggregate |
| ||
|
|
|
|
|
| ||||||
Options outstanding, beginning of period |
| 7,348 |
| $ | 30.19 |
|
|
|
|
|
|
Options granted |
| 27 |
|
| 29.10 |
|
|
|
|
|
|
Options exercised |
| (80 | ) |
| 15.59 |
|
|
|
|
|
|
Options forfeited |
| (11 | ) |
| 34.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options outstanding, end of period |
| 7,284 |
| $ | 30.34 |
| 4.7 |
| $ | 15,561 |
|
|
|
|
|
|
| ||||||
Options exercisable, end of period |
| 5,903 |
| $ | 30.29 |
| 3.8 |
| $ | 14,864 |
|
|
|
|
|
|
|
The total exercise date intrinsic value of options exercised during the three months ended March 31, 2009 was $0.9 million.
A summary of non-vested restricted stock awards for the three months ended March 31, 2009 is presented below (in thousands, except grant price data):
|
|
|
|
|
|
|
|
| Shares |
| Weighted- |
| |
|
|
|
| |||
Non-vested shares, beginning of period |
| 2,167 |
| $ | 34.23 |
|
Shares awarded |
| 27 |
|
| 25.61 |
|
Shares vested |
| (349 | ) |
| 34.24 |
|
Shares forfeited |
| (5 | ) |
| 51.91 |
|
|
|
|
|
|
| |
Non-vested shares, end of period |
| 1,840 |
| $ | 34.05 |
|
|
|
|
|
As of March 31, 2009, there was approximately $63 million of total unrecognized compensation cost related to non-vested stock awards and stock options granted to Omnicare employees, which is expected to be recognized as expense prospectively over a remaining weighted-average period of approximately 5 years. The total grant date fair value of shares vested during the three months ended March 31, 2009 related to stock awards and stock options was approximately $12.2 million.
For the three months ended March 31, 2009 and 2008, the Company recorded approximately $1.7 million and $1.1 million, respectively, in charges relating to the prior implementation of SFAS 123R, which primarily relate to stock option expense.
15
Note 8 - Employee Benefit Plans
The Company has various defined contribution savings plans under which eligible employees can participate by contributing a portion of their salary for investment, at the direction of each employee, in one or more investment funds, as further described in Omnicare’s 2008 Annual Report. Expense relating primarily to the Company’s matching contributions for these defined contribution plans was $1.8 million and $1.9 million for the three months ended March 31, 2009 and 2008, respectively.
The Company has various defined benefit plans, as further described in Omnicare’s 2008 Annual Report. The following table presents the components of net periodic pension cost for all pension plans for the three months ended March 31, 2009 and 2008 (pretax, in thousands):
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
|
| |||||
|
| 2009 |
| 2008 |
| ||
|
|
|
| ||||
Service cost |
| $ | 375 |
| $ | 1,499 |
|
Interest cost |
|
| 1,499 |
|
| 2,385 |
|
Amortization of deferred amounts (primarily prior actuarial losses) |
|
| 250 |
|
| 3,673 |
|
Return on assets |
|
| (60 | ) |
| (54 | ) |
Other |
|
| — |
|
| (268 | ) |
|
|
|
| ||||
Net periodic pension cost |
| $ | 2,064 |
| $ | 7,235 |
|
|
|
|
|
As of March 31, 2009, the aggregate defined benefit plans’ liabilities total approximately $107 million. During the first three months of 2009, the Company made no payments related to funding the rabbi trusts for the settlement of the Company’s pension obligations, resulting in aggregate assets with a fair value of approximately $135 million at March 31, 2009. The aggregate defined benefit plans’ liabilities are the projected benefit obligation to be paid based upon services through retirement. The aggregate assets in the rabbi trusts are the amounts required to fund the lump sum benefits of the Excess Benefit Plan. These benefits are fully funded as of March 31, 2009.
Note 9 - Earnings Per Share Data
Basic earnings per share are computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share include the dilutive effect of stock options, warrants and restricted stock awards, as well as convertible debentures.
The following is a reconciliation of the basic and diluted earnings per share (“EPS”) computations for both the numerator and denominator (in thousands, except per share data):
16
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| |||||||
|
|
| ||||||||
2009: |
| Income |
| Common Shares |
| Per Common Share |
| |||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 30,894 |
|
| 116,448 |
| $ | 0.27 |
|
|
|
|
|
|
|
|
|
| ||
Effect of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
4.00% junior subordinated convertible debentures |
|
| 71 |
|
| 275 |
|
|
|
|
Stock options, warrants and awards |
|
| — |
|
| 618 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
Net income plus assumed conversions |
| $ | 30,965 |
|
| 117,341 |
| $ | 0.26 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 26,150 |
|
| 119,848 |
| $ | 0.22 |
|
|
|
|
|
|
|
|
|
| ||
Effect of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
4.00% junior subordinated convertible debentures |
|
| 70 |
|
| 275 |
|
|
|
|
Stock options, warrants and awards |
|
| — |
|
| 415 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
Net income plus assumed conversions |
| $ | 26,220 |
|
| 120,538 |
| $ | 0.22 |
|
|
|
|
|
|
During the three months ended March 31, 2009 and 2008, the anti-dilutive effect associated with certain stock options, warrants and awards was excluded from the computation of diluted EPS, since the exercise price was greater than the average market price of the Company’s common stock during these periods. The aggregate number of stock options, warrants and awards excluded from the computation of diluted EPS for the quarters ended March 31, 2009 and 2008 totaled 6.2 million and 6.6 million, respectively.
Effective January 1, 2009, the Company adopted the provisions of FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP-EITF 03-6-1”). FSP-EITF 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method. FSP-EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. FSP-EITF 03-6-1 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
17
Note 10 - Restructuring and Other Related Charges
Omnicare Full Potential Program
In 2006, the Company commenced the implementation of the “Omnicare Full Potential” Plan, a major initiative primarily designed to re-engineer the Company’s pharmacy operating model to increase efficiency and enhance customer growth. The Omnicare Full Potential Plan is expected to optimize resources across the entire organization by implementing best practices, including the realignment and right-sizing of functions, and a “hub-and-spoke” model, whereby certain key administrative and production functions will be transferred to regional support centers (“hubs”) specifically designed and managed to perform these tasks, with local pharmacies (“spokes”) focusing on time-sensitive services and customer-facing processes. Additionally, in connection with this productivity enhancement initiative, the Company is also right-sizing and consolidating certain CRO operations.
This program is expected to be completed over a multi-year period and is estimated to result in total pretax restructuring and other related charges of approximately $93 million. As presented in further detail below, the Company recorded restructuring and other related charges for the Omnicare Full Potential Plan of approximately $7 million pretax (approximately $4 million aftertax) during the three months ended March 31, 2009, and approximately $36 million pretax during the year ended December 31, 2008 (approximately $6 million pretax in the three months ended March 31, 2008), or cumulative aggregate restructuring and other related charges of approximately $90 million before taxes through the first quarter of 2009. The remainder of the overall restructuring and other related charges will be recognized and disclosed prospectively, as the remaining portions of the project are finalized and implemented. The Company eliminated approximately 1,200 positions in completing its initial phase of the program. The remainder of the program is currently estimated to result in a net reduction of approximately 1,200 positions (1,900 positions eliminated, net of 700 new positions filled in different geographic locations as well as to perform new functions required by the hub-and-spoke model of operations), of which approximately 270 positions had been eliminated as of March 31, 2009. The foregoing reductions do not include additional savings expected from lower levels of overtime and reduced temporary labor. The Company currently estimates reductions in overtime, excess hours and temporary help, as well as productivity gains, to equal an additional 820 full-time equivalents.
The restructuring charges primarily include severance pay, the buy-out of employment agreements, lease terminations, and other exit-related asset disposals, professional fees and facility exit costs. The other related charges are primarily comprised of professional fees. Details of the Omnicare Full Potential Plan restructuring and other related charges follow (pretax, in thousands):
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges: |
| Balance at |
| 2009 |
| Utilized |
| Balance at |
| ||||
|
|
|
|
| |||||||||
Employee severance |
| $ | — |
| $ | 651 |
| $ | (651 | ) | $ | — |
|
Employment agreement buy-outs |
|
| 35 |
|
| 82 |
|
| (117 | ) |
| — |
|
Lease terminations |
|
| 8,885 |
|
| 486 |
|
| (1,034 | ) |
| 8,337 |
|
Other assets, fees and facility exit costs |
|
| 2,394 |
|
| 3,273 |
|
| (2,754 | ) |
| 2,913 |
|
|
|
|
|
|
| ||||||||
Total restructuring charges |
| $ | 11,314 |
|
| 4,492 |
| $ | (4,556 | ) | $ | 11,250 |
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other related charges |
|
|
|
|
| 2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other related charges |
|
|
|
| $ | 6,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, the Company has made cumulative payments of approximately $17 million of severance and other employee-related costs for the Omnicare Full Potential Plan. The remaining liabilities at March 31, 2009, represent amounts not yet paid relating to actions taken in connection with the program (primarily lease payments and professional fees) and will be settled as these matters are finalized. The provision/accrual and corresponding payment amounts relating to employee severance are being accounted for primarily in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits;” and the provision/accrual and corresponding payment amounts relating to employment agreement buy-outs are being accounted for primarily in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).
2005 Program
In connection with the previously disclosed consolidation plans and other productivity initiatives to streamline pharmacy services (related, in part, to the NeighborCare, Inc. acquisition) and contract research organization operations, including maximizing workforce and operating asset utilization, and producing a more cost-efficient, operating infrastructure (the “2005 Program”), the Company had liabilities of $3.5 million at December 31, 2008, of which $0.3 million was utilized in the three months ended March 31, 2009. The remaining liabilities of $3.2 million at March 31, 2009 represent amounts not yet paid relating to actions taken in connection with the program (primarily lease payments) and will be settled as these matters are finalized.
Note 11 - Commitments and Contingencies
Omnicare continuously evaluates contingencies based upon the best available information. The Company believes that liabilities have been recorded to the extent necessary in cases where the outcome is considered probable and reasonably estimable. To the extent that resolution of contingencies results in amounts that vary from the Company’s recorded liabilities, future earnings will be charged or credited accordingly.
As previously disclosed, the United States Attorney’s Office, District of Massachusetts is conducting an investigation relating to the Company’s relationships with certain manufacturers and distributors of pharmaceutical products and certain customers, as well as with respect to
19
contracts with certain companies acquired by the Company. Any actions resulting from this investigation could result in civil or criminal proceedings against the Company. The Company believes that it has complied with all applicable laws and regulations with respect to these matters.
On October 27, 2008, the U.S. District Court in Boston, Massachusetts unsealed aqui tam complaint against the Company that was originally filed under seal with the court on July 16, 2002. This action was brought by Deborah Maguire as a private party “qui tam relator” on behalf of the federal government and various state governments. On September 16, 2008, the U.S. Government filed a Notice that it is not intervening in the action at this time.
Aqui tam action is always filed under seal. Before aqui tam action is unsealed, and typically following an investigation by the government initiated after the filing of thequi tam action, the government is required to notify the court of its decision whether to intervene in the action. The government could seek to intervene in thisqui tam action in the future with permission from the court. Where the government ultimately declines to intervene, thequi tam relators may continue to pursue the litigation at their own expense on behalf of the federal or state government and, if successful, would receive a portion of the government’s recovery. On April 2, 2009, counsel for Ms. Maguire served the Company with the complaint relating to this action.
The action brought by Ms. Maguire alleges civil violations of the False Claims Act, 31 U.S.C. (S) 3729 et seq. and various state false claims statutes based on allegations that the Company: submitted claims for name brand drugs when actually providing generic versions of the same drug to nursing homes; provided consultant pharmacist services to its customers at below-market rates to induce the referral of pharmaceutical business in violation of the Anti-Kickback Statute, 42 U.S.C. 1320a-7b; and accepted discounts from drug manufacturers in return for recommending that certain pharmaceuticals be prescribed to nursing home residents in violation of the Anti-Kickback Statute. The unsealed action seeks damages provided for in the False Claims Act and applicable state statutes.
In addition to the matters described above, on October 30 and 31, 2008, Omnicare was provided with copies of two complaints against Omnicare and other Pharmaceutical manufacturer defendants that were previously filed under seal with the U.S. District Court in Boston, Massachusetts. One complaint was brought by Bernard Lisitza, and the other by David Kammerer, both as private party “qui tam relators” on behalf of the federal government and various state governments. The U.S. Government has notified the court that it is not intervening in these actions at this time.
The action brought by Mr. Kammerer alleges civil violations of the False Claims Act, 31 U.S.C. (S) 3729 et seq. and various state statutes based on allegations that Omnicare accepted rebates, post-purchase discounts, grants and other forms of remuneration from drug manufacturers in return for purchasing pharmaceuticals from those manufacturers and taking steps to increase the purchase of those manufacturers’ drugs in violation of the Anti-Kickback Statute, 42 U.S.C.
20
(S) 1320a-7b and applicable state statutes. The action brought by Mr. Lisitza alleges civil violations of the False Claims Act and various state statutes based on allegations that Omnicare: accepted rebates from drug manufacturers in return for recommending to physicians that certain pharmaceuticals be prescribed to nursing home residents in violation of the Anti-Kickback Statute and applicable state statutes; made false statements and omissions to physicians in connection with its recommendations of those pharmaceuticals; and substituted certain pharmaceuticals without physician authorization. The unsealed actions seek damages provided for in the False Claims Act and applicable state statutes. On March 27 and April 3, 2009, counsel for Mr. Kammerer and Mr. Lisitza, respectively, served the Company with the complaints relating to their respective actions against the Company. The Company and counsel for each of Ms. Maguire and Messrs. Kammerer and Lisitza have stipulated that the Company shall have until June 5, 2009 to answer or otherwise respond to the complaints.
In addition to the unsealedqui tam actions described above, the Company is aware of two otherqui tam complaints against it and other companies that have been filed with the U.S. District Court in Boston, Massachusetts and remain under seal.
On or about March 23, 2009, the Company reached an agreement in principle without admitting liability, subject to board approval and reaching agreement on the global settlement described below, with the U.S. Attorney’s Office, District of Massachusetts, pursuant to which the Company would pay $75 million to settle the claims raised in the two sealed complaints as well as the portion of Ms. Maguire's complaint described above that relates to the Company's provision of consultant pharmacist services and other claims covering similar conduct. Pursuant to this agreement in principle, the Company may withdraw its settlement offer of $75 million if it does not also reach a global settlement with the government of any other actions and investigations pending against the Company covering conduct generally related to the matters described in the remaining portions of the Maguire complaint and the Kammerer and Lisitza complaints described above. There can be no assurance as to whether any such settlements will be reached. If any settlements are reached, there can be no assurance as to the scope or terms of, or the ultimate cost to the Company of, any such settlements.
Omnicare recorded a special litigation charge of $35 million pretax in its financial results for the three months ended March 31, 2009 in order to increase the settlement reserve it has established in connection with the investigation by the U.S. Attorney’s Office, District of Massachusetts and the related matters described above to $75 million. This special litigation charge and the settlement reserve relate to the Company’s estimate of potential settlement amounts and associated costs under SFAS No. 5, “Accounting for Contingencies.” The Company cannot predict the ultimate outcome of this matter or the amount, if any, of additional charges that may be taken in the future in connection with this matter.
The Company believes that all of the allegations described above are without merit and intends to vigorously defend itself in these actions if pursued.
As previously disclosed, on November 14, 2006, the Company entered into a voluntary civil settlement of all federal and state civil claims arising from allegations relating to three generic pharmaceuticals provided by the Company in connection with the substitution of capsules for tablets (Ranitidine), tablets for capsules (Fluoxetine) and two 7.5 mg tablets for one 15 mg tablet (Buspirone). Another issue alleged by onequi tam relator remains under seal and was not resolved by the settlement. The settlement agreement did not include any finding of wrongdoing or any admission of liability. As part of the settlement agreement, on November 9, 2006, the Company entered into a Corporate Integrity Agreement with the Department of Health and Human Services Office of the Inspector General with a term of five years from November 9, 2006. The Corporate Integrity Agreement requires that the Company maintain its compliance program in accordance with the terms of the Corporate Integrity Agreement. The agreement contains specific requirements regarding the development and implementation of therapeutic interchange programs and the general training of certain Company employees as to the requirements of the Company’s compliance program and the Corporate Integrity Agreement. The requirements of the Corporate Integrity Agreement have resulted in increased costs to maintain the Company’s compliance program and could result in greater scrutiny by federal regulatory authorities. Violations of the Corporate Integrity Agreement could subject the Company to significant monetary and/or administrative penalties.
As previously disclosed, on October 5, 2006, the Company entered into a voluntary settlement agreement and a Corporate Integrity Agreement with the State of Michigan to resolve the
21
Michigan Attorney General’s investigation relating to certain billing issues under the Michigan Medicaid program at Specialized Pharmacy Services, a subsidiary of the Company located in Michigan. On October 26, 2007, the Company also entered into settlement agreements with the federal government and the State of Michigan to resolve certain hospice claims relating to Specialized Pharmacy Services. In connection with the settlements, the November 9, 2006 Corporate Integrity Agreement with the Department of Health and Human Services Office of the Inspector General was also amended to cover certain hospice billing matters. The settlement agreements do not include any finding of wrongdoing or any admission of liability. The Corporate Integrity Agreement with the State of Michigan requires that the Company and Specialized Pharmacy Services maintain Specialized Pharmacy Services’ compliance program in accordance with the terms of the Corporate Integrity Agreement. The agreement contains specific requirements regarding compliance with Medicaid policies governing access to pharmacy facilities and records, unit dose billing agreements, consumption billing, hospice patient terminal illness prescriptions and prescriptions dispensed after a patient’s death. The requirements of the Corporate Integrity Agreement have resulted in increased costs to maintain Specialized Pharmacy Services’ compliance program and could result in greater scrutiny by Michigan regulatory authorities. Violations of the Corporate Integrity Agreement could subject the Company to significant monetary and/or administrative penalties.
On February 2 and February 13, 2006, respectively, two substantially similar putative class action lawsuits, entitledIndiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., et al., No. 2:06cv26 (“HOD Carriers”), andChi v. Omnicare, Inc., et al., No. 2:06cv31 (“Chi”), were filed against Omnicare and two of its officers in the United States District Court for the Eastern District of Kentucky purporting to assert claims for violation of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeking, among other things, compensatory damages and injunctive relief. The complaints, which purported to be brought on behalf of all open-market purchasers of Omnicare common stock from August 3, 2005 through January 27, 2006, alleged that Omnicare had artificially inflated its earnings by engaging in improper generic drug substitution and that defendants had made false and misleading statements regarding the Company’s business and prospects. On April 3, 2006, plaintiffs in theHOD Carriers case formally moved for consolidation and the appointment of lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act of 1995. On May 22, 2006, that motion was granted, the cases were consolidated, and a lead plaintiff and lead counsel were appointed. On July 20, 2006, plaintiffs filed a consolidated amended complaint, adding a third officer as a defendant and new factual allegations primarily relating to revenue recognition, the valuation of receivables and the valuation of inventories. On October 31, 2006, plaintiffs moved for leave to file a second amended complaint, which was granted on January 26, 2007, on the condition that no further
22
amendments would be permitted absent extraordinary circumstances. Plaintiffs thereafter filed their second amended complaint on January 29, 2007. The second amended complaint (i) expands the putative class to include all purchasers of Omnicare common stock from August 3, 2005 through July 27, 2006, (ii) names two members of the Company’s board of directors as additional defendants, (iii) adds a new plaintiff and a new claim for violation of Section 11 of the Securities Act of 1933 based on alleged false and misleading statements in the registration statement filed in connection with the Company’s December 2005 public offering, (iv) alleges that the Company failed to timely disclose its contractual dispute with UnitedHealth Group, Inc. and its affiliates (“United”), and (v) alleges that the Company failed to timely record certain special litigation reserves. The defendants filed a motion to dismiss the second amended complaint on March 12, 2007, claiming that plaintiffs had failed adequately to plead loss causation, scienter or any actionable misstatement or omission. That motion was fully briefed as of May 1, 2007. In response to certain arguments relating to the individual claims of the named plaintiffs that were raised in defendants’ pending motion to dismiss, plaintiffs filed a motion to add, or in the alternative, to intervene an additional named plaintiff, Alaska Electrical Pension Fund, on July 27, 2007. On October 12, 2007, the court issued an opinion and order dismissing the case and denying plaintiffs’ motion to add an additional named plaintiff. On November 9, 2007, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Sixth Circuit with respect to the dismissal of their case. Oral argument was held on September 18, 2008.
