for each of Ms. Maguire and Messrs. Kammerer and Lisitza subsequently stipulated that the Company shall have until September 29, 2009 to answer or otherwise respond to the complaints.
On or about June 24, 2009, the Company reached an agreement in principle, without admitting liability, with the U.S. Attorney’s Office, District of Massachusetts, pursuant to which the Company would pay $98 million plus interest from June 24, 2009 to settle the claims raised in the two sealed complaints, the Maguire, Kammerer and Lisitza complaints and other similar claims. This agreement in principle is subject to approval by the Company’s board of directors and agreement on the terms of the settlement documentation, including with respect to the similar claims referred to above. There can be no assurance as to whether any final settlement will be reached. If any final settlement is reached, there can be no assurance as to the scope, terms or ultimate cost to the Company thereof.
Omnicare recorded a special litigation charge of approximately $23 million and approximately $58 million pretax in its financial results for the three and six months ended June 30, 2009, respectively, 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 approximately $98 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.
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 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 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,
26
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.
The Company believes the above-described purported class and derivative actions are without merit and will be vigorously defended.
27
The three and six months ended June 30, 2009 included a $28.4 million pretax charge ($22.0 million after taxes) and a $70.0 million pretax charge ($54.5 million after taxes), respectively, and the three and six months ended June 30, 2008 included a $16.0 million pretax charge ($10.1 million after taxes) and a $37.7 million pretax charge ($23.1 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 Repack 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 June 30, 2009 included special charges of approximately $1.2 million pretax (approximately $0.8 million and approximately $0.4 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($0.7 million after taxes) for additional costs precipitated by the quality control, product recall and fire damage issues at Heartland (“Repack Matters”). The associated costs for the six months ended June 30, 2009 totaled $3.2 million pretax ($1.9 million and $1.3 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($2.0 million after taxes). The three months ended June 30, 2008 included special charges of approximately $1.7 million pretax (approximately $1.5 million and approximately $0.2 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($1.1 million after taxes) for additional costs precipitated by the Repack Matters. The associated costs for the six months ended June 30, 2008 totaled $3.6 million pretax ($3.1 million and $0.5 million was recorded in the cost of sales and operating expenses sections of the
28
Consolidated Statements of Income, respectively) ($2.2 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 June 30, 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 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.
29
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 June 30, 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 June 30, 2009, including the United States.
The table below presents information about the segments as of and for the three and six months ended June 30, 2009 and 2008, and should be read in conjunction with the paragraph that follows (in thousands):
| | | | | | | | | | | | | |
| | Three months ended June 30, | |
| |
| |
2009: | | Pharmacy
Services | | CRO
Services | | Corporate and
Consolidating | | Consolidated
Totals | |
|
|
|
|
|
|
|
|
| |
Net sales | | $ | 1,499,704 | | $ | 40,803 | | $ | — | | $ | 1,540,507 | |
Depreciation and amortization expense | | | (21,385 | ) | | (469 | ) | | (13,983 | ) | | (35,837 | ) |
Restructuring and other related charges | | | (4,761 | ) | | (653 | ) | | (469 | ) | | (5,883 | ) |
Litigation and other related professional fees | | | (28,357 | ) | | — | | | — | | | (28,357 | ) |
Heartland repack matters | | | (1,196 | ) | | — | | | — | | | (1,196 | ) |
Acquisition and other related costs | | | (2,011 | ) | | — | | | — | | | (2,011 | ) |