On February 13, 2006, two substantially similar shareholder derivative actions, entitledIsak v. Gemunder, et al., Case No. 06-CI-390, andFragnoli v. Hutton, et al., Case No. 06-CI-389, were filed in Kentucky State Circuit Court, Kenton Circuit, against the members of Omnicare’s board of directors, individually, purporting to assert claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment arising out of the Company’s alleged violations of federal and state health care laws based upon the same purportedly improper generic drug substitution that is the subject of the federal purported class action lawsuits. The complaints seek, among other things, damages, restitution and injunctive relief. TheIsak andFragnoli actions were later consolidated by agreement of the parties. On January 12, 2007, the defendants filed a motion to dismiss the consolidated action on the grounds that the dismissal of the substantially identical shareholder derivative action, Irwin v. Gemunder, et al., 2:06cv62, by the United States District Court for the Eastern District of Kentucky on November 20, 2006 should be given preclusive effect and thus bars re-litigation of the issues already decided inIrwin. Instead of opposing that motion, on March 16, 2007, the plaintiffs filed an amended consolidated complaint, which continues to name all of the directors as defendants and asserts the same claims, but attempts to bolster those claims by adding nearly all of the substantive allegations from the most recent complaint in the federal securities class action (seediscussion ofHOD Carriers above) and an amended complaint inIrwin that added the same factual allegations that were added to the consolidated amended complaint in the HOD Carriers action. On April 16, 2007, defendants filed a supplemental memorandum of law in further support of their pending motion to dismiss contending that the amended complaint should be dismissed on the same grounds previously articulated for dismissal, namely, the preclusive effect of the dismissal of theIrwin action. That motion has been fully briefed, oral argument was held on August 21, 2007, and the court reserved decision.
23
The Company believes the above-described purported class and derivative actions are without merit and will be vigorously defended.
The three months ended March 31, 2009 and 2008 included a $41.7 million and $21.6 million pretax charge ($32.5 million and $13.0 million after taxes), respectively, reflected in the “Litigation and other related professional fees” line of the Consolidated Statements of Income, primarily for litigation-related professional expenses in connection with the Company’s lawsuit against United, certain other large customer disputes, the investigation by the United States Attorney’s Office, District of Massachusetts; the purported class and derivative actions; the investigation by the federal government and certain states relating to drug substitutions; the Company’s response to subpoenas it received relating to other legal proceedings to which the Company is not a party; and the inquiry conducted by the Attorney General’s Office in Michigan relating to certain billing issues under the Michigan Medicaid program.
During 2006, the Company experienced certain quality control and product recall issues, as well as fire damage, at one of its repackaging facilities, Heartland Repack Services (“Heartland”). As a precautionary measure, the Company voluntarily and temporarily suspended operations at Heartland. During the time that the Heartland facility was closed, the Company conducted certain environmental tests at the facility. Based on the results of these tests, which showed very low levels of beta lactam residue, and the time and expense associated with completing the necessary remediation procedures, as well as the short remaining term on the lease for the current facility, the Company decided not to reopen the Heartland facility. The Company has been cooperating with federal and state officials who have been conducting investigations relating to the Heartland Matters (as defined below). The Company continues to work to address and resolve certain remaining issues, and fully restore centralized repackaging to its original levels. In order to replace the capacity of the Heartland facility, the Company ramped-up production in its other repackaging facility, as well as onsite in its individual pharmacies. Further, in order to replace the repackaging capacity of the Heartland facility, on February 27, 2007, Omnicare entered into an agreement for the Repackaging Services division of Cardinal Health to serve as the contract repackager for pharmaceutical volumes previously repackaged at the Heartland facility. The agreement initially extends through October 2010. As a result, the Company has been and continues to be able to meet the needs of all of its client facilities and their residents. Addressing these issues served to increase costs and, as a result, the three months ended March 31, 2009 included special charges of approximately $2.0 million pretax (approximately $1.1 million and approximately $0.9 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($1.2 million after taxes) for additional costs precipitated by the quality control, product recall and fire damage issues at Heartland (“Heartland Matters”). The associated costs for the three months ended March 31, 2008 totaled $1.9 million pretax ($1.6 million and $0.3 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($1.1 million after taxes). The Company maintains product recall, property and casualty and business interruption insurance, and the extent of insurance recovery for these expenses continues to be reviewed by its outside advisors. As of March 31, 2009, the Company has received no material insurance recoveries.
Although the Company cannot know with certainty the ultimate outcome of the matters described in the preceding paragraphs, there can be no assurance that the resolution of these matters will not have a material adverse impact on the Company’s consolidated results of
24
operations, financial position or cash flows or, in the case of the investigations regarding certain drug substitutions and the matters relating to the Heartland facility, that these matters will be resolved in an amount that would not exceed the amount of the pretax charges recorded by the Company.
As part of its ongoing operations, the Company is subject to various inspections, audits, inquiries and similar actions by third parties, as well as governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company is subject. The Company is also involved in various legal actions arising in the normal course of business. These matters are continuously being evaluated and, in many cases, are being contested by the Company and the outcome is not predictable. Consequently, an estimate of the possible loss or range of loss associated with certain actions cannot be made. Although occasional adverse outcomes (or settlements) may occur and could possibly have an adverse effect on the results of operations and cash flows in any one accounting period, outside of the matters described in the preceding paragraphs, the Company is not aware of any such matters whereby it is presently believed that the final disposition will have a material adverse affect on the Company’s overall consolidated financial position.
The Company indemnifies the directors and officers of the Company for certain liabilities that might arise from the performance of their job responsibilities for the Company. Additionally, in the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this involves the resolution of claims made, or future claims that may be made, against the Company, its directors and/or officers, the outcomes of which is unknown and not currently predictable. Accordingly, no liabilities have been recorded for the indemnifications.
Note 12 - Segment Information
Based on the “management approach,” as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” Omnicare has two operating segments. The Company’s larger segment is Pharmacy Services. Pharmacy Services primarily provides distribution of pharmaceuticals, related pharmacy consulting and other ancillary services, data management services, medical supplies, and distribution and patient assistance services for specialty pharmaceuticals. The Company’s customers are primarily skilled nursing, assisted living, hospice and other providers of healthcare services in 47 states in the United States, the District of Columbia and in Canada at March 31, 2009. The Company’s other segment is CRO Services, which provides comprehensive product development and research services to client companies in pharmaceutical, biotechnology, nutraceutical, medical devices and diagnostics industries in 31 countries around the world at March 31, 2009, including the United States.
25
The table below presents information about the segments as of and for the three months ended March 31, 2009 and 2008, and should be read in conjunction with the paragraph that follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| ||||||||||
|
| ||||||||||||
2009: |
| Pharmacy |
| CRO |
| Corporate and |
| Consolidated |
| ||||
Net sales |
| $ | 1,518,817 |
| $ | 44,743 |
| $ | — |
| $ | 1,563,560 |
|
Depreciation and amortization expense |
|
| (22,067 | ) |
| (474 | ) |
| (14,200 | ) |
| (36,741 | ) |
Restructuring and other related charges |
|
| (5,998 | ) |
| (52 | ) |
| (867 | ) |
| (6,917 | ) |
Litigation and other related professional fees |
|
| (41,665 | ) |
| — |
|
| — |
|
| (41,665 | ) |
Heartland matters |
|
| (1,993 | ) |
| — |
|
| — |
|
| (1,993 | ) |
Acquisition and other related costs |
|
| (839 | ) |
| — |
|
| — |
|
| (839 | ) |
Operating income (expense) |
|
| 118,973 |
|
| 2,992 |
|
| (26,655 | ) |
| 95,310 |
|
Total assets |
|
| 6,884,829 |
|
| 166,984 |
|
| 389,760 |
|
| 7,441,573 |
|
Capital expenditures |
|
| (7,745 | ) |
| (520 | ) |
| (554 | ) |
| (8,819 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,509,806 |
| $ | 49,173 |
| $ | — |
| $ | 1,558,979 |
|
Depreciation and amortization expense |
|
| (20,239 | ) |
| (439 | ) |
| (15,137 | ) |
| (35,815 | ) |
Restructuring and other related charges |
|
| (5,096 | ) |
| (774 | ) |
| (578 | ) |
| (6,448 | ) |
Litigation and other related professional fees |
|
| (21,642 | ) |
| — |
|
| — |
|
| (21,642 | ) |
Heartland matters |
|
| (1,893 | ) |
| — |
|
| — |
|
| (1,893 | ) |
Operating income (expense) |
|
| 109,235 |
|
| 2,668 |
|
| (27,659 | ) |
| 84,244 |
|
Total assets |
|
| 6,917,435 |
|
| 187,168 |
|
| 459,314 |
|
| 7,563,917 |
|
Capital expenditures |
|
| (11,924 | ) |
| (342 | ) |
| (173 | ) |
| (12,439 | ) |
In accordance with EITF Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred” (“EITF No. 01-14”), Omnicare included in its reported CRO segment net sales amount, for the three month periods ended March 31, 2009 and 2008, reimbursable out-of-pockets totaling $5.8 million and $7.4 million, respectively.
26
Note 13 - Guarantor Subsidiaries
The Company’s 6.125% senior subordinated notes due 2013, the 6.75% senior subordinated notes due 2013 and the 6.875% senior subordinated notes due 2015 are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly-owned subsidiaries of the Company (the “Guarantor Subsidiaries”). The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. (“Parent”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of March 31, 2009 and December 31, 2008 for the balance sheets as well as the statements of income and the statements of cash flows for the three months ended March 31, 2009 and 2008. Management believes separate complete financial statements of the respective Guarantor Subsidiaries would not provide information that would be necessary for evaluating the sufficiency of the Guarantor Subsidiaries, and thus are not presented. No consolidating/eliminating adjustment column is presented for the condensed consolidating statements of cash flows since there were no significant consolidating/eliminating adjustment amounts during the periods presented.
27
Note 13 - Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income - Unaudited
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| |||||||||||||
|
|
| ||||||||||||||
2009: |
| Parent |
| Guarantor |
| Non- |
| Consolidating/ |
| Omnicare, |
| |||||
Net sales |
| $ | — |
| $ | 1,515,991 |
| $ | 47,569 |
| $ | — |
| $ | 1,563,560 |
|
Cost of sales |
|
| — |
|
| 1,127,520 |
|
| 37,516 |
|
| — |
|
| 1,165,036 |
|
Heartland matters |
|
| — |
|
| 1,102 |
|
| — |
|
| — |
|
| 1,102 |
|
|
|
|
|
|
|
| ||||||||||
Gross profit |
|
| — |
|
| 387,369 |
|
| 10,053 |
|
| — |
|
| 397,422 |
|
Selling, general and administrative expenses |
|
| 6,938 |
|
| 211,173 |
|
| 7,063 |
|
| — |
|
| 225,174 |
|
Provision for doubtful accounts |
|
| — |
|
| 25,564 |
|
| 1,062 |
|
| — |
|
| 26,626 |
|
Restructuring and other related charges |
|
| — |
|
| 6,917 |
|
| — |
|
| — |
|
| 6,917 |
|
Litigation and other related professional fees |
|
| — |
|
| 41,665 |
|
| — |
|
| — |
|
| 41,665 |
|
Heartland matters |
|
| — |
|
| 891 |
|
| — |
|
| — |
|
| 891 |
|
Acquisition and other related costs |
|
| — |
|
| 839 |
|
| — |
|
| — |
|
| 839 |
|
|
|
|
|
|
|
| ||||||||||
Operating income (loss) |
|
| (6,938 | ) |
| 100,320 |
|
| 1,928 |
|
| — |
|
| 95,310 |
|
Investment income |
|
| 436 |
|
| 1,971 |
|
| — |
|
| — |
|
| 2,407 |
|
Interest expense, including amortization of discount on convertible notes |
|
| (37,828 | ) |
| (257 | ) |
| (4 | ) |
| — |
|
| (38,089 | ) |
|
|
|
|
|
|
| ||||||||||
Income (loss) before income taxes |
|
| (44,330 | ) |
| 102,034 |
|
| 1,924 |
|
| — |
|
| 59,628 |
|
Income tax (benefit) expense |
|
| (16,970 | ) |
| 44,967 |
|
| 737 |
|
| — |
|
| 28,734 |
|
Equity in net income of subsidiaries |
|
| 58,254 |
|
| — |
|
| — |
|
| (58,254 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Net income |
| $ | 30,894 |
| $ | 57,067 |
| $ | 1,187 |
| $ | (58,254 | ) | $ | 30,894 |
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | — |
| $ | 1,498,685 |
| $ | 60,294 |
| $ | — |
| $ | 1,558,979 |
|
Cost of sales |
|
| — |
|
| 1,131,614 |
|
| 46,149 |
|
| — |
|
| 1,177,763 |
|
Heartland matters |
|
| — |
|
| 1,574 |
|
| — |
|
| — |
|
| 1,574 |
|
|
|
|
|
|
|
| ||||||||||
Gross profit |
|
| — |
|
| 365,497 |
|
| 14,145 |
|
| — |
|
| 379,642 |
|
Selling, general and administrative expenses |
|
| 1,948 |
|
| 224,995 |
|
| 9,654 |
|
| — |
|
| 236,597 |
|
Provision for doubtful accounts |
|
| — |
|
| 29,051 |
|
| 1,341 |
|
| — |
|
| 30,392 |
|
Restructuring and other related charges |
|
| — |
|
| 6,448 |
|
| — |
|
| — |
|
| 6,448 |
|
Litigation and other related professional fees |
|
| — |
|
| 21,642 |
|
| — |
|
| — |
|
| 21,642 |
|
Heartland matters |
|
| — |
|
| 319 |
|
| — |
|
| — |
|
| 319 |
|
|
|
|
|
|
|
| ||||||||||
Operating income (loss) |
|
| (1,948 | ) |
| 83,042 |
|
| 3,150 |
|
| — |
|
| 84,244 |
|
Investment income |
|
| 574 |
|
| 2,037 |
|
| — |
|
| — |
|
| 2,611 |
|
Interest expense, including amortization of discount on convertible notes |
|
| (41,051 | ) |
| (1,155 | ) |
| (916 | ) |
| — |
|
| (43,122 | ) |
|
|
|
|
|
|
| ||||||||||
Income (loss) before income taxes |
|
| (42,425 | ) |
| 83,924 |
|
| 2,234 |
|
| — |
|
| 43,733 |
|
Income tax (benefit) expense |
|
| (16,768 | ) |
| 33,460 |
|
| 891 |
|
| — |
|
| 17,583 |
|
Equity in net income of subsidiaries |
|
| 51,807 |
|
| — |
|
| — |
|
| (51,807 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Net income |
| $ | 26,150 |
| $ | 50,464 |
| $ | 1,343 |
| $ | (51,807 | ) | $ | 26,150 |
|
|
|
|
|
|
|
|
28
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 (Unaudited): |
| Parent |
| Guarantor |
| Non- |
| Consolidating/ |
| Omnicare, |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 147,331 |
| $ | 44,043 |
| $ | 23,715 |
| $ | — |
| $ | 215,089 |
|
Restricted cash |
|
| — |
|
| 2,872 |
|
| — |
|
| — |
|
| 2,872 |
|
Accounts receivable, net (including intercompany) |
|
| — |
|
| 1,341,376 |
|
| 59,379 |
|
| (35,919 | ) |
| 1,364,836 |
|
Unbilled receivables, CRO |
|
| — |
|
| 23,931 |
|
| — |
|
| — |
|
| 23,931 |
|
Inventories |
|
| — |
|
| 400,463 |
|
| 9,580 |
|
| — |
|
| 410,043 |
|
Deferred income tax benefits, net-current |
|
| — |
|
| 143,074 |
|
| 106 |
|
| (106 | ) |
| 143,074 |
|
Other current assets |
|
| 1,096 |
|
| 182,830 |
|
| 5,431 |
|
| — |
|
| 189,357 |
|
|
|
|
|
|
|
| ||||||||||
Total current assets |
|
| 148,427 |
|
| 2,138,589 |
|
| 98,211 |
|
| (36,025 | ) |
| 2,349,202 |
|
|
|
|
|
|
|
| ||||||||||
Properties and equipment, net |
|
| — |
|
| 216,416 |
|
| 6,560 |
|
| — |
|
| 222,976 |
|
Goodwill |
|
| — |
|
| 4,178,977 |
|
| 93,764 |
|
| — |
|
| 4,272,741 |
|
Identifiable intangible assets, net |
|
| — |
|
| 325,663 |
|
| 3,689 |
|
| — |
|
| 329,352 |
|
Other noncurrent assets |
|
| 37,403 |
|
| 229,852 |
|
| 47 |
|
| — |
|
| 267,302 |
|
Investment in subsidiaries |
|
| 6,065,238 |
|
| — |
|
| — |
|
| (6,065,238 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Total assets |
| $ | 6,251,068 |
| $ | 7,089,497 |
| $ | 202,271 |
| $ | (6,101,263 | ) | $ | 7,441,573 |
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (including intercompany) |
| $ | 42,995 |
| $ | 626,474 |
| $ | 9,185 |
| $ | (36,025 | ) | $ | 642,629 |
|
Long-term debt, notes and convertible debentures |
|
| 2,283,413 |
|
| 2,274 |
|
| 56 |
|
| — |
|
| 2,285,743 |
|
Deferred income tax liabilities, net-noncurrent |
|
| 73,108 |
|
| 297,107 |
|
| 11,098 |
|
| — |
|
| 381,313 |
|
Other noncurrent liabilities |
|
| — |
|
| 278,846 |
|
| 1,490 |
|
| — |
|
| 280,336 |
|
Stockholders’ equity |
|
| 3,851,552 |
|
| 5,884,796 |
|
| 180,442 |
|
| (6,065,238 | ) |
| 3,851,552 |
|
|
|
|
|
|
|
| ||||||||||
Total liabilities and stockholders’ equity |
| $ | 6,251,068 |
| $ | 7,089,497 |
| $ | 202,271 |
| $ | (6,101,263 | ) | $ | 7,441,573 |
|
|
|
|
|
|
|
|
29
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets - (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008: |
| Parent |
| Guarantor |
| Non- |
| Consolidating/ |
| Omnicare, |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 145,178 |
| $ | 44,529 |
| $ | 25,383 |
| $ | — |
| $ | 215,090 |
|
Restricted cash |
|
| — |
|
| 1,891 |
|
| — |
|
| — |
|
| 1,891 |
|
Accounts receivable, net (including intercompany) |
|
| — |
|
| 1,338,354 |
|
| 60,865 |
|
| (32,064 | ) |
| 1,367,155 |
|
Unbilled receivables, CRO |
|
| — |
|
| 22,329 |
|
| — |
|
| — |
|
| 22,329 |
|
Inventories |
|
| — |
|
| 441,826 |
|
| 10,922 |
|
| — |
|
| 452,748 |
|
Deferred income tax benefits, net-current |
|
| 1,202 |
|
| 132,991 |
|
| 56 |
|
| — |
|
| 134,249 |
|
Other current assets |
|
| 1,270 |
|
| 171,726 |
|
| 5,235 |
|
| — |
|
| 178,231 |
|
|
|
|
|
|
|
| ||||||||||
Total current assets |
|
| 147,650 |
|
| 2,153,646 |
|
| 102,461 |
|
| (32,064 | ) |
| 2,371,693 |
|
|
|
|
|
|
|
| ||||||||||
Properties and equipment, net |
|
| — |
|
| 212,416 |
|
| 7,236 |
|
| — |
|
| 219,652 |
|
Goodwill |
|
| — |
|
| 4,159,159 |
|
| 93,747 |
|
| — |
|
| 4,252,906 |
|
Identifiable intangible assets, net |
|
| — |
|
| 329,882 |
|
| 3,887 |
|
| — |
|
| 333,769 |
|
Other noncurrent assets |
|
| 40,171 |
|
| 232,008 |
|
| 46 |
|
| — |