Operating income (expense) from continuing operations | | | 129,557 | | | 967 | | | (22,443 | ) | | 108,081 | |
Total assets | | | 6,724,776 | | | 162,785 | | | 438,465 | | | 7,326,026 | |
Capital expenditures | | | (6,252 | ) | | (222 | ) | | (244 | ) | | (6,718 | ) |
| | | | | | | | | | | | | |
2008: | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | | $ | 1,469,081 | | $ | 53,631 | | $ | — | | $ | 1,522,712 | |
Depreciation and amortization expense | | | (19,344 | ) | | (450 | ) | | (13,427 | ) | | (33,221 | ) |
Restructuring and other related charges | | | (9,222 | ) | | (600 | ) | | (962 | ) | | (10,784 | ) |
Litigation and other related professional fees | | | (16,022 | ) | | — | | | — | | | (16,022 | ) |
Heartland repack matters | | | (1,740 | ) | | — | | | — | | | (1,740 | ) |
Operating income (expense) from continuing operations | | | 118,415 | | | 3,800 | | | (28,957 | ) | | 93,258 | |
Total assets | | | 6,915,425 | | | 194,286 | | | 362,528 | | | 7,472,239 | |
Capital expenditures | | | (13,714 | ) | | (1,728 | ) | | (81 | ) | | (15,523 | ) |
30
| | | | | | | | | | | | | |
| | Six months ended June 30, | |
| |
| |
2009: | | | Pharmacy
Services | | | CRO
Services | | | Corporate and
Consolidating | | | Consolidated
Totals | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales | | $ | 2,997,066 | | $ | 85,546 | | $ | — | | $ | 3,082,612 | |
Depreciation and amortization expense | | | (42,227 | ) | | (943 | ) | | (28,183 | ) | | (71,353 | ) |
Restructuring and other related charges | | | (10,759 | ) | | (705 | ) | | (1,336 | ) | | (12,800 | ) |
Litigation and other related professional fees | | | (70,022 | ) | | — | | | — | | | (70,022 | ) |
Heartland repack matters | | | (3,189 | ) | | — | | | — | | | (3,189 | ) |
Acquisition and other related costs | | | (2,850 | ) | | — | | | — | | | (2,850 | ) |
Operating income (expense) from continuing operations | | | 250,739 | | | 3,959 | | | (49,098 | ) | | 205,600 | |
Total assets | | | 6,724,776 | | | 162,785 | | | 438,465 | | | 7,326,026 | |
Capital expenditures | | | (13,775 | ) | | (742 | ) | | (798 | ) | | (15,315 | ) |
| | | | | | | | | | | | | |
2008: | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales | | $ | 2,950,346 | | $ | 102,804 | | $ | — | | $ | 3,053,150 | |
Depreciation and amortization expense | | | (38,199 | ) | | (889 | ) | | (28,564 | ) | | (67,652 | ) |
Restructuring and other related charges | | | (14,318 | ) | | (1,374 | ) | | (1,540 | ) | | (17,232 | ) |
Litigation and other related professional fees | | | (37,664 | ) | | — | | | — | | | (37,664 | ) |
Heartland repack matters | | | (3,633 | ) | | — | | | — | | | (3,633 | ) |
Operating income (expense) from continuing operations | | | 229,901 | | | 6,468 | | | (56,616 | ) | | 179,753 | |
Total assets | | | 6,915,425 | | | 194,286 | | | 362,528 | | | 7,472,239 | |
Capital expenditures | | | (25,106 | ) | | (2,070 | ) | | (254 | ) | | (27,430 | ) |
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”), Omnicare included in its reported CRO segment net sales amount, for the three and six month periods ended June 30, 2009, reimbursable out-of-pockets totaling $5.2 million and $10.9 million, respectively and $8.8 million and $16.2 million for the three and six months ended June 30, 2008, respectively.
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 June 30, 2009 and December 31, 2008 for the balance sheets as well as the three and six months ended June 30, 2009 and 2008 for the statements of income, and the statements of cash flows for the six months ended June 30, 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.
31
Note 13 - Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income - Unaudited
(in thousands)
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | |
| |
| |
2009: | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating/
Eliminating
Adjustments | | Omnicare,
Inc. and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
| |
Net sales | | $ | — | | $ | 1,496,113 | | $ | 44,394 | | $ | — | | $ | 1,540,507 | |
Cost of sales | | | — | | | 1,133,316 | | | 35,462 | | | — | | | 1,168,778 | |
Heartland matters | | | — | | | 815 | | | — | | | — | | | 815 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Gross profit | | | — | | | 361,982 | | | 8,932 | | | — | | | 370,914 | |
Selling, general and administrative expenses | | | 1,603 | | | 194,925 | | | 6,963 | | | — | | | 203,491 | |
Provision for doubtful accounts | | | — | | | 22,254 | | | 456 | | | — | | | 22,710 | |
Restructuring and other related charges | | | — | | | 5,588 | | | 295 | | | — | | | 5,883 | |
Litigation and other related professional fees | | | — | | | 28,357 | | | — | | | — | | | 28,357 | |
Repack matters | | | — | | | 381 | | | — | | | — | | | 381 | |
Acquisition and other related costs | | | — | | | 2,011 | | | — | | | — | | | 2,011 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) | | | (1,603 | ) | | 108,466 | | | 1,218 | | | — | | | 108,081 | |
Investment income | | | 100 | | | 932 | | | — | | | — | | | 1,032 | |
Interest expense, including amortization of discount on convertible notes | | | (36,513 | ) | | (188 | ) | | (1 | ) | | — | | | (36,702 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) from continuing operations before income taxes | | | (38,016 | ) | | 109,210 | | | 1,217 | | | — | | | 72,411 | |
Income tax (benefit) expense | | | (14,519 | ) | | 44,455 | | | 481 | | | — | | | 30,417 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income from continuing operations | | | (23,497 | ) | | 64,755 | | | 736 | | | — | | | 41,994 | |
Loss from discontinued operations, including impairment charge of $12,065 aftertax | | | — | | | (12,620 | ) | | (655 | ) | | — | | | (13,275 | ) |
Equity in net income of subsidiaries | | | 52,216 | | | — | | | — | | | (52,216 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 28,719 | | $ | 52,135 | | $ | 81 | | $ | (52,216 | ) | $ | 28,719 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
2008: | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales | | $ | — | | $ | 1,465,703 | | $ | 57,009 | | $ | — | | $ | 1,522,712 | |
Cost of sales | | | — | | | 1,104,369 | | | 45,495 | | | — | | | 1,149,864 | |
Heartland matters | | | — | | | 1,560 | | | — | | | — | | | 1,560 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Gross profit | | | — | | | 359,774 | | | 11,514 | | | — | | | 371,288 | |
Selling, general and administrative expenses | | | 2,349 | | | 218,582 | | | 6,020 | | | — | | | 226,951 | |
Provision for doubtful accounts | | | — | | | 23,679 | | | 414 | | | — | | | 24,093 | |
Restructuring and other related charges | | | — | | | 10,560 | | | 224 | | | — | | | 10,784 | |
Litigation and other related professional fees | | | — | | | 16,022 | | | — | | | — | | | 16,022 | |
Repack matters | | | — | | | 180 | | | — | | | — | | | 180 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) | | | (2,349 | ) | | 90,751 | | | 4,856 | | | — | | | 93,258 | |
Investment income | | | 817 | | | 1,142 | | | — | | | — | | | 1,959 | |
Interest expense, including amortization of discount on convertible notes | | | (41,033 | ) | | (270 | ) | | (811 | ) | | — | | | (42,114 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) from continuing operations before income taxes | | | (42,565 | ) | | 91,623 | | | 4,045 | | | — | | | 53,103 | |
Income tax (benefit) expense | | | (15,985 | ) | | 34,054 | | | 1,540 | | | — | | | 19,609 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income from continuing operations | | | (26,580 | ) | | 57,569 | | | 2,505 | | | — | | | 33,494 | |
Loss from discontinued operations, including impairment charge of $12,065 aftertax | | | — | | | (83 | ) | | (476 | ) | | — | | | (559 | ) |
Equity in net income of subsidiaries | | | 59,515 | | | — | | | — | | | (59,515 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 32,935 | | $ | 57,486 | | $ | 2,029 | | $ | (59,515 | ) | $ | 32,935 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
32
Note 13 - Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income - Unaudited
(in thousands)
| | | | | | | | | | | | | | | | |
| | Six months ended June 30, | |
| |
| |
2009: | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating/
Eliminating
Adjustments | | Omnicare,
Inc. and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
| |
Net sales | | $ | — | | $ | 2,993,839 | | $ | 88,773 | | $ | — | | $ | 3,082,612 | |
Cost of sales | | | — | | | 2,249,159 | | | 71,387 | | | — | | | 2,320,546 | |
Heartland matters | | | — | | | 1,917 | | | — | | | — | | | 1,917 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Gross profit | | | — | | | 742,763 | | | 17,386 | | | — | | | 760,149 | |
Selling, general and administrative expenses | | | 8,541 | | | 399,228 | | | 11,855 | | | — | | | 419,624 | |
Provision for doubtful accounts | | | — | | | 47,075 | | | 906 | | | — | | | 47,981 | |