|
| 272,225 |
|
Investment in subsidiaries |
|
| 6,075,308 |
|
| — |
|
| — |
|
| (6,075,308 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Total assets |
| $ | 6,263,129 |
| $ | 7,087,111 |
| $ | 207,377 |
| $ | (6,107,372 | ) | $ | 7,450,245 |
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (including intercompany) |
| $ | 28,460 |
| $ | 633,070 |
| $ | 11,323 |
| $ | (32,064 | ) | $ | 640,789 |
|
Long-term debt, notes and convertible debentures |
|
| 2,350,227 |
|
| 2,594 |
|
| 56 |
|
| — |
|
| 2,352,877 |
|
Deferred income tax liabilities, net-noncurrent |
|
| 66,757 |
|
| 285,361 |
|
| 10,492 |
|
| — |
|
| 362,610 |
|
Other noncurrent liabilities |
|
| — |
|
| 274,825 |
|
| 1,459 |
|
| — |
|
| 276,284 |
|
Stockholders’ equity |
|
| 3,817,685 |
|
| 5,891,261 |
|
| 184,047 |
|
| (6,075,308 | ) |
| 3,817,685 |
|
|
|
|
|
|
|
| ||||||||||
Total liabilities and stockholders’ equity |
| $ | 6,263,129 |
| $ | 7,087,111 |
| $ | 207,377 |
| $ | (6,107,372 | ) | $ | 7,450,245 |
|
|
|
|
|
|
|
|
30
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows - Unaudited
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| ||||||||||
|
| ||||||||||||
2009: |
| Parent |
| Guarantor |
| Non-Guarantor |
| Omnicare, Inc. |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
| $ | 10,113 |
| $ | 114,092 |
| $ | (3,287 | ) | $ | 120,918 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash received |
|
| — |
|
| (31,710 | ) |
| — |
|
| (31,710 | ) |
Capital expenditures |
|
| — |
|
| (8,880 | ) |
| 61 |
|
| (8,819 | ) |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust |
|
| — |
|
| 1,448 |
|
| — |
|
| 1,448 |
|
Other |
|
| — |
|
| (2,394 | ) |
| — |
|
| (2,394 | ) |
|
|
|
|
|
| ||||||||
Net cash flows used in investing activities |
|
| — |
|
| (41,536 | ) |
| 61 |
|
| (41,475 | ) |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments on revolving credit facility and term A loan |
|
| (75,000 | ) |
| — |
|
| — |
|
| (75,000 | ) |
Payments on long-term borrowings and obligations |
|
| (494 | ) |
| — |
|
| — |
|
| (494 | ) |
(Decrease) increase in cash overdraft balance |
|
| (2,711 | ) |
| 1,308 |
|
| — |
|
| (1,403 | ) |
Payments for stock awards and exercise of stock options, net of stock tendered in payment |
|
| (1,870 | ) |
| — |
|
| — |
|
| (1,870 | ) |
Excess tax benefits from stock-based compensation |
|
| 438 |
|
| — |
|
| — |
|
| 438 |
|
Dividends paid |
|
| (2,673 | ) |
| — |
|
| — |
|
| (2,673 | ) |
Other |
|
| 74,350 |
|
| (74,350 | ) |
| — |
|
| — |
|
|
|
|
|
|
| ||||||||
Net cash flows used in financing activities |
|
| (7,960 | ) |
| (73,042 | ) |
| — |
|
| (81,002 | ) |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| — |
|
| — |
|
| 1,558 |
|
| 1,558 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 2,153 |
|
| (486 | ) |
| (1,668 | ) |
| (1 | ) |
Cash and cash equivalents at beginning of period |
|
| 145,178 |
|
| 44,529 |
|
| 25,383 |
|
| 215,090 |
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents at end of period |
| $ | 147,331 |
| $ | 44,043 |
| $ | 23,715 |
| $ | 215,089 |
|
|
|
|
|
|
|
31
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows - (Continued) - Unaudited
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| ||||||||||
|
|
| ||||||||||||
2008: |
| Parent |
| Guarantor |
| Non-Guarantor |
| Omnicare, Inc. |
| |||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net cash flows from operating activities |
| $ | 10,759 |
| $ | 142,984 |
| $ | (11,479 | ) | $ | 142,264 |
| |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Acquisition of businesses, net of cash received |
|
| — |
|
| (35,983 | ) |
| — |
|
| (35,983 | ) | |
Capital expenditures |
|
| — |
|
| (12,242 | ) |
| (197 | ) |
| (12,439 | ) | |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust |
|
| — |
|
| (11,542 | ) |
| — |
|
| (11,542 | ) | |
Other |
|
| — |
|
| (32 | ) |
| — |
|
| (32 | ) | |
|
|
|
|
|
|
| ||||||||
Net cash flows used in investing activities |
|
| — |
|
| (59,799 | ) |
| (197 | ) |
| (59,996 | ) | |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net payments on revolving credit facility and term A loan |
|
| (50,000 | ) |
| — |
|
| — |
|
| (50,000 | ) | |
Payments on long-term borrowings and obligations |
|
| (963 | ) |
| — |
|
| — |
|
| (963 | ) | |
Increase (decrease) in cash overdraft balance |
|
| (900 | ) |
| 43 |
|
| — |
|
| (857 | ) | |
Payments for stock awards and exercise of stock options, net of stock tendered in payment |
|
| (3,584 | ) |
| — |
|
| — |
|
| (3,584 | ) | |
Excess tax benefits from stock-based compensation |
|
| 82 |
|
| — |
|
| — |
|
| 82 |
| |
Dividends paid |
|
| (2,746 | ) |
| — |
|
| — |
|
| (2,746 | ) | |
Other |
|
| 92,923 |
|
| (92,923 | ) |
| — |
|
| — |
| |
|
|
|
|
|
|
| ||||||||
Net cash flows from financing activities |
|
| 34,812 |
|
| (92,880 | ) |
| — |
|
| (58,068 | ) | |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| — |
|
| — |
|
| 2,612 |
|
| 2,612 |
| |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 45,571 |
|
| (9,695 | ) |
| (9,064 | ) |
| 26,812 |
| |
Cash and cash equivalents at beginning of period |
|
| 171,779 |
|
| 70,088 |
|
| 32,581 |
|
| 274,448 |
| |
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents at end of period |
| $ | 217,350 |
| $ | 60,393 |
| $ | 23,517 |
| $ | 301,260 |
| |
|
|
|
|
|
|
|
32
Note 13 - Guarantor Subsidiaries (Continued)
The Company’s 3.25% convertible senior debentures due 2035 are fully and unconditionally guaranteed on an unsecured basis by Omnicare Purchasing Company, LP, a wholly-owned subsidiary of the Company (the “Guarantor Subsidiary”). The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. (“Parent”), the Guarantor Subsidiary and the Non-Guarantor Subsidiaries as of March 31, 2009 and December 31, 2008 for the balance sheets, as well as the statements of income and the statements of cash flows for the three months ended March 31, 2009 and 2008. Management believes separate complete financial statements of the respective Guarantor Subsidiary would not provide information that would be necessary for evaluating the sufficiency of the Guarantor Subsidiary, and thus are not presented. The Guarantor Subsidiary does not have any material net cash flows in the condensed consolidating statements of cash flows. No consolidating/eliminating adjustments column is presented for the condensed consolidating statements of cash flows since there were no significant consolidating/eliminating adjustment amounts during the periods presented.
33
Summary Consolidating Statements of Income - Unaudited
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| |||||||||||||
|
| |||||||||||||||
2009: |
| Parent |
| Guarantor |
| Non- |
| Consolidating/ |
| Omnicare, |
| |||||
Net sales |
| $ | — |
| $ | — |
| $ | 1,563,560 |
| $ | — |
| $ | 1,563,560 |
|
Cost of sales |
|
| — |
|
| — |
|
| 1,165,036 |
|
| — |
|
| 1,165,036 |
|
Heartland matters |
|
| — |
|
| — |
|
| 1,102 |
|
| — |
|
| 1,102 |
|
|
|
|
|
|
|
| ||||||||||
Gross profit |
|
| — |
|
| — |
|
| 397,422 |
|
| — |
|
| 397,422 |
|
Selling, general and administrative expenses |
|
| 6,938 |
|
| 421 |
|
| 217,815 |
|
| — |
|
| 225,174 |
|
Provision for doubtful accounts |
|
| — |
|
| — |
|
| 26,626 |
|
| — |
|
| 26,626 |
|
Restructuring and other related charges |
|
| — |
|
| — |
|
| 6,917 |
|
| — |
|
| 6,917 |
|
Litigation and other related professional fees |
|
| — |
|
| — |
|
| 41,665 |
|
| — |
|
| 41,665 |
|
Heartland matters |
|
| — |
|
| — |
|
| 891 |
|
| — |
|
| 891 |
|
Acquisition and other related costs |
|
| — |
|
| — |
|
| 839 |
|
| — |
|
| 839 |
|
|
|
|
|
|
|
| ||||||||||
Operating income (loss) |
|
| (6,938 | ) |
| (421 | ) |
| 102,669 |
|
| — |
|
| 95,310 |
|
Investment income |
|
| 436 |
|
| — |
|
| 1,971 |
|
| — |
|
| 2,407 |
|
Interest expense, including amortization of discount on convertible notes |
|
| (37,828 | ) |
| — |
|
| (261 | ) |
| — |
|
| (38,089 | ) |
|
|
|
|
|
|
| ||||||||||
Income (loss) before income taxes |
|
| (44,330 | ) |
| (421 | ) |
| 104,379 |
|
| — |
|
| 59,628 |
|
Income tax (benefit) expense |
|
| (16,970 | ) |
| (161 | ) |
| 45,865 |
|
| — |
|
| 28,734 |
|
Equity in net income of subsidiaries |
|
| 58,254 |
|
| — |
|
| — |
|
| (58,254 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Net income (loss) |
| $ | 30,894 |
| $ | (260 | ) | $ | 58,514 |
| $ | (58,254 | ) | $ | 30,894 |
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | — |
| $ | — |
| $ | 1,558,979 |
| $ | — |
| $ | 1,558,979 |
|
Cost of sales |
|
| — |
|
| — |
|
| 1,177,763 |
|
| — |
|
| 1,177,763 |
|
Heartland matters |
|
| — |
|
| — |
|
| 1,574 |
|
| — |
|
| 1,574 |
|
|
|
|
|
|
|
| ||||||||||
Gross profit |
|
| — |
|
| — |
|
| 379,642 |
|
| — |
|
| 379,642 |
|
Selling, general and administrative expenses |
|
| 1,948 |
|
| 300 |
|
| 234,349 |
|
| — |
|
| 236,597 |
|
Provision for doubtful accounts |
|
| — |
|
| — |
|
| 30,392 |
|
| — |
|
| 30,392 |
|
Restructuring and other related charges |
|
| — |
|
| — |
|
| 6,448 |
|
| — |
|
| 6,448 |
|
Litigation and other related professional fees |
|
| — |
|
| — |
|
| 21,642 |
|
| — |
|
| 21,642 |
|
Heartland matters |
|
| — |
|
| — |
|
| 319 |
|
| — |
|
| 319 |
|
|
|
|
|
|
|
| ||||||||||
Operating income (loss) |
|
| (1,948 | ) |
| (300 | ) |
| 86,492 |
|
| — |
|
| 84,244 |
|
Investment income |
|
| 574 |
|
| — |
|
| 2,037 |
|
| — |
|
| 2,611 |
|
Interest expense, including amortization of discount on convertible notes |
|
| (41,051 | ) |
| — |
|
| (2,071 | ) |
| — |
|
| (43,122 | ) |
|
|
|
|
|
|
| ||||||||||
Income (loss) before income taxes |
|
| (42,425 | ) |
| (300 | ) |
| 86,458 |
|
| — |
|
| 43,733 |
|
Income tax (benefit) expense |
|
| (16,768 | ) |
| (120 | ) |
| 34,471 |
|
| — |
|
| 17,583 |
|
Equity in net income of subsidiaries |
|
| 51,807 |
|
| — |
|
| — |
|
| (51,807 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Net income (loss) |
| $ | 26,150 |
| $ | (180 | ) | $ | 51,987 |
| $ | (51,807 | ) | $ | 26,150 |
|
|
|
|
|
|
|
|
34
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 (Unaudited): |
| Parent |
| Guarantor |
| Non- |
| Consolidating/ |
| Omnicare, |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 147,331 |
| $ | — |
| $ | 67,758 |
| $ | — |
| $ | 215,089 |
|
Restricted cash |
|
| — |
|
| — |
|
| 2,872 |
|
| — |
|
| 2,872 |
|
Accounts receivable, net (including intercompany) |
|
| — |
|
| 150 |
|
| 1,364,836 |
|
| (150 | ) |
| 1,364,836 |
|
Unbilled receivables, CRO |
|
| — |
|
| — |
|
| 23,931 |
|
| — |
|
| 23,931 |
|
Inventories |
|
| — |
|
| — |
|
| 410,043 |
|
| — |
|
| 410,043 |
|
Deferred income tax benefits, net-current |
|
| — |
|
| — |
|
| 143,180 |
|
| (106 | ) |
| 143,074 |
|
Other current assets |
|
| 1,096 |
|
| — |
|
| 188,261 |
|
| — |
|
| 189,357 |
|
|
|
|
|
|
|
| ||||||||||
Total current assets |
|
| 148,427 |
|
| 150 |
|
| 2,200,881 |
|
| (256 | ) |
| 2,349,202 |
|
|
|
|
|
|
|
| ||||||||||
Properties and equipment, net |
|
| — |
|
| 25 |
|
| 222,951 |
|
| — |
|
| 222,976 |
|
Goodwill |
|
| — |
|
| — |
|
| 4,272,741 |
|
| — |
|
| 4,272,741 |
|
Identifiable intangible assets, net |
|
| — |
|
| — |
|
| 329,352 |
|
| — |
|
| 329,352 |
|
Other noncurrent assets |
|
| 37,403 |
|
| 19 |
|
| 229,880 |
|
| — |
|
| 267,302 |
|
Investment in subsidiaries |
|
| 6,065,238 |
|
| — |
|
| — |
|
| (6,065,238 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Total assets |
| $ | 6,251,068 |
| $ | 194 |
| $ | 7,255,805 |
| $ | (6,065,494 | ) | $ | 7,441,573 |
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (including intercompany) |
| $ | 42,995 |
| $ | 84 |
| $ | 599,700 |
| $ | (150 | ) | $ | 642,629 |
|
Long-term debt, notes and convertible debentures |
|
| 2,283,413 |
|
| — |
|
| 2,330 |
|
| — |
|
| 2,285,743 |
|
Deferred income tax liabilities, net-noncurrent |
|
| 73,108 |
|
| — |
|
| 308,311 |
|
| (106 | ) |
| 381,313 |
|
Other noncurrent liabilities |
|
| — |
|
| — |
|
| 280,336 |
|
| — |
|
| 280,336 |
|
Stockholders’ equity |
|
| 3,851,552 |
|
| 110 |
|
| 6,065,128 |
|
| (6,065,238 | ) |
| 3,851,552 |
|
|
|
|
|
|
|
| ||||||||||
Total liabilities and stockholders’ equity |
| $ | 6,251,068 |
| $ | 194 |
| $ | 7,255,805 |
| $ | (6,065,494 | ) | $ | 7,441,573 |
|
|
|
|
|
|
|
|
35
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets - (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008: |
| Parent |
| Guarantor |
| Non- |
| Consolidating/ |
| Omnicare, |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 145,178 |
| $ | — |
| $ | 69,912 |
| $ | — |
| $ | 215,090 |
|
Restricted cash |
|
| — |
|
| — |
|
| 1,891 |
|
| — |
|
| 1,891 |
|
Accounts receivable, net (including intercompany) |
|
| — |
|
| 66 |
|
| 1,367,155 |
|
| (66 | ) |
| 1,367,155 |
|
Unbilled receivables, CRO |
|
| — |
|
| — |
|
| 22,329 |
|
| — |
|
| 22,329 |
|
Inventories |
|
| — |
|
| — |
|
| 452,748 |
|
| — |
|
| 452,748 |
|
Deferred income tax benefits, net-current |
|
| 1,202 |
|
| — |
|
| 133,047 |
|
| — |
|
| 134,249 |
|
Other current assets |
|
| 1,270 |
|
| — |
|
| 176,961 |
|
| — |
|
| 178,231 |
|
|
|
|
|
|
|
| ||||||||||
Total current assets |
|
| 147,650 |
|
| 66 |
|
| 2,224,043 |
|
| (66 | ) |
| 2,371,693 |
|
|
|
|
|
|
|
| ||||||||||
Properties and equipment, net |
|
| — |
|
| 26 |
|
| 219,626 |
|
| — |
|
| 219,652 |
|
Goodwill |
|
| — |
|
| — |
|
| 4,252,906 |
|
| — |
|
| 4,252,906 |
|
Identifiable intangible assets, net |
|
| — |
|
| — |
|
| 333,769 |
|
| — |
|
| 333,769 |
|
Other noncurrent assets |
|
| 40,171 |
|
| 19 |
|
| 232,035 |
|
| — |
|
| 272,225 |
|
Investment in subsidiaries |
|
| 6,075,308 |
|
| — |
|
| — |
|
| (6,075,308 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Total assets |
| $ | 6,263,129 |
| $ | 111 |
| $ | 7,262,379 |
| $ | (6,075,374 | ) | $ | 7,450,245 |
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (including intercompany) |
| $ | 28,460 |
| $ | — |
| $ | 612,395 |
| $ | (66 | ) | $ | 640,789 |
|
Long-term debt, notes and convertible debentures |
|
| 2,350,227 |
|
| — |
|
| 2,650 |
|
| — |
|
| 2,352,877 |
|
Deferred income tax liabilities, net-noncurrent |
|
| 66,757 |
|
| — |
|
| 295,853 |
|
| — |
|
| 362,610 |
|
Other noncurrent liabilities |
|
| — |
|
| — |
|
| 276,284 |
|
| — |
|
| 276,284 |
|
Stockholders’ equity |
|
| 3,817,685 |
|
| 111 |
|
| 6,075,197 |
|
| (6,075,308 | ) |
| 3,817,685 |
|
|
|
|
|
|
|
| ||||||||||
Total liabilities and stockholders’ equity |
| $ | 6,263,129 |
| $ | 111 |
| $ | 7,262,379 |
| $ | (6,075,374 | ) | $ | 7,450,245 |
|
|
|
|
|
|
|
|
36
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows - Unaudited
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| ||||||||||
|
| ||||||||||||
2009: |
| Parent |
| Guarantor |
| Non-Guarantor |
| Omnicare, Inc. |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
| $ | 10,113 |
| $ | — |
| $ | 110,805 |
| $ | 120,918 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash received |
|
| — |
|
| — |
|
| (31,710 | ) |
| (31,710 | ) |
Capital expenditures |
|
| — |
|
| — |
|
| (8,819 | ) |
| (8,819 | ) |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust |
|
| — |
|
| — |
|
| 1,448 |
|
| 1,448 |
|
Other |
|
| — |
|
| — |
|
| (2,394 | ) |
| (2,394 | ) |
|
|
|
|
|
| ||||||||
Net cash flows used in investing activities |
|
| — |
|
| — |
|
| (41,475 | ) |
| (41,475 | ) |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments on revolving credit facility and term A loan |
|
| (75,000 | ) |
| — |
|
| — |
|
| (75,000 | ) |
Payments on long-term borrowings and obligations |
|
| (494 | ) |
| — |
|
| — |
|
| (494 | ) |
(Decrease) increase in cash overdraft balance |
|
| (2,711 | ) |
| — |
|
| 1,308 |
|
| (1,403 | ) |
Payments for stock awards and exercise of stock options, net of stock tendered in payment |
|
| (1,870 | ) |
| — |
|
| — |
|
| (1,870 | ) |
Excess tax benefits from stock-based compensation |
|
| 438 |
|
| — |
|
| — |
|
| 438 |
|
Dividends paid |
|
| (2,673 | ) |
| — |
|
| — |
|
| (2,673 | ) |
Other |
|
| 74,350 |
|
| — |
|
| (74,350 | ) |
| — |
|
|
|
|
|
|
| ||||||||
Net cash flows used in financing activities |
|
| (7,960 | ) |
| — |
|
| (73,042 | ) |
| (81,002 | ) |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| — |
|
| — |
|
| 1,558 |
|
| 1,558 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 2,153 |
|
| — |
|
| (2,154 | ) |
| (1 | ) |
Cash and cash equivalents at beginning of period |
|
| 145,178 |
|
| — |
|
| 69,912 |
|
| 215,090 |
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents at end of period |
| $ | 147,331 |
| $ | — |
| $ | 67,758 |
| $ | 215,089 |
|
|
|
|
|
|
|
37
Note 13 - Guarantor Subsidiaries (Continued)
|
Condensed Consolidating Statements of Cash Flows - (Continued) - Unaudited |
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| ||||||||||
|
|
| |||||||||||
2008: |
| Parent |
| Guarantor |
| Non-Guarantor |
| Omnicare, Inc. |
| ||||
| |||||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
| $ | 10,759 |
| $ | — |
| $ | 131,505 |
| $ | 142,264 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash received |
|
| — |
|
| — |
|
| (35,983 | ) |
| (35,983 | ) |
Capital expenditures |
|
| — |
|
| — |
|
| (12,439 | ) |
| (12,439 | ) |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust |
|
| — |
|
| — |
|
| (11,542 | ) |
| (11,542 | ) |
Other |
|
| — |
|
| — |
|
| (32 | ) |
| (32 | ) |
|
|
|
|
|
| ||||||||
Net cash flows used in investing activities |
|
| — |
|
| — |
|
| (59,996 | ) |
| (59,996 | ) |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments on revolving credit facility and term A loan |
|
| (50,000 | ) |
| — |
|
| — |
|
| (50,000 | ) |
Payments on long-term borrowings and obligations |
|
| (963 | ) |
| — |
|
| — |
|
| (963 | ) |
Increase (decrease) in cash overdraft balance |
|
| (900 | ) |
| — |
|
| 43 |
|
| (857 | ) |
Payments for stock awards and exercise of stock options, net of stock tendered in payment |
|
| (3,584 | ) |
| — |
|
| — |
|
| (3,584 | ) |
Excess tax benefits from stock-based compensation |
|
| 82 |
|
| — |
|
| — |
|
| 82 |
|
Dividends paid |
|
| (2,746 | ) |
| — |
|
| — |
|
| (2,746 | ) |
Other |
|
| 92,923 |
|
| — |
|
| (92,923 | ) |
| — |
|
|
|
|
|
|
| ||||||||
Net cash flows from financing activities |
|
| 34,812 |
|
| — |
|
| (92,880 | ) |
| (58,068 | ) |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| — |
|
| — |
|
| 2,612 |
|
| 2,612 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 45,571 |
|
| — |
|
| (18,759 | ) |
| 26,812 |
|
Cash and cash equivalents at beginning of period |
|
| 171,779 |
|
| — |
|
| 102,669 |
|
| 274,448 |
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents at end of period |
| $ | 217,350 |
| $ | — |
| $ | 83,910 |
| $ | 301,260 |
|
|
|
|
|
|
|
38
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
The following discussion should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information appearing elsewhere in this report. In addition, see “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information.” The reader should also refer to the Consolidated Financial Statements and notes thereto and MD&A, including critical accounting policies, for the year ended December 31, 2008, which appear in the Company’s Annual Report on Form 10-K, (“Omnicare’s 2008 Annual Report”), which was filed with the Securities and Exchange Commission on February 26, 2009.
|
Overview of Three Months Ended March 31, 2009 and Results of Operations |
Omnicare, Inc. (“Omnicare” or the “Company”) is a leading geriatric pharmaceutical services company. Omnicare is the nation’s largest provider of pharmaceuticals and related pharmacy and ancillary services to long-term healthcare institutions. Omnicare’s clients include primarily skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), retirement centers, independent living communities, hospitals, hospice, and other healthcare settings and service providers. At March 31, 2009, Omnicare served long-term care facilities as well as chronic care and other settings comprising approximately 1,425,000 beds, including approximately 56,000 patients served by the patient assistance programs of its specialty pharmacy services business. The comparable number at December 31, 2008 was 1,435,000 (including approximately 68,000 patients served by patient assistance programs). The comparable number at March 31, 2008 was 1,446,000 (including approximately 69,000 patients served by patient assistance programs). Omnicare provides its pharmacy services in 47 states in the United States, the District of Columbia and Canada at March 31, 2009. Omnicare also provides comprehensive product development and research services for the pharmaceutical, biotechnology, nutraceutical, medical devices and diagnostic industries in 31 countries worldwide. For further description of the Company’s business activities see the “Business” caption of Part I, Item 1 of Omnicare’s 2008 Annual Report.
The following summary table presents consolidated net sales and results of operations of Omnicare for the three months ended March 31, 2009 and 2008 (in thousands, except per share amounts). In accordance with the Securities and Exchange Commission (“SEC”) release entitled “Conditions for Use of Non-GAAP Financial Measures,” the Company has disclosed in this MD&A, with the exception of EBITDA (discussed below), only those measures that are in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
39
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
|
| |||||
|
| 2009 |
| 2008 |
| ||
|
|
|
| ||||
| |||||||
Net sales |
| $ | 1,563,560 |
| $ | 1,558,979 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
Net income |
| $ | 30,894 |
| $ | 26,150 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
Basic |
| $ | 0.27 |
| $ | 0.22 |
|
|
|
|
| ||||
Diluted |
| $ | 0.26 |
| $ | 0.22 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
EBITDA(b) |
| $ | 125,254 |
| $ | 113,759 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
EBITDA reconciliation to net cash flows from operating activities: |
|
|
|
|
|
|
|
EBITDA(b) |
| $ | 125,254 |
| $ | 113,759 |
|
(Subtract)/Add: |
|
|
|
|
|
|
|
Interest expense, net of investment income |
|
| (28,885 | ) |
| (34,211 | ) |
Income tax provision |
|
| (28,734 | ) |
| (17,583 | ) |
Changes in assets and liabilities, net of effects from acquisition of businesses |
|
| 53,283 |
|
| 80,299 |
|
|
|
|
| ||||
Net cash flows from operating activities |
| $ | 120,918 |
| $ | 142,264 |
|
|
|
|
|
(a) Effective January 1, 2009, Omnicare adopted the provisions of FASB Staff Position (FSP) No. APB 14-1. “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). Financial statements for 2008 and prior periods have been restated for this change in accounting.
(b) “EBITDA” represents earnings before interest (net of investment income), income taxes, depreciation and amortization. Omnicare uses EBITDA primarily as an indicator of the Company’s ability to service its debt, and believes that certain investors find EBITDA to be a useful financial measure for the same purpose. However, EBITDA does not represent net cash flows from operating activities, as defined by U.S. GAAP, and should not be considered as a substitute for operating cash flows as a measure of liquidity. The Company’s calculation of EBITDA may differ from the calculation of EBITDA by others.
|
Three Months Ended March 31, 2009 vs. 2008 |
Total net sales for the three months ended March 31, 2009 increased to $1,563.6 million from $1,559.0 million in the comparable prior-year period. Net income for the three months ended March 31, 2009 was $30.9 million versus $26.2 million earned in the comparable 2008 period. Diluted earnings per share for the three months ended March 31, 2009 were $0.26 versus $0.22 in the same prior-year period. EBITDA totaled $125.3 million for the three months ended March 31, 2009 as compared with $113.8 million for the same period of 2008.
40
Net sales for the quarter were favorably impacted primarily by drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in specialty pharmacy services. Partially offsetting these factors were the unfavorable sales impact of the increased availability and utilization of generic drugs, reductions in reimbursement and/or utilization for certain drugs as well as competitive pricing issues, a lower net number of beds served along with a year-over-year shift in mix towards assisted living. Also, it should be noted that the March 31, 2009 quarter contained one less day than the prior leap-year period. See discussion of sales and operating profit results in more detail at the “Pharmacy Services Segment” and “CRO Services Segment” captions below.
The Company continues to be impacted by the unilateral reduction in April 2006 by UnitedHealth Group, Inc. and its affiliates (“United”) in the reimbursement rates paid by United to Omnicare by switching to its PacifiCare pharmacy network contract for services rendered by Omnicare to beneficiaries of United’s drug benefit plans under the Medicare Part D program. The differential in reimbursement rates that resulted from United’s action, as compared with reimbursement rates under the originally negotiated contract, reduced sales and operating profit in the first quarter of 2009 by approximately $22 million (approximately $14 million aftertax), and cumulatively since April 2006 by approximately $318 million (approximately $184 million aftertax). This matter is currently the subject of litigation initiated by Omnicare and is before the federal court in the Northern District of Illinois. See further discussion at the “Legal Proceedings” section at Part II, Item 1 of this Filing.
The Company’s consolidated gross profit of $397.4 million increased $17.8 million for the three months ended March 31, 2009, from the same prior-year period amount of $379.6 million. Gross profit as a percentage of total net sales of 25.4% in the three months ended March 31, 2009, was higher than the 24.4% experienced during the comparable 2008 period. Gross profit was favorably affected in the 2009 period largely due to the increased availability and utilization of higher margin generic drugs, purchasing improvements, the continued integration of acquisitions and productivity enhancements, and the favorable effect of drug price inflation. Partially offsetting these factors were certain of the aforementioned items that reduced net sales, primarily the reductions in reimbursement and/or utilization for certain drugs, competitive pricing issues and the lower net number of beds served.
Omnicare’s consolidated selling, general and administrative (“operating”) expenses for the three months ended March 31, 2009 of $225.2 million were lower than the comparable prior-year amount of $236.6 million by $11.4 million. Operating expenses as a percentage of net sales amounted to 14.4% in the first quarter of 2009, representing a decrease from the 15.2% experienced in the comparable prior-year period. Operating expenses for the quarter ended March 31, 2009 were favorably impacted largely by continued progress in the Company’s productivity improvement initiatives, non-drug purchasing initiatives, reductions in employee benefit costs and the continued integration of prior-period acquisitions. These favorable items were partially offset by increased operating costs associated with recent acquisitions.
The provision for doubtful accounts for the three months ended March 31, 2009 was $26.6 million versus $30.4 million in the comparable prior-year period.
41
Investment income for the three months ended March 31, 2009 of $2.4 million was lower than the $2.6 million earned in the comparable prior-year period, primarily due to lower interest rates versus the prior year.
Interest expense for the three months ended March 31, 2009 of $31.3 million is lower than the $36.8 million in the comparable prior-year period, primarily due to lower debt outstanding resulting from payments aggregating $125 million on the Company’s senior term A loan facility, maturing on July 28, 2010 (the “Term Loans”) during the first quarter of 2008 through the first quarter of 2009, payments of $39.1 million to pay off a term note payable in the fourth quarter of 2008 and lower interest rates on variable rate loans.
The effective income tax rate was 48.2% for the three months ended March 31, 2009, as compared to the first quarter of 2008 rate of 40.2%. The year-over-year increase in the effective tax rate is primarily attributable to certain nondeductible litigation costs recognized in the 2009 period. The effective tax rates in 2009 and 2008 are higher than the federal statutory rate largely as a result of the impact of state and local income taxes and various nondeductible expenses (including a portion of the aforementioned litigation costs in 2009).
Special Items and Accounting Changes:
The three months ended March 31, 2009 included the following charges totaling approximately $60.0 million pretax ($43.8 million aftertax), which primarily impacted the Pharmacy Services segment. Management believes that these items are either infrequent occurrences or otherwise not related to Omnicare’s ordinary course of business and/or are non-cash in nature:
(i) Operating income included restructuring and other related charges of approximately $6.9 million pretax ($4.3 million aftertax), relating to the implementation of the “Omnicare Full Potential” Plan, a major initiative primarily designed to re-engineer the pharmacy operating model to increase efficiency and enhance customer growth. See further discussion at the “Restructuring and Other Related Charges” note of the Notes to Consolidated Financial Statements and the “Restructuring and Other Related Charges” section of this MD&A.
(ii) During 2006, the Company experienced certain quality control and product recall issues, as well as fire damage, at one of its repackaging facilities, Heartland Repack Services (“Heartland”), as described in further detail at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements (the “Heartland Matters”). In addressing and resolving the Heartland Matters, the Company continues to experience increased costs and, as a result, the three months ended March 31, 2009 included special charges of $2.0 million pretax (approximately $1.1 million and $0.9 million was recorded in the cost of sales and operating expense sections of the Consolidated Statements of Income, respectively) ($1.2 million aftertax) for these increased costs. The Company maintains product recall, property and casualty and business interruption insurance, and the extent of insurance recovery for these expenses continues to be reviewed by its outside advisors. As of March 31, 2009, the Company has received no material insurance recoveries.
42
(iii) Operating income included special litigation and other related professional fees of $41.7 million pretax ($32.5 million aftertax) for litigation-related professional expenses primarily in connection with the Company’s lawsuit against United, certain other large customer disputes, the investigation by the United States Attorney’s Office, District of Massachusetts, the purported class and derivative actions, the investigation by the federal government and certain states relating to drug substitutions, and the Company’s response to subpoenas it received relating to other legal proceedings to which the Company is not a party. Also included in the $41.7 million is a charge of $35 million pretax representing an addition to the settlement reserve established in connection with the previously disclosed investigation by the United States Attorney’s Office, District of Massachusetts. This special litigation charge relates to the Company’s estimate of potential settlement amounts and associated costs under Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies.” The Company cannot predict the ultimate outcome of this matter. With respect to these proceedings to which the Company is a party, including the investigation by the United States Attorney’s Office, District of Massachusetts, see further discussion at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements, and the “Legal Proceedings” section at Part II, Item 1 of this Filing.
(iv) Operating income included acquisition and other related costs of approximately $0.8 million pretax related to the implementation of the SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) accounting change. These expenses were primarily related to professional fees from acquisitions completed during the quarter. See further discussion at the “Acquisition” note of the Notes to Consolidated Financial Statements.
(v) Operating expenses included approximately $1.7 million in pretax charges relating to the prior implementation of the SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) accounting change, which primarily relate to stock option expense. SFAS 123R requires the Company to record compensation costs based on estimated fair values relating to share-based payment transactions, including stock options, in its consolidated financial statements.
(vi) The Company recorded a $6.8 million non-cash increase in pretax interest expense ($4.2 million aftertax) related to the retrospective adoption of the FSP APB 14-1 accounting change. See further discussion of FSP APB 14-1, including this amortization of discount on convertible notes, at the “Debt” note of the Notes to Consolidated Financial Statements.
The three months ended March 31, 2008 included the following charges totaling approximately $36.3 million pretax ($22.0 million aftertax), which primarily impacted the Pharmacy Services segment. Management believes that these items are either infrequent occurrences or otherwise not related to Omnicare’s ordinary course of business and/or are non-cash in nature:
(i) Operating income included restructuring and other related charges of approximately $6.4 million pretax ($3.9 million aftertax), relating to the implementation of the “Omnicare Full Potential” Plan, a major initiative primarily designed to re-engineer the pharmacy operating model to increase efficiency and enhance customer growth. See further discussion at the
43
“Restructuring and Other Related Charges” note of the Notes to Consolidated Financial Statements and the “Restructuring and Other Related Charges” section of this MD&A.
(ii) In addressing and resolving the Heartland Matters, the Company continues to experience increased costs and as a result, the three months ended March 31, 2008 included special charges of $1.9 million pretax (approximately $1.6 million and $0.3 million was recorded in the cost of sales and operating expense sections of the Consolidated Statements of Income, respectively) ($1.1 million aftertax) for these increased costs. The Company maintains product recall, property and casualty and business interruption insurance, and the extent of insurance recovery for these expenses continues to be reviewed by its outside advisors. As of March 31, 2008, no receivables for insurance recoveries had been recorded by the Company.
(iii) Operating income included special litigation and other related professional fees of $21.6 million pretax ($13.0 million aftertax) for litigation-related professional expenses primarily in connection with the Company’s lawsuit against United, certain other large customer disputes, the investigation by the United States Attorney’s Office, District of Massachusetts, the purported class and derivative actions, the investigation by the federal government and certain states relating to drug substitutions, and the Company’s response to subpoenas it received relating to other legal proceedings to which the Company is not a party. With respect to these proceedings to which the Company is a party, see further discussion at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements, and the “Legal Proceedings” section at Part II, Item 1 of this Filing.
(iv) The Company recorded a $6.3 million non-cash increase in pretax interest expense ($3.9 million aftertax) related to the retrospective adoption of FSP APB 14-1 accounting change. See further discussion of FSP APB 14-1, including this amortization of discount on convertible notes, at the “Debt” note of the Notes to Consolidated Financial Statements.
Pharmacy Services Segment
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
|
| |||||
|
| 2009 |
| 2008 |
| ||
|
|
|
| ||||
Net sales |
| $ | 1,518,817 |
| $ | 1,509,806 |
|
|
|
|
| ||||
Operating income |
| $ | 118,973 |
| $ | 109,235 |
|
|
|
|
|
Omnicare’s Pharmacy Services segment recorded sales of $1,518.8 million for the three months ended March 31, 2009, an increase from the comparable 2008 amount of $1,509.8 million by $9.0 million, or 0.6%. At March 31, 2009, Omnicare served long-term care facilities as well as chronic care and other settings comprising approximately 1,425,000 beds, including approximately 56,000 patients served by the patient assistance programs of its specialty pharmacy business. The comparable number at March 31, 2008 was 1,446,000 (including approximately 69,000 patients served by patient assistance programs). Pharmacy Services sales were favorably impacted primarily by drug price inflation, the increased use of certain higher acuity drugs,
44
biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in the specialty pharmacy services business. Partially offsetting these factors were the increased availability and utilization of generic drugs, reductions in reimbursement and/or utilization of certain drugs as well as competitive pricing issues, a lower net number of beds served, and a year-over-year shift in mix toward assisted living, which typically has lower penetration rates than skilled nursing facilities. Also, it should be noted that the March 31, 2009 quarter contained one less day than the prior leap-year period. While the Company is focused on reducing its costs to mitigate the impact of drug pricing and reimbursement issues, there can be no assurance that such issues or other pricing and reimbursement pressures will not adversely impact the Pharmacy Services segment.
Operating income of the Pharmacy Services segment was $119.0 million in the first quarter of 2009, a $9.8 million increase as compared with the $109.2 million earned in the comparable period of 2008. As a percentage of the segment’s sales, operating income was 7.8% for the first quarter of 2009, compared with 7.2% in 2008. The 2009 quarter was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, growth in specialty pharmacy, lower bad debt expense, and purchasing improvements, as well as by the continued progress in the Company’s productivity improvement initiatives and the continued integration of prior-period acquisitions. Operating income in 2009 was unfavorably affected primarily by the operating income effect of certain of the aforementioned items that reduced net sales and the year-over-year impact of the previously mentioned special items.
The Company derives a significant portion of its revenues directly or indirectly from government-sponsored programs, principally the federal Medicare program and to a lesser extent state Medicaid programs. As part of ongoing operations, the Company and its customers are subject to regulatory changes in the level of reimbursement received from the Medicare and Medicaid programs.
In 1997 Congress mandated a prospective payment system (“PPS”) for reimbursement to skilled nursing facilities (“SNFs”) for their Medicare-eligible residents during a Medicare Part A-covered stay. Under PPS, Medicare pays SNFs a fixed fee per patient per day based upon the acuity level of the resident, covering substantially all items and services, including pharmacy services. PPS initially resulted in a significant reduction of reimbursement to SNFs. Although some of the reductions were subsequently mitigated, the PPS fundamentally changed the payment for Medicare SNF services.
In recent years, SNFs have received the full market basket inflation increase to annual rates. For fiscal year 2009, beginning October 1, 2008, SNFs received a 3.4 percent inflation update that will increase overall payments to SNFs by $780 million. The Centers for Medicare & Medicaid Services (“CMS”) did not adopt a provision to recalibrate case mix weights to compensate for increased expenditures resulting from refinements made in January 2006, which would have cut overall SNF PPS payments by $770 million in fiscal year 2009. While these rulemakings have not decreased payments to SNFs, reimbursement changes could be adopted in the future that could have an adverse effect on the financial condition of the Company’s SNF clients which could, in turn, adversely affect the timing or level of their payments to Omnicare.