Restructuring and other related charges | | | — | | | 12,505 | | | 295 | | | — | | | 12,800 | |
Litigation and other related professional fees | | | — | | | 70,022 | | | — | | | — | | | 70,022 | |
Repack matters | | | — | | | 1,272 | | | — | | | — | | | 1,272 | |
Acquisition and other related costs | | | — | | | 2,850 | | | — | | | — | | | 2,850 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) | | | (8,541 | ) | | 209,811 | | | 4,330 | | | — | | | 205,600 | |
Investment income | | | 536 | | | 2,903 | | | — | | | — | | | 3,439 | |
Interest expense, including amortization of discount on convertible notes | | | (74,341 | ) | | (444 | ) | | (1 | ) | | — | | | (74,786 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) from continuing operations before income taxes | | | (82,346 | ) | | 212,270 | | | 4,329 | | | — | | | 134,253 | |
Income tax (benefit) expense | | | (31,489 | ) | | 89,830 | | | 1,690 | | | — | | | 60,031 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income from continuing operations | | | (50,857 | ) | | 122,440 | | | 2,639 | | | — | | | 74,222 | |
Loss from discontinued operations, including impairment charge of $12,065 aftertax | | | — | | | (13,238 | ) | | (1,371 | ) | | — | | | (14,609 | ) |
Equity in net income of subsidiaries | | | 110,470 | | | — | | | — | | | (110,470 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 59,613 | | $ | 109,202 | | $ | 1,268 | | $ | (110,470 | ) | $ | 59,613 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
2008: | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales | | $ | — | | $ | 2,940,333 | | $ | 112,817 | | $ | — | | $ | 3,053,150 | |
Cost of sales | | | — | | | 2,219,779 | | | 89,666 | | | — | | | 2,309,445 | |
Heartland matters | | | — | | | 3,134 | | | — | | | — | | | 3,134 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Gross profit | | | — | | | 717,420 | | | 23,151 | | | — | | | 740,571 | |
Selling, general and administrative expenses | | | 4,297 | | | 435,521 | | | 13,360 | | | — | | | 453,178 | |
Provision for doubtful accounts | | | — | | | 51,402 | | | 843 | | | — | | | 52,245 | |
Restructuring and other related charges | | | — | | | 17,008 | | | 224 | | | — | | | 17,232 | |
Litigation and other related professional fees | | | — | | | 37,664 | | | — | | | — | | | 37,664 | |
Repack matters | | | — | | | 499 | | | — | | | — | | | 499 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) | | | (4,297 | ) | | 175,326 | | | 8,724 | | | — | | | 179,753 | |
Investment income | | | 1,391 | | | 3,179 | | | — | | | — | | | 4,570 | |
Interest expense, including amortization of discount on convertible notes | | | (82,084 | ) | | (1,425 | ) | | (1,718 | ) | | — | | | (85,227 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) from continuing operations before income taxes | | | (84,990 | ) | | 177,080 | | | 7,006 | | | — | | | 99,096 | |
Income tax (benefit) expense | | | (32,753 | ) | | 68,106 | | | 2,712 | | | — | | | 38,065 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income from continuing operations | | | (52,237 | ) | | 108,974 | | | 4,294 | | | — | | | 61,031 | |
Loss from discontinued operations | | | — | | | (1,024 | ) | | (922 | ) | | — | | | (1,946 | ) |
Equity in net income of subsidiaries | | | 111,322 | | | — | | | — | | | (111,322 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 59,085 | | $ | 107,950 | | $ | 3,372 | | $ | (111,322 | ) | $ | 59,085 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
33
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
| | | | | | | | | | | | | | | | |
As of June 30, 2009 (Unaudited): | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating/
Eliminating
Adjustments | | Omnicare,
Inc. and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 215,404 | | $ | 42,368 | | $ | 15,994 | | $ | — | | $ | 273,766 | |
Restricted cash | | | — | | | 2,484 | | | — | | | — | | | 2,484 | |
Accounts receivable, net (including intercompany) | | | — | | | 1,253,755 | | | 38,242 | | | (21,051 | ) | | 1,270,946 | |
Unbilled receivables, CRO | | | — | | | 23,093 | | | — | | | — | | | 23,093 | |
Inventories | | | — | | | 331,098 | | | 7,355 | | | — | | | 338,453 | |
Deferred income tax benefits, net-current | | | — | | | 144,568 | | | 150 | | | (2,676 | ) | | 142,042 | |
Other current assets | | | 1,209 | | | 175,111 | | | 4,864 | | | — | | | 181,184 | |