45
In December 2003, Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), which included a major expansion of the Medicare prescription drug benefit under a new Medicare Part D.
The Part D drug benefit permits Medicare beneficiaries to enroll in prescription drug plans offered by private entities which provide coverage of outpatient prescription drugs (collectively, “Part D Plans”). Part D Plans include plans providing the drug benefit on a stand-alone basis (known as “prescription drug plans”, or “PDPs”) and Medicare Advantage plans providing drug coverage as a supplement to an existing medical benefit under that Medicare Advantage plan (known as “MA-PDs”). Medicare beneficiaries generally have to pay a premium to enroll in a Part D Plan, with the premium amount varying from plan to plan, although CMS provides various federal subsidies to Part D Plans to reduce the cost to beneficiaries. Medicare beneficiaries who are also entitled to benefits under a state Medicaid program (so-called “dual eligibles”) have their prescription drug costs covered by the Medicare drug benefit, unless they elect to opt out of Part D coverage. Many nursing home residents Omnicare serves are dual eligibles. In the first quarter of 2009, approximately 39% of Omnicare’s revenue was derived from beneficiaries covered under the federal Medicare Part D program.
CMS provides premium and cost-sharing subsidies to Part D Plans for dual eligible residents of nursing homes. Such dual eligibles are not required to pay a premium for enrollment in a Part D Plan, so long as the premium for the Part D Plan in which they are enrolled does not exceed the premium subsidy, nor are they required to meet deductibles or pay copayment amounts. Further, all dual eligibles who do not affirmatively enroll in a Part D Plan are automatically enrolled into a PDP by CMS on a random basis from among those PDPs meeting CMS criteria for low-income premiums in the PDP region, unless they elect to opt out of Part D coverage. Such dual eligible beneficiaries may select a different Part D Plan at any time through the Part D enrollment process. Also, dual eligibles who are qualifying covered retirees under an employer or union-sponsored qualified retiree prescription drug plan (plans which offer an alternative to Part D coverage supported by federal subsidies to the plan sponsor) will be determined to have elected not to enroll in a Part D Plan, unless they affirmatively enroll in a Part D Plan or contact CMS to indicate they wish to be auto-enrolled. In sum, dual eligible residents of nursing homes are entitled to have their prescription drug costs covered by a Part D Plan, provided that the prescription drugs which they are taking are either on the Part D Plan’s formulary, or an exception to the plan’s formulary is granted, subject to prior authorization or similar utilization management requirements for certain drugs. CMS requires the formularies of Part D Plans to include the types of drugs most commonly needed by Medicare beneficiaries and to offer an exceptions process to provide coverage for medically necessary drugs.
The Company obtains reimbursement for drugs it provides to enrollees of a given Part D Plan pursuant to the agreement it negotiates with that Part D Plan. The Company has entered into such agreements with nearly all Part D Plan sponsors under which it will provide drugs and associated services to their enrollees. The Company continues to have ongoing discussions with Part D Plans and renegotiates these agreements in the ordinary course. Further, the proportion of the Company’s Part D business serviced under specific agreements may change over time based upon beneficiary choice, reassignment of dual eligibles to different Part D Plans or Part D Plan consolidation.
46
As such, reimbursement under these agreements is subject to change. Moreover, as expected in the transition to a new program of this magnitude, certain administrative and payment issues have arisen, resulting in higher operating expenses, as well as outstanding gross accounts receivable (net of allowances for contractual adjustments, and prior to any allowance for doubtful accounts), particularly for copays. As of March 31, 2009, copays outstanding from Part D Plans were approximately $17 million relating to 2006 and 2007. The Company is pursuing solutions, including legal actions against certain Part D payors, to collect outstanding copays, as well as certain rejected claims. Participants in the long-term care pharmacy industry continue to address these issues with CMS and the Part D Plans and attempt to develop solutions. Among other things, on January 12, 2009, CMS finalized a change in its regulations requiring Part D Plan sponsors to accept and act upon certain types of documentation, referred to as “best available evidence,” to correct copays for dual eligibles and other low-income subsidy eligible beneficiaries. However, until all administrative and payment issues are fully resolved, there can be no assurance that the Part D drug benefit will not adversely impact the Company’s results of operations, financial position or cash flows.
For Medicare beneficiaries covered under a Medicare Part A stay, the Company receives reimbursement for drugs provided to such residents from the SNFs, in accordance with the terms of the agreements it has negotiated with each SNF. The Company also receives reimbursement from the state Medicaid programs for those Medicaid beneficiaries not eligible for the Part D program, including those under age 65 who are not disabled, and for certain drugs specifically excluded from Medicare Part D.
CMS has issued subregulatory guidance on many aspects of the Part D program, including the provision of pharmaceutical services to long-term care residents. CMS has also expressed some concerns about pharmacies’ receipt of discounts, rebates and other price concessions from drug manufacturers. For 2007 and 2008, CMS instructed Part D Plan sponsors to require pharmacies to disclose to the Part D Plan sponsor any discounts, rebates and other direct or indirect remuneration designed to directly or indirectly influence or impact utilization of Part D drugs. The Company reported information specified by CMS with respect to rebates received by the Company for 2007 and the first quarter of 2008 to those Part D Plans which agreed to maintain the confidentiality of such information. In November 2008, CMS suspended collection of the long-term care pharmacy rebate data from Part D Plan sponsors for calendar years 2008 and 2009. Instead, CMS intends to collect different non-rebate information to focus plan attention on network pharmacy compliance and appropriate drug utilization management. The new data would include the number and the cost of formulary versus non-formulary drugs dispensed by each pharmacy (whether long-term care or non-long-term care) in the Part D Plan’s pharmacy network. CMS will test the proposed reporting requirements with a small number of Part D Plan sponsors prior to calendar year 2010, when the new reporting requirements will become effective. CMS also issued a memo on November 25, 2008 reminding Part D Plan sponsors of the requirement to (1) provide convenient access to network long-term care pharmacies to all of their enrollees residing in long-term care facilities, and (2) exclude payment for drugs that are covered under a Medicare Part A stay that would otherwise satisfy the definition of a Part D drug. The Company will continue to work with Part D Plan sponsors to ensure compliance with CMS’s evolving policies related to long-term care pharmacy services.
47
On July 15, 2008, Congress enacted the “Medicare Improvements for Patients and Providers Act of 2008” (“MIPPA”). This law includes further reforms to the Part D program. Among other things, as of January 1, 2010, the law requires that long-term care pharmacies have between 30 and 90 days to submit claims to a Part D Plan. As of January 1, 2009, Part D Plan sponsors must update the prescription drug pricing data they use to pay pharmacies at least every seven days. The law also expands the number of Medicare beneficiaries who are entitled to premium and cost-sharing subsidies by modifying previous income and asset requirements, eliminates late enrollment penalties for beneficiaries entitled to these subsidies, and limits the sales and marketing activities in which Part D Plan sponsors may engage. On September 18, 2008, CMS published final regulations implementing many of the MIPPA Part D provisions, and the agency published another interim final rule with comment period on January 16, 2009 implementing additional MIPPA provisions related to drug formularies and protected classes of drugs. Additional legislative proposals are pending before Congress that could further modify the Part D benefit, including proposals that could impact the payment available or pricing for drugs under Part D Plans. The Company cannot predict at this time whether such legislation will be enacted or the form any such legislation would take. The Company can make no assurances that future Part D legislation would not adversely impact its business.
Moreover, CMS continues to issue guidance on and make other revisions to the Part D program. The Company is continuing to monitor issues relating to implementation of the Part D benefit, and until further agency guidance is known and until all administrative and payment issues associated with this massive program are fully resolved, there can be no assurance that the impact of the Part D rules, future legislative changes, or the outcome of other potential developments relating to its implementation on our business, results of operations, financial position or cash flows will not change based on the outcome of any unforeseen future developments.
The MMA also changed the Medicare payment methodology and conditions for coverage of certain items of durable medical equipment prosthetics, orthotics, and supplies (“DMEPOS”) under Medicare Part B. Approximately 1% of the Company’s revenue is derived from beneficiaries covered under Medicare Part B. The changes include a temporary freeze in annual increases in payments for durable medical equipment from 2004 through 2008, new clinical conditions for payment, quality standards (applied by CMS-approved accrediting organizations), and competitive bidding requirements. Only suppliers that are winning bidders will be eligible to provide competitively-bid items to Medicare beneficiaries in the selected areas.
In mid-2007, CMS conducted a first round of bidding for 10 DMEPOS product categories in 10 competitive bidding areas, and announced winning bidders in March 2008. In light of concerns about implementation of the bidding program, in MIPPA Congress terminated the contracts awarded by CMS in the first round of competitive bidding, required that new bidding be conducted for the first round, and required certain reforms to the bidding process. Among other things, the law requires CMS to rebid those areas in 2009, with bidding for round two delayed until 2011. The delay is being financed by reducing Medicare fee schedule payments for all items covered by the round one bidding program by 9.5 percent nationwide effective January 1, 2009, followed by a 2 percent increase in 2014 (with certain exceptions). The legislation also
48
includes a series of procedural improvements to the bidding process. CMS published an interim final rule with comment period to implement the MIPPA competitive bidding changes on January 16, 2009, and on April 17, 2009 announced that it is proceeding with implementation of the January 16, 2009 rule after a brief delay. The Company intends to participate in the new bidding process for round one, and is assessing the potential impact of the fee schedule reductions on its business.
CMS requires all existing DMEPOS suppliers to submit proof of accreditation by a deemed accreditation organization by September 30, 2009. MIPPA codifies the requirement that all suppliers be accredited by September 30, 2009 and extends the accreditation requirement to companies that subcontract with contract suppliers under the competitive bidding program. The Company intends to comply with all accreditation requirements for DMEPOS suppliers by the applicable deadline.
On January 2, 2009, CMS published a final rule requiring certain Medicare DMEPOS suppliers to furnish CMS with a $50,000 surety bond, although the required bond amount will be higher for certain “high-risk” suppliers with previous adverse legal actions. A separate surety bond will be required for each National Provider Identifier obtained for DMEPOS billing purposes, with limited exceptions. CMS did not establish exceptions from the bond requirement for pharmacies or for nursing facilities that bill for Medicare DMEPOS services provided to their own residents. Current suppliers must comply with the surety bond requirement by October 2, 2009, while new enrolling suppliers or suppliers seeking to change ownership after the effective date must meet this requirement by May 4, 2009. The Company intends to comply with the surety bond requirement by the applicable deadline.
With respect to Medicaid, states have considerable latitude in setting payment rates for nursing facilities. States also have flexibility to establish Medicaid managed care programs without the need to obtain a federal waiver. Although these waiver programs generally exempt institutional care, including nursing facilities and institutional pharmacy services, some states do use managed care principles in their long-term care programs. The Deficit Reduction Act (“DRA”), enacted in 2006, also gives states greater flexibility to expand access to home and community based services by allowing states to provide these services as an optional benefit without undergoing the waiver approval process, and includes a new demonstration to encourage states to provide long-term care services in a community setting to individuals who currently receive Medicaid services in nursing homes. Together, these provisions could increase state funding for home and community-based services, while prompting states to cut funding for nursing facilities. No assurances can be given that state Medicaid programs ultimately will not change the reimbursement system for long-term care or pharmacy services in a way that adversely impacts the Company.
The DRA also changed the so-called federal upper limit payment rules for multiple source prescription drugs covered under Medicaid. Like the current upper limit, it only applies to drug ingredient costs and does not include dispensing fees, which will continue to be determined by the states. First, the DRA redefined a multiple source drug subject to the upper limit rules to be a covered outpatient drug that has at least one other drug product that is therapeutically equivalent. Thus, the federal upper limit is triggered when there are two or more therapeutic equivalents,
49
instead of three or more as was previously the case. Second, effective January 1, 2007, the DRA changed the federal upper payment limit from 150 percent of the lowest published price for a drug (which is usually the average wholesale price) to 250 percent of the lowest average manufacturer price (“AMP”). Congress expected these DRA provisions to reduce federal and state Medicaid spending by $8.4 billion over five years. On July 17, 2007, CMS issued a final rule with comment period to implement changes to the upper limit rules. Among other things, the final rule: established a new federal upper limit calculation for multiple source drugs based on 250 percent of the lowest AMP in a drug class; required CMS to post AMP amounts on its web site; and established a uniform definition for AMP. Additionally, the final rule provided that sales of drugs to long-term care pharmacies for supply to nursing homes and assisted living facilities (as well as associated discounts, rebates or other price concessions) are not to be taken into account in determining AMP where such sales can be identified with adequate documentation, and that any AMPs which are not at least 40% of the next highest AMP will not be taken into account in determining the upper limit amount (the so-called “outlier” test). However, on December 19, 2007, the United States District Court for the District of Columbia issued a preliminary injunction that enjoins CMS from implementing provisions of the July 17, 2007 rule to the extent that it affects Medicaid reimbursement rates for retail pharmacies under the Medicaid program. The order also enjoins CMS from posting AMP data on a public website or disclosing it to states. As a result of this preliminary injunction, CMS did not post AMPs or new upper limit prices in late December 2007 based upon the July 17, 2007 final rule despite its earlier planned timetable, and the schedule for states to implement the new upper limits has been delayed until further notice. Separately, on March 14, 2008, CMS published an interim final rule with comment period revising the Medicaid rebate definition of multiple source drug set forth in the July 17, 2007 final rule. In short, the effect of the rule will be that federal upper limits apply in all states unless the state finds that a particular generic drug is not available within that state. While the rule’s effective date was April 14, 2008, it was subject to public comment. CMS also noted that the regulation is subject to the injunction by the United States District Court for the District of Columbia to the extent that it may affect Medicaid reimbursement rates for pharmacies. On October 7, 2008, CMS published the final version of this rule, responding to public comments received on the March 14, 2008 regulation. The final rule adopted the March 2008 interim final rule with technical changes effective November 6, 2008, although it continues to be subject to an injunction to the extent that it affects Medicaid pharmacy reimbursement rates. Moreover, MIPPA delays the adoption of the DRA’s new federal upper limit payment rules for Medicaid based on AMP for multiple source drugs and prevents CMS from publishing AMP data until October 1, 2009; until then, upper limits will continue to be determined under the pre-DRA rules. With the advent of Medicare Part D, the Company’s revenues from state Medicaid programs are substantially lower than has been the case previously. However, some of the Company’s agreements with Part D Plans and other payors have incorporated the Medicaid upper limit rules into the pricing mechanisms for prescription drugs. Until the litigation regarding the final rule is resolved and new upper limit amounts are published by CMS, the Company cannot predict the impact of the final rule on the Company’s business. Further, there can be no assurance that federal upper limit payments under pre-DRA rules, changes under the DRA or other efforts by payors to limit reimbursement for certain drugs will not adversely impact the Company’s business.
MIPPA also seeks to promote e-prescribing by providing incentive payments for physicians and other practitioners paid under the Medicare physician fee schedule who are “successful
50
electronic prescribers.” Specifically, successful electronic prescribers are to receive a 2 percent bonus during 2009 and 2010, a 1 percent bonus for 2011 and 2012 and a 0.5 percent bonus for 2013; practitioners who are not successful electronic prescribers are penalized by a 1 percent reduction from the current fee schedule in 2012, a 1.5 percent reduction in 2013, and thereafter a 2 percent reduction. CMS has announced that to be a successful electronic prescriber and to receive an incentive payment for the 2009 e-prescribing reporting year, an eligible professional must report, using a qualified e-prescribing system, one of three e-prescribing measures in at least 50% of the cases in which the measure is reportable by the eligible professional during 2009. CMS has issued detailed guidelines on the specifications for qualified e-prescribing systems. The Company is closely monitoring developments related to this initiative, and will seek to make available systems under which prescribers may submit prescriptions to the Company’s pharmacies electronically so as to enable them to qualify for the incentive payments.
Most recently, on February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. This $790 billion economic stimulus package includes a number of health care policy provisions, including approximately $19 billion in funding for health information technology infrastructure and Medicare and Medicaid incentives to encourage doctors, hospitals, and other providers to use health information technology to electronically exchange patients’ health information. The law also strengthens federal privacy and security provisions to protect personally-identifiable health information. In addition, the legislation increases Federal Medical Assistance Percentage (“FMAP”) payments by approximately $87 billion to help support state Medicaid programs in the face of budget shortfalls. The law also temporarily extends current Medicaid prompt payment requirements to nursing facility and hospital claims, requiring state Medicaid programs to reimburse providers for 90 percent of claims within 30 days of receipt and 99 percent of claims within 90 days of receipt. The Company is reviewing the new law and assessing the potential impact of the various provisions on the Company.
Two other recent actions at the federal level could impact Medicaid payments to nursing facilities. The Tax Relief and Health Care Act of 2006 modified several Medicaid policies including, among other things, reducing the limit on Medicaid provider taxes from 6 percent to 5.5 percent from January 1, 2008 through September 30, 2011. On February 22, 2008, CMS published a final rule that implements this legislation, and makes other clarifications to the standards for determining the permissibility of provider tax arrangements. On June 30, 2008, legislation was enacted imposing a moratorium on implementation of certain provisions of this rule until April 1, 2009. The American Recovery and Reinvestment Act of 2009 extends this moratorium until July 1, 2009. Second, on January 18, 2007, CMS published a proposed rule designed to ensure that Medicaid payments to governmentally-operated nursing facilities and certain other health care providers are based on actual costs and that state financing arrangements are consistent with the Medicaid statute. CMS estimates that the rule, if finalized, would save $120 million during the first year and $3.87 billion over five years. On May 29, 2007, CMS published a final rule to implement this provision, but Congress blocked the rule through April 1, 2009. The American Recovery and Reinvestment Act of 2009 expresses the sense of Congress that the Secretary of Health and Human Services should not promulgate the provider cost limit rule, citing a ruling by the United States District Court for the District of Columbia that the final rule was “improperly promulgated.”
Broader changes in federal health care policy have been proposed by President Obama and are expected to be considered by Congress this year. Specifically, on February 26, 2009, the Obama Administration released its proposed federal budget for fiscal year (“FY”) 2010, which would establish a reserve fund of $633.8 billion over 10 years to finance comprehensive health reform. The reserve fund would be paid for by tax increases and health system savings. Among other things, the plan would reduce payments to Medicare Advantage plans and bundle payments to hospitals and certain post-acute providers for services provided within 30 days after discharge from the hospital. The proposal would also increase the Medicaid drug rebate level paid by pharmaceutical manufacturers to Medicaid for brand-name drugs, apply the rebate levels paid by pharmaceutical manufacturers to Medicaid on existing drugs to new formulations of those drugs, and allow states to collect rebates from pharmaceutical manufacturers on drugs provided through Medicaid managed care organizations. With regard to Medicare Part D, the plan would impose higher premiums on certain higher-income beneficiaries and expand oversight and program integrity activities related to the program. The proposal also would establish a regulatory pathway for approval of follow-on biologicals, take steps to promote generic drugs, and allow drug reimportation. It should be noted that many provisions of the proposed budget would require Congressional approval to implement and would take effect after FY 2010.
51
On October 4, 2006, the plaintiffs inNew England Carpenters Health Benefits Fund et al. v. First DataBank, Inc. and McKesson Corporation, CA No. 1:05-CV-11148-PBS (United States District Court for the District of Massachusetts) and defendant First DataBank, Inc. (“First DataBank”) entered into a settlement agreement relating to First DataBank’s publication of average wholesale price (“AWP”). AWP is a pricing benchmark that is widely used to calculate a portion of the reimbursement payable to pharmacy providers for the drugs and biologicals they provide, including under State Medicaid programs, Medicare Part D Plans and certain of the Company’s contracts with long-term care facilities. The settlement agreement would have required First DataBank to cease publishing AWP two years after the settlement became effective unless a competitor of First DataBank was then publishing AWP, and would have required that First DataBank modify the manner in which it calculates AWP for over 8,000 distinct drugs (“NDCs”) from 125% of the drug’s wholesale acquisition cost (“WAC”) price established by manufacturers to 120% of WAC until First DataBank ceased publishing same. In a related case,District Council 37 Health and Security Plan v. Medi-Span,CA No. 1:07-CV-10988-PBS (United States District Court for the District of Massachusetts), in which Medi-Span is accused of misrepresenting pharmaceutical prices by relying on and publishing First DataBank’s price list, the parties entered into a similar settlement agreement. The Court granted preliminary approval of both agreements. However on January 22, 2008, the court held a hearing on a motion for final approval of the proposed settlements, and after hearing various objections to the proposed settlements indicated that it would not approve the settlements as proposed. On May 29, 2008, the plaintiffs and First DataBank filed a new settlement that included a reduction in the number of NDCs to which a new mark-up over WAC would apply (20% vs. 25%) from over 8,000 to 1,356, and removed the provision requiring that AWP no longer be published in the future. First DataBank also agreed to contribute approximately $2 million to a settlement fund and for legal fees. On July 15, 2008, Medi-Span and the plaintiffs in that litigation also proposed an amended settlement agreement under which Medi-Span agreed to reduce the mark-up over WAC (from 20% to 25%) for only the smaller number of NDCs, the requirement that AWP not be published in the future was removed, and Medi-Span agreed to pay $500,000 for the benefit of the plaintiff class. First DataBank and Medi-Span, independent of these settlements, announced that they would, of their own volition, reduce to 20% the markup on all drugs with a mark-up higher than 20% and stop publishing AWP within two years after the changes in mark-up are implemented (in the case of First DataBank) or within two years after the settlement is finally approved (in the case of Medi-Span). During June and July, 2008, the Court granted preliminary approval to the revised settlements and approved the process for class notification. On December 17, 2008, the Court held a hearing on the plaintiffs’ motion for final approval of the two proposed settlements, and on March 17, 2009 the Court released an opinion approving the proposed settlements, with a modification by the Court requiring that the change in mark-ups take place 180 days after the order approving the settlements is entered. The Court entered an order approving the settlements on March 30, 2009. Notices of appeal of the Court’s order to the United States Court of Appeals for the First Circuit have been filed by several entities; no briefing schedule for the appeal has as yet been established. Additionally, motions for a stay of the Court’s order pending appeal have been filed, and are currently pending.
The Company is monitoring these cases for further developments and evaluating potential implications and/or actions that may be required, including any adverse effect on the Company’s
52
reimbursement for drugs and biologicals and any actions that may be taken to offset or otherwise mitigate such impact. There can be no assurance, however, that the First DataBank and Medi-Span settlements and associated unilateral actions by First DataBank and Medi-Span, if implemented, or actions, if any, by the government or private health insurance programs relating to AWP, would not have an adverse impact on the Company’s reimbursement for drugs and biologicals, which could adversely affect the Company.
Longer term, funding for federal and state healthcare programs must consider the aging of the population and the growth in enrollees as eligibility is expanded; the escalation in drug costs owing to higher drug utilization among seniors and the introduction of new, more efficacious but also more expensive medications; the impact of the Medicare Part D program; and the long-term financing of the Medicare and Medicaid programs. Given competing national priorities, it remains difficult to predict the outcome and impact on the Company of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs.
Demographic trends indicate that demand for long-term care will increase well into the middle of this century as the elderly population grows significantly. Moreover, those over 65 consume a disproportionately high level of healthcare services, including prescription drugs, when compared with the under-65 population. There is widespread consensus that appropriate pharmaceutical care is generally considered the most cost-effective form of treatment for the chronic ailments afflicting the elderly and also one that is able to improve the quality of life. These trends not only support long-term growth for the geriatric pharmaceutical industry but also containment of healthcare costs and the well-being of the nation’s growing elderly population.
In order to fund this growing demand, the Company believes that the government and the private sector will continue to review, assess and possibly alter healthcare delivery systems and payment methodologies. While it cannot at this time predict the ultimate effect of the Medicare Part D drug benefit or any further initiatives on Omnicare’s business, management believes that the Company’s expertise in geriatric pharmaceutical care and pharmaceutical cost management position Omnicare to help meet the challenges of today’s healthcare environment.
CRO Services Segment
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
|
| |||||
|
|
| 2009 |
|
| 2008 |
|
|
|
|
| ||||
| |||||||
Revenues |
| $ | 44,743 |
| $ | 49,173 |
|
|
|
|
| ||||
Operating income |
| $ | 2,992 |
| $ | 2,668 |
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|
|
|
Omnicare’s CRO Services segment recorded revenues of $44.7 million for the three months ended March 31, 2009, which decreased by $4.5 million, or 9.1% from the $49.2 million recorded in the same prior-year period. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred” (“EITF No. 01-14”), the Company included $5.8 million
53
and $7.4 million of reimbursable out-of-pockets in its CRO Services segment reported revenue and cost of sales amounts for the three months ended March 31, 2009 and 2008, respectively. Revenues for 2009 were lower than in the same prior-year period primarily due to the early termination and client-driven delays in the commencement of certain projects during the first three months of 2009.
Operating income in the CRO Services segment was $3.0 million in the first quarter of 2009 compared with $2.7 million in 2008, an increase of $0.3 million or 12.1%. As a percentage of the segment’s revenue, operating income was 6.7% in the first quarter of 2009 compared with 5.4% in the same period of 2008. This increase is primarily attributable to operating expense control. Backlog at March 31, 2009 was $273.7 million, representing a decrease of $29.2 million from the December 31, 2008 backlog of $302.9 million, and a decrease of $35.7 million from the March 31, 2008 backlog of $309.4 million.
While volatility can occur from time to time in the contract research business owing to factors such as the success or failure of its clients’ compounds, the timing or budgetary constraints of its clients, or consolidation within our client base, new drug discovery remains an important priority of drug manufacturers. The Company believes that drug manufacturers, in order to optimize their research and development efforts, will continue to turn to contract research organizations to assist them in drug research development and commercialization.
Restructuring and Other Related Charges
Omnicare Full Potential Program
In 2006, the Company commenced the implementation of the “Omnicare Full Potential” Plan, a major initiative primarily designed to re-engineer the Company’s pharmacy operating model to increase efficiency and enhance customer growth. The Omnicare Full Potential Plan is expected to optimize resources across the entire organization by implementing best practices, including the realignment and right-sizing of functions, and a “hub-and-spoke” model whereby certain key administrative and production functions will be transferred to regional support centers (“hubs”) specifically designed and managed to perform these tasks, with local pharmacies (“spokes”) focusing on time-sensitive services and customer-facing processes. Additionally, in connection with this productivity enhancement initiative, the Company is also right-sizing and consolidating certain CRO operations.
This program is expected to be completed over a multi-year period and is estimated to generate pretax savings in the range of $100 million to $120 million annually upon completion of the initiative. It is anticipated that approximately one-half of these savings will be realized in cost of sales, with the remainder being realized in operating expenses. The program is estimated to result in total pretax restructuring and other related charges of approximately $93 million over this implementation period. The Company recorded restructuring and other related charges for the Omnicare Full Potential Plan of approximately $7 million pretax (approximately $4 million aftertax) during the three months ended March 31, 2009, and approximately $36 million pretax during the year ended December 31, 2008 (approximately $6 million pretax in the three months ended March 31, 2008), or cumulative aggregate restructuring and other related charges of
54
approximately $90 million before taxes through the first quarter of 2009. The remainder of the overall restructuring and other related charges will be recognized and disclosed prospectively, as the remaining portions of the project are finalized and implemented. Incremental capital expenditures related to this program are expected to total approximately $50 million to $55 million over the entire implementation period. The Company eliminated approximately 1,200 positions in completing its initial phase of the program. The remainder of the program is currently estimated to result in a net reduction of approximately 1,200 positions (1,900 positions eliminated, net of 700 new positions filled in different geographic locations as well as to perform new functions required by the hub-and-spoke model of operations), of which approximately 270 positions had been eliminated as of March 31, 2009. The foregoing reductions do not include additional savings expected from lower levels of overtime and reduced temporary labor. The Company currently estimates reductions in overtime, excess hours and temporary help, as well as productivity gains, to equal an additional 820 full-time equivalents.
The restructuring charges primarily include severance pay, the buy-out of employment agreements, lease terminations, and other exit-related asset disposals, professional fees and facility exit costs. The other related charges are primarily comprised of professional fees.
While the Company is working diligently to achieve the estimated savings as discussed above, there can be no assurances as to the ultimate outcome of the program, including the savings and/or related timing thereof, due to the inherent risks associated with the implementation of a project of this magnitude and the related new technologies. Specifically, the potential inability to successfully mitigate implementation risks, including but not necessarily limited to, dependence on third-party suppliers and consultants for the timely delivery of technology as well as its performance at expected capacities, compliance with federal, state and local regulatory requirements; reliance on information technology and telecommunications support, timely completion of facility lease transactions and/or leasehold improvements, and the ability to obtain adequate staffing levels, individually or in the aggregate, could affect the overall success of the program from a savings and/or timing standpoint.
See further discussion at the “Restructuring and Other Related Charges” note of the Notes to Consolidated Financial Statements.
2005 Program
In connection with the previously disclosed consolidation plans and other productivity initiatives to streamline pharmacy services (related, in part, to the NeighborCare acquisition) and contract research organization operations, including maximizing workforce and operating asset utilization, and producing a more cost-efficient, operating infrastructure (the “2005 Program”), the Company had liabilities of $3.5 million at December 31, 2008, of which $0.3 million was utilized in the three months ended March 31, 2009. The remaining liabilities of $3.2 million at March 31, 2009 represent amounts not yet paid relating to actions taken in connection with the program (primarily lease payments) and will be settled as these matters are finalized.
55
|
Financial Condition, Liquidity and Capital Resources |
Cash and cash equivalents and restricted cash at March 31, 2009 were $218.0 million compared with $217.0 million at December 31, 2008 (including restricted cash amounts of $2.9 million and $1.9 million, respectively).
The Company generated positive net cash flows from operating activities of $120.9 million during the three months ended March 31, 2009, compared with net cash flows from operating activities of $142.3 million during the three months ended March 31, 2008. Compared to the same prior-year period, cash flow from operating activities was unfavorably impacted largely by the year-over-year reduction in cash receipts, including the impact of a broad-based slowdown in Medicaid reimbursements to nursing homes and pharmacies from the State of Illinois, as well as one less day during the 2009 first quarter in comparison to the same prior leap-year period. Further, tax payments increased during 2009 compared to the same prior-year period largely in connection with the increased earnings of the Company.
Net cash used in investing activities was $41.5 million and $60.0 million for the three months ended March 31, 2009 and 2008, respectively. Acquisitions of businesses, primarily funded by operating cash flows, required outlays of $31.7 million (including amounts payable pursuant to acquisition agreements relating to pre-2009 acquisitions) in the first three months of 2009. Acquisitions of businesses during the first three months of 2008 required $36.0 million of cash payments (including amounts payable pursuant to acquisition agreements relating to pre-2008 acquisitions) which were primarily funded by invested cash and operating cash flows. Omnicare’s capital requirements, in addition to the payment of debt and dividends, are primarily comprised of its acquisition program and capital expenditures, largely relating to investments in the Company’s information technology systems and the implementation of the “Omnicare Full Potential” Plan.
Net cash used in financing activities was $81.0 million for the three months ended March 31, 2009 as compared to $58.1 million for the comparable prior-year period. During the first three months of 2009 and 2008, the Company paid down $75 million and $50 million, respectively, on the Term Loans.
At March 31, 2009, there were no outstanding borrowings under the $800 million revolving credit facility, and $325 million in borrowings were outstanding under Term Loans.
On February 12, 2009, the Company’s Board of Directors declared a quarterly cash dividend of 2.25 cents per common share for an indicated annual rate of 9 cents per common share for 2009, which is consistent with the annual dividends per share actually paid in 2008. Aggregate dividends paid of $2.7 million during the three month period ended March 31, 2009 were relatively consistent with those paid in the comparable prior-period.
There were no known material commitments and contingencies outstanding at March 31, 2009, other than the contractual obligations summarized in the “Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements” caption below; certain
56
acquisition-related payments potentially due in the future, including deferred payments, indemnification payments and payments originating from earnout and other provisions that may become payable; as well as the matters discussed in the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements, and the “Legal Proceedings” section at Part II, Item 1 of this Filing.
The Company believes that net cash flows from operating activities, credit facilities and existing cash balances will be sufficient to satisfy its future working capital needs, acquisition contingency commitments, debt servicing, capital expenditures and other financing requirements for the foreseeable future. Additionally, the Company believes that external sources of financing, including short- and long-term debt financings, are available. Due to turmoil in the credit markets, Omnicare may not be able to refinance maturing debt at terms that are as favorable as those from which the Company previously benefited or at terms that are acceptable to Omnicare. In addition, no assurances can be given regarding the Company’s ability to obtain additional financing in the future.
Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements
Aggregate Contractual Obligations:
The following table summarizes the Company’s aggregate contractual obligations as of March 31, 2009, the nature of which is described in further detail at the “Aggregate Contractual Obligations” caption of the “MD&A” section at Part II, Item 7 of Omnicare’s 2008 Annual Report and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods (in thousands):
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|
|
| Total |
| Less Than 1 |
| 1-3 Years |
| 4-5 Years |
| After 5 Years |
| |||||
|
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|
|
|
|
| ||||||||||
| ||||||||||||||||
Debt obligations |
| $ | 2,647,500 |
| $ | — |
| $ | 325,000 |
| $ | 475,000 |
| $ | 1,847,500 |
|
Capital lease obligations |
|
| 4,418 |
|
| 2,088 |
|
| 1,830 |
|
| 198 |
|
| 302 |
|
Operating lease obligations |
|
| 152,547 |
|
| 41,454 |
|
| 49,931 |
|
| 31,188 |
|
| 29,974 |
|
Purchase obligations |
|
| 50,638 |
|
| 36,986 |
|
| 11,298 |
|
| 2,354 |
|
| — |
|
Other current obligations |
|
| 306,377 |
|
| 306,377 |
|
| — |
|
| — |
|
| — |
|
Other long-term obligations |
|
| 280,336 |
|
| — |
|
| 231,783 |
|
| 23,495 |
|
| 25,058 |
|
|
|
|
|
|
|
| ||||||||||
Subtotal |
|
| 3,441,816 |
|
| 386,905 |
|
| 619,842 |
|
| 532,235 |
|
| 1,902,834 |
|
Future interest costs relating to debt and capital lease obligations |
|
| 1,548,247 |
|
| 114,598 |
|
| 216,307 |
|
| 200,948 |
|
| 1,016,394 |
|
|
|
|
|
|
|
| ||||||||||
Total contractual cash obligations |
| $ | 4,990,063 |
| $ | 501,503 |
| $ | 836,149 |
| $ | 733,183 |
| $ | 2,919,228 |
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|
|
|
|
|
|
|
As of March 31, 2009, the Company had approximately $26 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals.
57
Off-Balance Sheet Arrangements:
A description of the Company’s Off Balance Sheet Arrangements, for which there were no significant changes during the 2009 first quarter, is presented at the “Off-Balance Sheet Arrangements” caption of Part II, Item 7 of Omnicare’s 2008 Annual Report.
Critical Accounting Policies
Allowance for Doubtful Accounts
Collection of accounts receivable from customers is the Company’s primary source of operating cash flow and is critical to Omnicare’s operating performance, cash flows and financial condition. Omnicare’s primary collection risk relates to facility, private pay and Part D customers. The Company provides a reserve for accounts receivable considered to be at increased risk of becoming uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. Omnicare establishes this allowance for doubtful accounts using the specific identification approach, and considering such factors as historical collection experience (i.e., payment history and credit losses) and creditworthiness, specifically identified credit risks, aging of accounts receivable by payor category, current and expected economic conditions and other relevant factors. Management reviews this allowance for doubtful accounts on an ongoing basis for appropriateness. Judgment is used to assess the collectability of account balances and the economic ability of customers to pay.
The Company computes and monitors its accounts receivable days sales outstanding (“DSO”), a non-GAAP measure, in order to evaluate the liquidity and collection patterns of its accounts receivable. DSO is calculated by averaging the beginning and end of quarter accounts
58
receivable, less contractual allowances and the allowance for doubtful accounts, to derive “average accounts receivable” and dividing average accounts receivable by the sales amount (excluding reimbursable out-of-pockets) for the related quarter. The resultant percentage is multiplied by 92 days to derive the DSO amount. Omnicare’s DSO approximated 81 days at March 31, 2009, which was higher than the December 31, 2008 amount of 79 days by approximately 1.4 days, largely due to a broad-based slowdown in Medicaid reimbursements to nursing homes and pharmacies from the State of Illinois. Also unfavorably impacting the overall DSO, as well as the 181 days and over past-due accounts receivable balance, is the aging in accounts receivable relating to several of the Company’s larger nursing home chain customers, and the continued aging of copays and rejected claims. Further, the increase in the 181 days and over past-due receivable balance from facility payors is partially attributable to the broad-based slowdown in Medicaid reimbursements to nursing homes from the State of Illinois. On July 11, 2007, the Company commenced legal action against a group of its customers for, among other things, the collection of past-due receivables that are owed to the Company. Specifically, approximately $93 million (excluding interest and prior to any allowance for doubtful accounts) is owed to the Company by this group of customers as of March 31, 2009, of which approximately $87 million is past-due based on applicable payment terms (a significant portion of which is not reserved based on the relevant facts and circumstances). The $93 million represents approximately 5 days of the overall DSO at March 31, 2009. As previously disclosed, the Company has experienced on-going administrative and payment issues associated with the Medicare Part D implementation, resulting in outstanding gross accounts receivable (net of allowances for contractual adjustments, and prior to any allowance for doubtful accounts), particularly for copays. As of March 31, 2009, copays outstanding from Part D Plans were approximately $17 million relating to 2006 and 2007. The Company is pursuing solutions, including legal actions against certain Part D payors, to collect outstanding copays, as well as certain rejected claims. Until all administrative and payment issues relating to the Part D Drug Benefit as well as the aforementioned legal action against a group of Omnicare’s customers are fully resolved, there can be no assurance that the impact of these matters on the Company’s results of operations, financial position or cash flows will not change based on the outcome of any unforeseen future developments.
The allowance for doubtful accounts as of March 31, 2009 was $337.7 million, compared with $333.0 million at December 31, 2008. The allowance for doubtful accounts represented 19.8% and 19.6% of gross receivables (net of contractual allowances) as of March 31, 2009 and December 31, 2008, respectively. Unforeseen future developments could lead to changes in the Company’s provision for doubtful accounts levels and future allowance for doubtful accounts percentages, which could materially impact the overall financial results, financial position or cash flows of the Company. For example, a one percentage point increase in the allowance for doubtful accounts as a percentage of gross receivables (net of allowances for contractual adjustments, and prior to allowances for doubtful accounts) as of March 31, 2009 would result in an increase to the provision for doubtful accounts and related allowance for doubtful accounts on the balance sheet of approximately $17.0 million pretax.