Current assets from discontinued operations | | | — | | | 24,814 | | | 6,882 | | | — | | | 31,696 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total current assets | | | 216,613 | | | 1,997,291 | | | 73,487 | | | (23,727 | ) | | 2,263,664 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Properties and equipment, net | | | — | | | 206,102 | | | 4,143 | | | — | | | 210,245 | |
Goodwill | | | — | | | 4,161,904 | | | 73,424 | | | — | | | 4,235,328 | |
Identifiable intangible assets, net | | | — | | | 300,875 | | | 10,918 | | | — | | | 311,793 | |
Other noncurrent assets | | | 31,222 | | | 227,876 | | | 52 | | | — | | | 259,150 | |
Noncurrent assets from discontinued operations | | | — | | | 22,070 | | | 23,776 | | | — | | | 45,846 | |
Investment in subsidiaries | | | 5,958,578 | | | — | | | — | | | (5,958,578 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total assets | | $ | 6,206,413 | | $ | 6,916,118 | | $ | 185,800 | | $ | (5,982,305 | ) | $ | 7,326,026 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
Current liabilities (including intercompany) | | $ | 21,143 | | $ | 537,803 | | $ | 9,827 | | $ | (21,051 | ) | $ | 547,722 | |
Long-term debt, notes and convertible debentures | | | 2,210,166 | | | 1,945 | | | 3 | | | — | | | 2,212,114 | |
Deferred income tax liabilities, net-noncurrent | | | 241,349 | | | 304,709 | | | 10,171 | | | (2,676 | ) | | 553,553 | |
Other noncurrent liabilities | | | — | | | 278,829 | | | — | | | — | | | 278,829 | |
Noncurrent liabilities from discontinued operations | | | — | | | — | | | 53 | | | — | | | 53 | |
Stockholders’ equity | | | 3,733,755 | | | 5,792,832 | | | 165,746 | | | (5,958,578 | ) | | 3,733,755 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total liabilities and stockholders’ equity | | $ | 6,206,413 | | $ | 6,916,118 | | $ | 185,800 | | $ | (5,982,305 | ) | $ | 7,326,026 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
34
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets - (Continued)
(in thousands)
| | | | | | | | | | | | | | | | |
As of December 31, 2008: | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating/
Eliminating
Adjustments | | Omnicare,
Inc. and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 145,178 | | $ | 44,109 | | $ | 25,381 | | $ | — | | $ | 214,668 | |
Restricted cash | | | — | | | 1,891 | | | — | | | — | | | 1,891 | |
Accounts receivable, net (including intercompany) | | | — | | | 1,314,760 | | | 54,862 | | | (32,064 | ) | | 1,337,558 | |
Unbilled receivables, CRO | | | — | | | 22,329 | | | — | | | — | | | 22,329 | |
Inventories | | | — | | | 438,972 | | | 10,051 | | | — | | | 449,023 | |
Deferred income tax benefits, net-current | | | 1,202 | | | 132,991 | | | 56 | | | — | | | 134,249 | |
Other current assets | | | 1,270 | | | 170,615 | | | 5,104 | | | — | | | 176,989 | |
Current assets from discontinued operations | | | — | | | 27,979 | | | 7,007 | | | — | | | 34,986 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total current assets | | | 147,650 | | | 2,153,646 | | | 102,461 | | | (32,064 | ) | | 2,371,693 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Properties and equipment, net | | | — | | | 203,882 | | | 4,645 | | | — | | | 208,527 | |
Goodwill | | | — | | | 4,138,754 | | | 72,467 | | | — | | | 4,211,221 | |
Identifiable intangible assets, net | | | — | | | 325,559 | | | 3,887 | | | — | | | 329,446 | |
Other noncurrent assets | | | 40,171 | | | 231,895 | | | 47 | | | — | | | 272,113 | |
Noncurrent assets from discontinued operations | | | — | | | 33,375 | | | 23,870 | | | — | | | 57,245 | |
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 | | | 3 | | | — | | | 2,352,824 | |
Deferred income tax liabilities, net-noncurrent | | | 229,573 | | | 285,361 | | | 10,492 | | | — | | | 525,426 | |
Other noncurrent liabilities | | | — | | | 274,825 | | | 1,459 | | | — | | | 276,284 | |
Noncurrent liabilities from discontinued operations | | | — | | | — | | | 53 | | | — | | | 53 | |
Stockholders’ equity | | | 3,654,869 | | | 5,891,261 | | | 184,047 | | | (6,075,308 | ) | | 3,654,869 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total liabilities and stockholders’ equity | | $ | 6,263,129 | | $ | 7,087,111 | | $ | 207,377 | | $ | (6,107,372 | ) | $ | 7,450,245 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
35
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows - Unaudited
(in thousands)
| | | | | | | | | | | | | |
| | Six months ended June 30, | |
| |
|
|
2009: | | Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Omnicare, Inc.