The following table is an aging of the Company’s March 31, 2009 and December 31, 2008 gross accounts receivable (net of allowances for contractual adjustments, and prior to allowances for
59
doubtful accounts), aged based on payment terms and categorized based on the four primary overall types of accounts receivable characteristics (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2009 |
| |||||||
|
|
| ||||||||
|
| Current and |
| 181 Days and |
| Total |
| |||
|
|
|
|
| ||||||
Medicare (Part D and Part B), Medicaid and Third-Party payors |
| $ | 393,643 |
| $ | 189,631 |
| $ | 583,274 |
|
Facility payors |
|
| 480,823 |
|
| 368,385 |
|
| 849,208 |
|
Private Pay payors |
|
| 112,803 |
|
| 135,624 |
|
| 248,427 |
|
CRO |
|
| 21,656 |
|
| — |
|
| 21,656 |
|
|
|
|
|
| ||||||
Total gross accounts receivable (net of contractual allowance adjustments) |
| $ | 1,008,925 |
| $ | 693,640 |
| $ | 1,702,565 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2008 |
| |||||||
|
|
| ||||||||
|
| Current and |
| 181 Days and |
| Total |
| |||
|
|
|
|
| ||||||
Medicare (Part D and Part B), Medicaid and Third-Party payors |
| $ | 393,263 |
| $ | 186,349 |
| $ | 579,612 |
|
Facility payors |
|
| 484,442 |
|
| 357,281 |
|
| 841,723 |
|
Private Pay payors |
|
| 118,541 |
|
| 132,640 |
|
| 251,181 |
|
CRO |
|
| 27,608 |
|
| — |
|
| 27,608 |
|
|
|
|
|
| ||||||
Total gross accounts receivable (net of contractual allowance adjustments) |
| $ | 1,023,854 |
| $ | 676,270 |
| $ | 1,700,124 |
|
|
|
|
|
|
Fair Value
On January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines a hierarchy which prioritizes the inputs in fair value measurements. “Level 1” measurements are measurements using quoted prices in active markets for identical assets or liabilities. “Level 2” measurements use significant other observable inputs. “Level 3” measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions. In recording the fair value of assets and liabilities, companies must use the most reliable measurement available. The impact to the Company’s consolidated results of operations, financial position and cash flows upon adoption of SFAS 157 was not material.
See further discussion at the “Fair Value” note of the Notes to Consolidated Financial Statements.
60
Legal Contingencies
The status of certain legal proceedings has been updated at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements, and the “Legal Proceedings” section at Part II, Item 1 of this Filing.
Acquisitions
Effective January 1, 2009, the Company adopted the provisions of SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction at fair value; and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including earn-out provisions.
See further discussion at the “Acquisitions” note of the Notes to Consolidated Financial Statements.
Interest Expense
Effective January 1, 2009, the Company retrospectively adopted the provisions of FSP APB 14-1. Among other items, FSP APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that reflects the entity’s calculated nonconvertible debt borrowing rate when the debt was issued. The 2009 implementation resulted in a non-cash increase in pretax interest expense of approximately $7 million during the three months ended March 31, 2009. Further, the Company reclassified approximately $441 million of convertible debt and related deferred debt issuance costs to equity in accordance with this new authoritative guidance.
See further discussion at the “Debt” note of the Notes to Consolidated Financial Statements.
Recently Issued Accounting Standards
Information pertaining to recently issued accounting standards is further discussed at the “Recently Issued Accounting Standards” section of the “Interim Financial Data, Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements of this Filing.
|
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information |
In addition to historical information, this report contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, all statements regarding the intent, belief or current expectations regarding the matters discussed or
61
incorporated by reference in this document (including statements as to “beliefs,” “expectations,” “anticipations,” “intentions” or similar words) and all statements which are not statements of historical fact. Such forward-looking statements, together with other statements that are not historical, are based on management’s current expectations and involve known and unknown risks, uncertainties, contingencies and other factors that could cause results, performance or achievements to differ materially from those stated. The most significant of these risks and uncertainties are described in the Company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: overall economic, financial, political and business conditions; trends in the long-term healthcare, pharmaceutical and contract research industries; the ability to attract new clients and service contracts and retain existing clients and service contracts; the ability to consummate pending acquisitions; trends for the continued growth of the Company’s businesses; trends in drug pricing; delays and reductions in reimbursement by the government and other payors to customers and to the Company; the overall financial condition of the Company’s customers and the ability of the Company to assess and react to such financial condition of its customers; the ability of vendors and business partners to continue to provide products and services to the Company; the continued successful integration of acquired companies; the continued availability of suitable acquisition candidates; the ability to attract and retain needed management; competition for qualified staff in the healthcare industry; the demand for the Company’s products and services; variations in costs or expenses; the ability to implement productivity, consolidation and cost reduction efforts and to realize anticipated benefits; the ability of clinical research projects to produce revenues in future periods; the potential impact of legislation, government regulations, and other government action and/or executive orders, including those relating to Medicare Part D, including its implementing regulations and any subregulatory guidance, reimbursement and drug pricing policies and changes in the interpretation and application of such policies; government budgetary pressures and shifting priorities; federal and state budget shortfalls; efforts by payors to control costs; changes to or termination of the Company’s contracts with Medicare Part D plan sponsors or to the proportion of the Company’s Part D business covered by specific contracts; the outcome of litigation; potential liability for losses not covered by, or in excess of, insurance; the impact of differences in actuarial assumptions and estimates as compared to eventual outcomes; events or circumstances which result in an impairment of assets, including but not limited to, goodwill and identifiable intangible assets; market conditions; the outcome of audit, compliance, administrative, regulatory, or investigatory reviews; volatility in the market for the Company’s stock and in the financial markets generally; access to adequate capital and financing; changes in international economic and political conditions and currency fluctuations between the U.S. dollar and other currencies; changes in tax laws and regulations; changes in accounting rules and standards; and costs to comply with our Corporate Integrity Agreements. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as otherwise required by law, the Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omnicare’s primary market risk exposure relates to variable interest rate risk through its borrowings. Accordingly, market risk loss is primarily defined as the potential loss in earnings due to higher interest rates on variable-rate debt of the Company. The modeling technique used by Omnicare for evaluating interest rate risk exposure involves performing sensitivity analysis on the variable-rate debt, assuming a change in interest rates of 100 basis-points. The Company’s debt obligations at March 31, 2009 include $325.0 million outstanding under the variable-rate Senior term A loan, due 2010, at an interest rate of 2.31% at March 31, 2009 (a 100 basis-point change in the interest rate would increase or decrease pretax interest expense by approximately $3.3 million per year); $250.0 million outstanding under its fixed-rate 6.125% Senior Notes, due 2013; $225.0 million outstanding under its fixed-rate 6.75% Senior Notes, due 2013; $525 million outstanding under its fixed-rate 6.875% Senior Notes, due 2015; $345.0 million outstanding under its fixed-rate 4.00% Convertible Debentures, due 2033; and $977.5 million outstanding under its fixed-rate 3.25% Convertible Debentures, due 2035 (with an optional repurchase right of holders on December 15, 2015). In connection with its offering of $250.0 million of 6.125% Senior Notes during 2003, the Company entered into a Swap Agreement on all $250.0 million of its aggregate principal amount of the 6.125% Senior Notes. Under the Swap Agreement, which hedges against exposure to long-term U.S. dollar interest rates, the Company receives a fixed rate of 6.125% and pays a floating rate based on LIBOR with a maturity of six months, plus a spread of 2.27%. The estimated LIBOR-based floating rate (including the 2.27% spread) was 3.98% at March 31, 2009 (a 100 basis-point change in the interest rate would increase or decrease pretax interest expense by approximately $2.5 million per year). The Swap Agreement, which matches the terms of the 6.125% Senior Notes, is designated and accounted for as a fair value hedge. The Company is accounting for the Swap Agreement in accordance with SFAS No. 133, as amended, so changes in the fair value of the Swap Agreement are offset by changes in the recorded carrying value of the related 6.125% Senior Notes. The fair value of the Swap Agreement is recorded as a noncurrent asset or (liability), with an offsetting increase or (decrease), respectively, to the book carrying value of the related 6.125% Senior Notes, and amounted to approximately $7.4 million at the end of the 2009 first quarter. Additionally, at March 31, 2009, the fair value of Omnicare’s variable rate debt facilities approximated the carrying value, as the effective interest rates fluctuate with changes in market rates.
The fair value of the Company’s fixed-rate debt facilities is based on quoted market prices and is summarized as follows (in thousands):
63
Fair Value of Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2009 |
| December 31, 2008 |
| ||||||||
|
|
|
| ||||||||||
|
| Book Value |
| Market Value |
| Book Value |
| Market Value |
| ||||
|
|
|
|
|
| ||||||||
Financial Instrument: |
|
|
|
|
|
|
|
|
|
|
|
|
|
6.125% senior subordinated notes, due 2013, gross |
| $ | 250,000 |
| $ | 224,400 |
| $ | 250,000 |
| $ | 208,800 |
|
6.75% senior subordinated notes, due 2013 |
|
| 225,000 |
|
| 205,900 |
|
| 225,000 |
|
| 189,000 |
|
6.875% senior subordinated notes, due 2015 |
|
| 525,000 |
|
| 471,100 |
|
| 525,000 |
|
| 446,000 |
|
4.00% junior subordinated convertible debentures, due 2033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
| 197,524 |
|
| — |
|
| 197,029 |
|
| — |
|
Unamortized debt discount |
|
| 147,476 |
|
| — |
|
| 147,971 |
|
| — |
|
|
|
|
|
|
| ||||||||
Principal amount |
|
| 345,000 |
|
| 228,500 |
|
| 345,000 |
|
| 250,800 |
|
3.25% convertible senior debentures, due 2035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
| 753,487 |
|
| — |
|
| 747,185 |
|
| — |
|
Unamortized debt discount |
|
| 224,013 |
|
| — |
|
| 230,315 |
|
| — |
|
|
|
|
|
|
| ||||||||
Principal amount |
|
| 977,500 |
|
| 637,800 |
|
| 977,500 |
|
| 565,100 |
|
Embedded in the Old Trust PIERS, the New Trust PIERS and the 3.25% Convertible Debentures are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision. In addition, the 3.25% Convertible Debentures include an interest reset provision. The embedded derivatives are periodically valued, and at period end, the values of the derivatives embedded in the Old Trust PIERS, the New Trust PIERS and the 3.25% Convertible Debentures were not material. However, the values are subject to change, based on market conditions, which could affect the Company’s future consolidated results of operations, financial position or cash flows.
The Company has operations and revenue that occur outside of the U.S. and transactions that are settled in currencies other than the U.S. dollar, exposing it to market risk related to changes in foreign currency exchange rates. However, the substantial portion of the Company’s operations and revenues and the substantial portion of the Company’s overall consolidated cash settlements are exchanged in U.S. dollars. Therefore, changes in foreign currency exchange rates do not represent a substantial market risk exposure to the Company.
The Company does not have any financial instruments held for trading purposes.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Under applicable SEC regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the Company’s “disclosure controls and procedures,” which are defined generally as controls and other procedures of a reporting company designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the SEC (such as this Form 10-Q) is recorded, processed, accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding disclosure. Omnicare is an acquisitive company that continuously acquires and integrates new businesses. Throughout and following an acquisition, Omnicare focuses on analyzing the acquiree’s procedures and controls to determine their effectiveness and, where appropriate, implements changes to conform them to the Company’s disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and concluded that they are effective.
64
(b) There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
On May 18, 2006, an antitrust and fraud action entitledOmnicare, Inc. v. UnitedHealth Group, Inc., et al., 2:06-cv-00103-WOB, was filed by the Company in the United States District Court for the Eastern District of Kentucky against UnitedHealth Group, Inc., PacifiCare Health Systems, Inc., and RxSolutions, Inc. d/b/a Prescription Solutions, asserting claims of violations of federal and state antitrust laws, civil conspiracy and common law fraud arising out of an alleged conspiracy by defendants to illegally and fraudulently coordinate their negotiations with the Company for Medicare Part D contracts as part of an effort to defraud the Company and fix prices. The complaint seeks, among other things, damages, injunctive relief and reformation of certain contracts. On June 5, 2006, the Company filed a first supplemental and amended complaint in which it asserted the identical claims. In an order dated November 9, 2006, a motion by defendants to transfer venue to the United States District Court for the Northern District of Illinois was granted, but a motion to dismiss the antitrust claims was denied without prejudice, with leave to refile in the transferee court. On January 16, 2009 the United States District Court for the Northern District of Illinois granted a motion for summary judgment filed by the defendants. On January 21, 2009, the Company filed a Notice of Appeal of the judgment and the related orders to the Seventh Circuit Court of Appeals. The Company intends to pursue the appeal vigorously and seek reversal of the judgment and the lower court’s orders.
As previously disclosed, the United States Attorney’s Office, District of Massachusetts is conducting an investigation relating to the Company’s relationships with certain manufacturers and distributors of pharmaceutical products and certain customers, as well as with respect to contracts with certain companies acquired by the Company. Any actions resulting from this investigation could result in civil or criminal proceedings against the Company. The Company believes that it has complied with all applicable laws and regulations with respect to these matters.
On October 27, 2008, the U.S. District Court in Boston, Massachusetts unsealed aqui tam complaint against the Company that was originally filed under seal with the court on July 16, 2002. This action was brought by Deborah Maguire as a private party “qui tam relator” on behalf of the federal government and various state governments. On September 16, 2008, the U.S. Government filed a Notice that it is not intervening in the action at this time.
65
Aqui tam action is always filed under seal. Before aqui tam action is unsealed, and typically following an investigation by the government initiated after the filing of thequi tam action, the government is required to notify the court of its decision whether to intervene in the action. The government could seek to intervene in thisqui tam action in the future with permission from the court. Where the government ultimately declines to intervene, thequi tam relators may continue to pursue the litigation at their own expense on behalf of the federal or state government and, if successful, would receive a portion of the government’s recovery. On April 2, 2009, counsel for Ms. Maguire served the Company with the complaint relating to this action.
The action brought by Ms. Maguire alleges civil violations of the False Claims Act, 31 U.S.C. (S) 3729 et seq. and various state false claims statutes based on allegations that the Company: submitted claims for name brand drugs when actually providing generic versions of the same drug to nursing homes; provided consultant pharmacist services to its customers at below-market rates to induce the referral of pharmaceutical business in violation of the Anti-Kickback Statute, 42 U.S.C. 1320a-7b; and accepted discounts from drug manufacturers in return for recommending that certain pharmaceuticals be prescribed to nursing home residents in violation of the Anti-Kickback Statute. The unsealed action seeks damages provided for in the False Claims Act and applicable state statutes.
In addition to the matters described above, on October 30 and 31, 2008, Omnicare was provided with copies of two complaints against Omnicare and other Pharmaceutical manufacturer defendants that were previously filed under seal with the U.S. District Court in Boston, Massachusetts. One complaint was brought by Bernard Lisitza, and the other by David Kammerer, both as private party “qui tam relators” on behalf of the federal government and various state governments. The U.S. Government has notified the court that it is not intervening in these actions at this time.
The action brought by Mr. Kammerer alleges civil violations of the False Claims Act, 31 U.S.C. (S) 3729 et seq. and various state statutes based on allegations that Omnicare accepted rebates, post-purchase discounts, grants and other forms of remuneration from drug manufacturers in return for purchasing pharmaceuticals from those manufacturers and taking steps to increase the purchase of those manufacturers’ drugs in violation of the Anti-Kickback Statute, 42 U.S.C. (S) 1320a-7b and applicable state statutes. The action brought by Mr. Lisitza alleges civil violations of the False Claims Act and various state statutes based on allegations that Omnicare: accepted rebates from drug manufacturers in return for recommending to physicians that certain pharmaceuticals be prescribed to nursing home residents in violation of the Anti-Kickback Statute and applicable state statutes; made false statements and omissions to physicians in connection with its recommendations of those pharmaceuticals; and substituted certain pharmaceuticals without physician authorization. The unsealed actions seek damages provided for in the False Claims Act and applicable state statutes. On March 27 and April 3, 2009, counsel for Mr. Kammerer and Mr. Lisitza, respectively, served the Company with the complaints relating to their respective actions against the Company. The Company and counsel for each of Ms. Maguire and Messrs. Kammerer and Lisitza have stipulated that the Company shall have until June 5, 2009 to answer or otherwise respond to the complaints.
In addition to the unsealedqui tam actions described above, the Company is aware of two otherqui tam complaints against it and other companies that have been filed with the U.S. District Court in Boston, Massachusetts and remain under seal.
On or about March 23, 2009, the Company reached an agreement in principle without admitting liability, subject to board approval and reaching agreement on the global settlement described below, with the U.S. Attorney’s Office, District of Massachusetts, pursuant to which the Company would pay $75 million to settle the claims raised in the two sealed complaints as well as the portion of Ms. Maguire’s complaint described above that relates to the Company’s provision of consultant pharmacist services and other claims covering similar conduct. Pursuant to this agreement in principle, the Company may withdraw its settlement offer of $75 million if it does not also reach a global settlement with the government of any other actions and investigations pending against the Company covering conduct generally related to the matters described in the remaining portions of the Maguire complaint and the Kammerer and Lisitza complaints described above. There can be no assurance as to whether any such settlements will be reached. If any settlements are reached, there can be no assurance as to the scope or terms of, or the ultimate cost to the Company of, any such settlements.
Omnicare recorded a special litigation charge of $35 million pretax in its financial results for the three months ended March 31, 2009 in order to increase the settlement reserve it has established in connection with the investigation by the U.S. Attorney’s Office, District of Massachusetts and the related matters described above to $75 million. This special litigation charge and the settlement reserve relate to the Company’s estimate of potential settlement amounts and associated costs under SFAS No. 5, “Accounting for Contingencies.” The Company cannot predict the ultimate outcome of this matter or the amount, if any, of additional charges that may be taken in the future in connection with this matter.
The Company believes that all of the allegations described above are without merit and intends to vigorously defend itself in these actions if pursued.
66
Information pertaining to other Legal Proceedings involving the Company is further discussed in the “Commitments and Contingencies” note of the “Notes to Consolidated Financial Statements” of this Filing.
Although the Company cannot predict the ultimate outcome of the matters described in the preceding paragraphs and elsewhere in this Filing, there can be no assurance that the resolution of these matters will not have a material adverse impact on the Company’s consolidated results of operations, financial position or cash flows.
As part of its ongoing operations, the Company is subject to various inspections, audits, inquiries and similar actions by governmental/regulatory authorities responsible for enforcing laws and regulations to which the Company is subject, including reviews of individual Omnicare pharmacy’s reimbursement documentation and administrative practices.
The Omnicare 2008 Annual Report on Form 10-K includes a detailed discussion of our risk factors. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.
Risks Relating to Our Business
Federal and state healthcare legislation has significantly impacted our business, and future legislation and regulations are likely to affect us.
In recent years, federal legislation has resulted in major changes in the healthcare system, which significantly affected healthcare providers. Under PPS, Medicare pays SNFs a fixed fee per patient per day based upon the acuity level of the resident, covering substantially all items and services furnished during a Medicare-covered stay, including pharmacy services. PPS initially resulted in a significant reduction of reimbursement to SNFs. Congress subsequently sought to restore some of the reductions in reimbursement resulting from PPS. Although some of the reductions were subsequently mitigated, the PPS fundamentally changed the payment for Medicare SNF services.
In recent years, SNFs have received the full market basket increase to annual rates. For fiscal year 2009, beginning October 1, 2008, SNFs received a 3.4 percent inflation update that increases overall payments to SNFs by $780 million. CMS did not adopt a provision included in its May 7, 2008 proposed rule to recalibrate case mix weights to compensate for increased expenditures resulting from refinements made in January 2006, which would have cut overall SNF PPS payments by $770 million in fiscal year 2009. While these rulemakings have not decreased payments to SNFs, reimbursement changes could be adopted in the future that could have an adverse effect on the financial condition of the Company’s SNF clients which could, in turn, adversely affect the timing or level of their payments to Omnicare.
Similarly, the Medicare Part D prescription drug benefit significantly shifted the payor mix for our pharmacy services. Effective January 1, 2006, the Part D drug benefit permits Medicare
67
beneficiaries to enroll in Part D Plans for their drug coverage. Medicare beneficiaries generally have to pay a premium to enroll in a Part D Plan, with the premium amount varying from plan to plan, although CMS provides various federal subsidies to Part D Plans to reduce the cost to beneficiaries. Medicare beneficiaries who are also entitled to benefits under a state Medicaid program (so-called “dual eligibles”) have their prescription drug costs covered by the new Medicare drug benefit, unless they elect to opt out of Part D coverage. Many nursing home residents Omnicare serves are dual eligibles, whose drug costs were previously covered by state Medicaid programs. In the first quarter of 2009, approximately 39% of Omnicare’s revenue was derived from beneficiaries covered under the federal Medicare Part D program.
The Company obtains reimbursement for drugs it provides to enrollees of a given Part D Plan pursuant to the agreement it negotiates with that Part D Plan. We have entered into such agreements with nearly all Part D Plan sponsors under which we provide drugs and associated services to their enrollees. We continue to have ongoing discussions with Part D Plans and renegotiate these agreements in the ordinary course. Further, the proportion of our Part D business serviced under specific agreements may change over time based upon beneficiary choice, reassignment of dual eligibles to different Part D Plans or Part D Plan consolidation. As such, reimbursement under these agreements is subject to change. Moreover, as expected in the transition to a program of this magnitude, certain administrative and payment issues have arisen, resulting in higher operating expenses, as well as outstanding gross accounts receivable (net of allowances for contractual adjustments, and prior to any allowance for doubtful accounts), particularly for copays. As of March 31, 2009, copays outstanding from Part D Plans were approximately $17 million relating to 2006 and 2007. The Company is pursuing solutions, including legal actions against certain Part D payors, to collect outstanding copays, as well as certain rejected claims. Participants in the long-term care pharmacy industry continue to address these issues with CMS and the Part D Plans and attempt to develop solutions. Among other things, on January 12, 2009, CMS finalized a change in its regulations requiring Part D Plan sponsors to accept and act upon certain types of documentation, referred to as “best available evidence,” to correct co-pays for dual eligibles, and other low-income subsidy eligible beneficiaries. However, until all administrative and payment issues are fully resolved, there can be no assurance that the Part D Drug benefit will not adversely impact our results of operations, financial position or cash flows.
CMS has issued subregulatory guidance on many aspects of the Part D program, including the provision of pharmaceutical services to long-term care residents. CMS has also expressed some concerns about pharmacies’ receipt of discounts, rebates and other price concessions from drug manufacturers. For 2007 and 2008, CMS instructed Part D Plan sponsors to require pharmacies to disclose to the Part D Plan sponsor any discounts, rebates and other direct or indirect remuneration designed to directly or indirectly influence or impact utilization of Part D drugs. The Company reported information specified by CMS with respect to rebates received by the Company for 2007 and the first quarter of 2008 to those Part D Plans which agreed to maintain the confidentiality of such information. In November 2008, CMS suspended collection of the long-term care pharmacy rebate data from Part D Plan sponsors for calendar years 2008 and 2009. Instead, CMS intends to collect different non-rebate information to focus plan attention on
68
network pharmacy compliance and appropriate drug utilization management. The new data would include the number and the cost of formulary versus non-formulary drugs dispensed by each pharmacy (whether long-term care or non-long-term care) in the Part D Plan’s pharmacy network. CMS will test the proposed reporting requirements with a small number of Part D Plan sponsors prior to calendar year 2010, when the new reporting requirements will become effective. CMS also issued a memo on November 25, 2008 reminding Part D Plan sponsors of the requirement to (1) provide convenient access to network long-term care pharmacies to all of their enrollees residing in long-term care facilities, and (2) exclude payment for drugs that are covered under a Medicare Part A stay that would otherwise satisfy the definition of a Part D drug. The Company will continue to work with Part D Plan sponsors to ensure compliance with CMS’s evolving policies related to long-term care pharmacy services.
MIPPA includes further reforms to the Part D program. As of January 1, 2009, the law also requires Part D Plan sponsors to update the prescription drug pricing data they use to pay pharmacies at least every seven days. As of January 1, 2010, the law requires that long-term care pharmacies have between 30 and 90 days to submit claims to a Part D Plan. The law also expands the number of Medicare beneficiaries who will be entitled to premium and cost-sharing subsidies by modifying previous income and asset requirements, eliminates late enrollment penalties for beneficiaries entitled to these subsidies, and limits the sales and marketing activities in which Part D Plan sponsors may engage, among other things. On September 18, 2008, CMS published final regulations implementing many of the MIPPA Part D provisions, and the agency published another interim final rule with comment period on January 16, 2009 implementing additional MIPPA provisions related to drug formularies and protected classes of drugs. Additional legislative proposals are pending before Congress that could further modify the Part D benefit, including proposals that could impact the payment available or pricing for drugs under Part D Plans. We cannot predict at this time whether such legislation will be enacted or the form any such legislation would take. We can make no assurances that future Part D legislation would not adversely impact our business.
Moreover, CMS continues to issue guidance on and make revisions to the Part D program. We are continuing to monitor issues relating to implementation of the Part D benefit, and until further agency guidance is known and until all administrative and payment issues associated with the transition to this massive program are fully resolved, there can be no assurance that the impact of the Part D rules, future legislative changes, or the outcome of other potential developments relating to its implementation on our business, results of operations, financial position or cash flows will not change based on the outcome of any unforeseen future developments.
The MMA also changed the Medicare payment methodology and conditions for coverage of certain items of DMEPOS under Medicare Part B. Approximately 1% of our revenue is derived from beneficiaries covered under Medicare Part B. The changes include a temporary freeze in annual increases in payments for durable medical equipment from 2004 through 2008, new clinical conditions for payment, quality standards (applied by CMS-approved accrediting organizations), and competitive bidding requirements. Only suppliers that are winning bidders will be eligible to provide competitively-bid items to Medicare beneficiaries in the selected areas.
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In mid-2007, CMS conducted a first round of bidding for 10 DMEPOS product categories in 10 competitive bidding areas, and announced winning bidders in March 2008. In light of concerns about implementation of the bidding program, in MIPPA Congress terminated the contracts awarded by CMS in the first round of competitive bidding, required that new bidding be conducted for the first round, and required certain reforms to the bidding process. The law requires CMS to rebid those areas in 2009, with bidding for round two delayed until 2011. The delay is being financed by reducing Medicare fee schedule payments for all items covered by the round one bidding program by 9.5 percent nationwide effective January 1, 2009, followed by a 2 percent increase in 2014 (with certain exceptions). The legislation also includes a series of procedural improvements to the bidding process. CMS published an interim final rule with comment period to implement the MIPPA competitive bidding changes on January 16, 2009, and on April 17, 2009 announced that it is proceeding with implementation of the January 16, 2009 rule after a brief delay. We intend to participate in the new bidding process for round one, and are assessing the impact of the fee schedule reductions on our business. There is no assurance that we will be a successful bidder in the DMEPOS competitive bidding process.
With respect to Medicaid, states have considerable latitude in setting payment rates for nursing facility services. States also have flexibility to establish Medicaid managed care programs without the need to obtain a federal waiver. Although these waiver programs generally exempt institutional care, including nursing facilities and institutional pharmacy services, some states do use managed care principles in their long-term care programs. The DRA also gives states greater flexibility to expand access to home and community based services by allowing states to provide these services as an optional benefit without undergoing the waiver approval process, and includes a new demonstration to encourage states to provide long-term care services in a community setting to individuals who currently receive Medicaid services in nursing homes. Together, these provisions could increase state funding for home and community-based services, while prompting states to cut funding for nursing facilities. No assurances can be given that state Medicaid programs ultimately will not change the reimbursement system for long-term care or pharmacy services in a way that adversely impacts the Company.
The DRA also changed the so-called federal upper limit payment rules for multiple source prescription drugs covered under Medicaid. Like the current upper limit, it only applies to drug ingredient costs and does not include dispensing fees, which will continue to be determined by the states. First, the DRA redefined a multiple source drug subject to the upper limit rules to be a covered outpatient drug that has at least one other drug product that is therapeutically equivalent. Thus, the federal upper limit is triggered when there are two or more therapeutic equivalents, instead of three or more as was previously the case. Second, effective January 1, 2007, the DRA changed the federal upper payment limit from 150 percent of the lowest published price for a drug (which is usually the average wholesale price) to 250 percent of the lowest average manufacturer price (“AMP”). Congress expected these DRA provisions to reduce federal and state Medicaid spending by $8.4 billion over five years. On July 17, 2007, CMS issued a final rule with comment period to implement changes to the upper limit rules. Among other things, the final rule: established a new federal upper limit calculation for multiple source drug based on 250 percent of the lowest AMP in a drug class; required CMS to post AMP amounts on its web site; and established a uniform definition for AMP. Additionally, the final rule provided that
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sales of drugs to long-term care pharmacies for supply to NHs and ALFs (as well as associated discounts, rebates or other price concessions) are not to be taken into account in determining AMP where such sales can be identified with adequate documentation, and that any AMPs which are not at least 40% of the next highest AMP will not be taken into account in determining the upper limit amount (the so-called “outlier” test). However, on December 19, 2007, the United States District Court for the District of Columbia issued a preliminary injunction that enjoins CMS from implementing provisions of the July 17, 2007 rule to the extent that it affects Medicaid reimbursement rates for retail pharmacies under the Medicaid program. The order also enjoins CMS from posting AMP data on a public website or disclosing it to states. As a result of this preliminary injunction, CMS did not post AMPs or new upper limit prices in late December 2007 based upon the July 17, 2007 final rule despite its earlier planned timetable, and the schedule for states to implement the new upper limits has been delayed until further notice. Separately, on March 14, 2008, CMS published an interim final rule with comment period revising the Medicaid rebate definition of multiple source drug set forth in the July 17, 2007 final rule. In short, the effect of the rule will be that federal upper limits apply in all states unless the state finds that a particular generic drug is not available within that state. While the rule’s effective date was April 14, 2008, it is subject to public comment. CMS also noted that the regulation is subject to the injunction by the United States District Court for the District of Columbia to the extent that it may affect Medicaid reimbursement rates for pharmacies. On October 7, 2008, CMS published the final version of this rule, responding to public comments received on the March 14, 2008 regulation. The final rule adopted the March 2008 interim final rule with technical changes effective November 6, 2008, although it continues to be subject to an injunction to the extent that it affects Medicaid pharmacy reimbursement rates. Moreover, MIPPA delays the adoption of the DRA’s new federal upper limit payment rules for Medicaid based on AMP for multiple source drugs and prevents CMS from publishing AMP data until October 1, 2009; until then, upper limits will continue to be determined under the pre-DRA rules. With the advent of Medicare Part D, our revenues from state Medicaid programs are substantially lower than has been the case previously. However, some of our agreements with Part D Plans and other payors have incorporated the Medicaid upper limit rules into the pricing mechanisms for prescription drugs. Until the litigation regarding the final rule is resolved and new upper limit amounts are published by CMS, we cannot predict the impact of the final rule on our business. Further, there can be no assurance that federal upper limit payments under pre-DRA rules, changes under the DRA or other efforts by payors to limit reimbursement for certain drugs will not adversely impact our business.
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. This $790 billion economic stimulus package includes a number of health care policy provisions, including approximately $19 billion in funding for health information technology infrastructure and Medicare and Medicaid incentives to encourage doctors, hospitals, and other providers to use health information technology to electronically exchange patients’ health information. The law also strengthens federal privacy and security provisions to protect personally-identifiable health information. In addition, the legislation increases Federal Medical Assistance Percentage (“FMAP”) payments by approximately $87 billion to help support state Medicaid programs in the face of budget shortfalls. The law also temporarily extends current Medicaid prompt payment requirements to nursing facility and hospital claims, requiring state Medicaid programs to reimburse providers for 90 percent of claims within 30 days of receipt and 99 percent of claims within 90 days of receipt. Omnicare is
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reviewing the new law and assessing the potential impact of the various provisions on the Company.
Two other recent actions at the federal level could impact Medicaid payments to nursing facilities. The Tax Relief and Health Care Act of 2006 modified several Medicaid policies including, among other things, reducing the limit on Medicaid provider taxes from 6 percent to 5.5 percent from January 1, 2008 through September 30, 2011. The Bush Administration had been expected to issue regulations calling for deeper cuts in this funding. On February 22, 2008, CMS published a final rule that implements this legislation, and makes other clarifications to the standards for determining the permissibility of provider tax arrangements. On June 30, 2008, President Bush signed into law a supplemental appropriations bill (P.L. 110-252) that imposes a moratorium on implementation of certain provisions of this rule until April 1, 2009. The American Recovery and Reinvestment Act of 2009 extends this moratorium until July 1, 2009. Second, on January 18, 2007, CMS published a proposed rule designed to ensure that Medicaid payments to governmentally-operated nursing facilities and certain other health care providers are based on actual costs and that state financing arrangements are consistent with the Medicaid statute. CMS estimates that the rule, if finalized, would save $120 million during the first year and $3.87 billion over five years. On May 29, 2007, CMS published a final rule to implement this provision, but Congress blocked the rule for one year in an emergency fiscal year 2007 spending bill, H.R. 2206. The supplemental appropriations bill, P.L. 110-252, further extends the moratorium on implementation of the rule through April 1, 2009. The American Recovery and Reinvestment Act of 2009 expresses the sense of Congress that the Secretary of Health and Human Services should not promulgate the provider cost limit rule, citing a ruling by the United States District Court for the District of Columbia that the final rule was “improperly promulgated.”
Broader changes in federal health care policy have been proposed by President Obama and are expected to be considered by Congress this year. Specifically, on February 26, 2009, the Obama Administration released its proposed federal budget for fiscal year (“FY”) 2010, which would establish a reserve fund of $633.8 billion over 10 years to finance comprehensive health reform. The reserve fund would be paid for by tax increases and health system savings. Among other things, the plan would reduce payments to Medicare Advantage plans and bundle payments to hospitals and certain post-acute providers for services provided within 30 days after discharge from the hospital. The proposal would also increase the Medicaid drug rebate level paid by pharmaceutical manufacturers to Medicaid for brand-name drugs, apply the rebate levels paid by pharmaceutical manufacturers to Medicaid on existing drugs to new formulations of those drugs, and allow states to collect rebates from pharmaceutical manufacturers on drugs provided through Medicaid managed care organizations. With regard to Medicare Part D, the plan would impose higher premiums on certain higher-income beneficiaries and expand oversight and program integrity activities related to the program. The proposal also would establish a regulatory pathway for approval of follow-on biologicals, take steps to promote generic drugs, and allow drug reimportation. It should be noted that many provisions of the proposed budget would require Congressional approval to implement and would take effect after FY 2010.
Congressional leaders have expressed their commitment to enacting major health reform legislation this year, including expanded access to insurance, possibly with a government health insurance option to compete with private plans. As part of this reform, Congress may also seek
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to rein in healthcare costs, which could include consideration of alternate healthcare delivery systems, revised payment methodologies and changes in operational requirements for healthcare providers. The actual legislative language of the major federal reform proposals have not been released to date. Given the continuous debate regarding the cost of healthcare, managed care, universal healthcare coverage, and other healthcare issues, we cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented at the federal or state level, or the effect any future legislation or regulation will have on our business.
Changes in the use of the average wholesale price as a benchmark from which pricing in the pharmaceutical industry is negotiated could adversely affect the Company.
On October 4, 2006, the plaintiffs inNew England Carpenters Health Benefits Fund et al. v. First DataBank, Inc. and McKesson Corporation, CA No. 1:05-CV-11148-PBS (United States District Court for the District of Massachusetts) and defendant First DataBank, Inc. (“First DataBank”) entered into a settlement agreement relating to First DataBank’s publication of average wholesale price (“AWP”). AWP is a pricing benchmark that is widely used to calculate a portion of the reimbursement payable to pharmacy providers for the drugs and biologicals they provide, including under State Medicaid programs, Medicare Part D Plans and certain of the Company’s contracts with long-term care facilities. The settlement agreement would have required First DataBank to cease publishing AWP two years after the settlement became effective unless a competitor of First DataBank was then publishing AWP, and would have required that First DataBank modify the manner in which it calculates AWP for over 8,000 distinct drugs (“NDCs”) from 125% of the drug’s wholesale acquisition cost (“WAC”) price established by manufacturers to 120% of WAC until First DataBank ceased publishing same. In a related case,District Council 37 Health and Security Plan v. Medi-Span,CA No. 1:07-CV-10988-PBS (United States District Court for the District of Massachusetts), in which Medi-Span is accused of misrepresenting pharmaceutical prices by relying on and publishing First DataBank’s price list, the parties entered into a similar settlement agreement. The Court granted preliminary approval of both agreements. However on January 22, 2008, the court held a hearing on a motion for final approval of the proposed settlements, and after hearing various objections to the proposed settlements indicated that it would not approve the settlements as proposed. On May 29, 2008, the plaintiffs and First DataBank filed a new settlement that included a reduction in the number of NDCs to which a new mark-up over WAC would apply (20% vs. 25%) from over 8,000 to 1,356, and removed the provision requiring that AWP no longer be published in the future. First DataBank also agreed to contribute approximately $2 million to a settlement fund and for legal fees. On July 15, 2008, Medi-Span and the plaintiffs in that litigation also proposed an amended settlement agreement under which Medi-Span agreed to reduce the mark-up over WAC (from 20% to 25%) for only the smaller number of NDCs, the requirement that AWP not be published in the future was removed, and Medi-Span agreed to pay $500,000 for the benefit of the plaintiff class. First DataBank and Medi-Span, independent of these settlements, announced that they would, of their own volition, reduce to 20% the mark-up on all drugs with a mark-up higher than 20% and stop publishing AWP within two years after the changes in mark-up are implemented (in the case of First DataBank) or within two years after the settlement is finally approved (in the case of Medi-Span). During June and July, 2008, the Court granted preliminary approval to the revised settlements and approved the process for class notification. On December 17, 2008, the Court held a hearing on the plaintiffs’ motion for final
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approval of the two proposed settlements, and on March 17, 2009 the Court released an opinion approving the proposed settlements, with a modification by the Court requiring that the change in mark-ups take place 180 days after the order approving the settlements is entered. The Court entered an order approving the settlements on March 30, 2009. Notices of appeal of the Court’s order to the United States Court of Appeals for the First Circuit have been filed by several entities; no briefing schedule for the appeal has as yet been established. Additionally, motions for a stay of the Court’s order pending appeal have been filed, and are currently pending.
The Company is monitoring these cases for further developments and evaluating potential implications and/or actions that may be required, including any adverse effect on the Company’s reimbursement for drugs and biologicals and any actions that may be taken to offset or otherwise mitigate such impact. There can be no assurance, however, that the First DataBank and Medi-Span settlements and associated unilateral actions by First DataBank and Medi-Span, if implemented, or actions, if any, by the government or private health insurance programs relating to AWP, would not have an adverse impact on the Company’s reimbursement for drugs and biologicals, which could adversely affect the Company.
ITEM 2 - UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
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(c) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
A summary of the Company’s repurchases of Omnicare, Inc. common stock during the quarter ended March 31, 2009 is as follows (in thousands, except per share data):
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Period |
| Total Number |
| Average |
| Number of |
| Maximum Number (or |
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January 1 - 31, 2009 |
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| — |
| $ | — |
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| — |
| $ | — |
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February 1 - 28, 2009 |
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| 30 |
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| 28.91 |
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| — |
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| — |
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March 1 - 31, 2009 |
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| 95 |
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| 23.64 |
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| — |
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| — |
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Total |
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| 125 |
| $ | 24.90 |
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| — |
| $ | — |
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(a) | During the first quarter of 2009, the Company purchased 125 shares of Omnicare common stock in connection with its employee benefit plans, including any purchases associated with the vesting of restricted stock awards. These purchases were not made pursuant to a publicly announced repurchase plan or program. |
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See Index of Exhibits.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Omnicare, Inc. |
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| Registrant |
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Date: April 30, 2009 | By: | /s/ | David W. Froesel, Jr. |
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| David W. Froesel, Jr. |
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| Senior Vice President and |
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| Chief Financial Officer |
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| (Principal Financial and |
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| Accounting Officer) |
INDEX OF EXHIBITS
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Number and Description of Exhibit |
| Document Incorporated by Reference | ||
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(3.1) |
| Restated Certificate of Incorporation of Omnicare, Inc. (as amended) |
| Form 10-K |
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(3.3) |
| Third Amended and Restated By-Laws of Omnicare, Inc. |
| Form 8-K |
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(12) |
| Statement of Computation of Ratio of Earnings to Fixed Charges |
| Filed Herewith |
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(31.1) |
| Rule 13a-14(a) Certification of Chief Executive Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 |
| Filed Herewith |
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(31.2) |
| Rule 13a-14(a) Certification of Chief Financial Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 |
| Filed Herewith |
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(32.1) |
| Section 1350 Certification of Chief Executive Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002** |
| Furnished Herewith |
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(32.2) |
| Section 1350 Certification of Chief Financial Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002** |
| Furnished Herewith |
** A signed original of this written statement required by Section 906 has been provided to Omnicare, Inc. and will be retained by Omnicare, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
E-1