and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: | | | | | | | | | | | | | |
Net cash flows from operating activities | | $ | (24,797 | ) | $ | 297,991 | | $ | (10,252 | ) | $ | 262,942 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Acquisition of businesses, net of cash received | | | — | | | (43,100 | ) | | — | | | (43,100 | ) |
Capital expenditures | | | — | | | (15,120 | ) | | (195 | ) | | (15,315 | ) |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust | | | — | | | 843 | | | — | | | 843 | |
Other | | | — | | | (2,233 | ) | | — | | | (2,233 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Net cash flows used in investing activities | | | — | | | (59,610 | ) | | (195 | ) | | (59,805 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | |
Payments on line of credit facilities and term A loan | | | (150,000 | ) | | — | | | — | | | (150,000 | ) |
Payments on long-term borrowings and obligations | | | (993 | ) | | — | | | — | | | (993 | ) |
(Decrease) increase in cash overdraft balance | | | (671 | ) | | 534 | | | — | | | (137 | ) |
Payments for stock awards and exercise of stock options, net of stock tendered in payment | | | 9,464 | | | — | | | — | | | 9,464 | |
Excess tax benefits from stock-based compensation | | | 2,366 | | | — | | | — | | | 2,366 | |
Dividends paid | | | (5,352 | ) | | — | | | — | | | (5,352 | ) |
Other | | | 240,209 | | | (240,209 | ) | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
Net cash flows used in financing activities | | | 95,023 | | | (239,675 | ) | | — | | | (144,652 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | — | | | — | | | 831 | | | 831 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 70,226 | | | (1,294 | ) | | (9,616 | ) | | 59,316 | |
Less increase in cash and cash equivalents of discontinued operations | | | — | | | 447 | | | (229 | ) | | 218 | |
| |
|
| |
|
| |
|
| |
|
| |
Increase (decrease) in cash and cash equivalents of continuing operations | | | 70,226 | | | (1,741 | ) | | (9,387 | ) | | 59,098 | |
Cash and cash equivalents at beginning of period | | | 145,178 | | | 44,109 | | | 25,381 | | | 214,668 | |
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents at end of period | | $ | 215,404 | | $ | 42,368 | | $ | 15,994 | | $ | 273,766 | |
| |
|
| |
|
| |
|
| |
|
| |
36
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows - (Continued) - Unaudited
(in thousands)
| | | | | | | | | | | | | |
| | Six months ended June 30, | |
| |
|
|
2008: | | Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Omnicare, Inc.
and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: | | | | | | | | | | | | | |
Net cash flows from operating activities | | $ | (20,886 | ) | $ | 263,011 | | $ | (13,513 | ) | $ | 228,612 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Acquisition of businesses, net of cash received | | | — | | | (90,988 | ) | | — | | | (90,988 | ) |
Capital expenditures | | | — | | | (27,233 | ) | | (197 | ) | | (27,430 | ) |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust | | | — | | | (11,589 | ) | | — | | | (11,589 | ) |
Other | | | — | | | (1,044 | ) | | — | | | (1,044 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Net cash flows used in investing activities | | | — | | | (130,854 | ) | | (197 | ) | | (131,051 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | |
Payments on line of credit facilities and term A loan | | | (50,000 | ) | | — | | | — | | | (50,000 | ) |
Payments on long-term borrowings and obligations | | | (1,606 | ) | | (119 | ) | | — | | | (1,725 | ) |
(Decrease) increase in cash overdraft balance | | | (4,032 | ) | | 426 | | | — | | | (3,606 | ) |
Payments for Omnicare common stock repurchase | | | (100,165 | ) | | — | | | — | | | (100,165 | ) |
Payments for stock awards and exercise of stock options, net of stock tendered in payment | | | (3,803 | ) | | — | | | — | | | (3,803 | ) |
Excess tax benefits from stock-based compensation | | | 82 | | | — | | | — | | | 82 | |
Dividends paid | | | (5,412 | ) | | — | | | — | | | (5,412 | ) |
Other | | | 149,929 | | | (149,810 | ) | | — | | | 119 | |
| |
|
| |
|
| |
|
| |
|
| |
Net cash flows used in financing activities | | | (15,007 | ) | | (149,503 | ) | | — | | | (164,510 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | — | | | — | | | 1,231 | | | 1,231 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (35,893 | ) | | (17,346 | ) | | (12,479 | ) | | (65,718 | ) |
Less increase in cash and cash equivalents of discontinued operations | | | — | | | 396 | | | 52 | | | 448 | |
| |
|
| |
|
| |
|
| |
|
| |
Increase (decrease) in cash and cash equivalents of continuing operations | | | (35,893 | ) | | (17,742 | ) | | (12,531 | ) | | (66,166 | ) |
Cash and cash equivalents at beginning of period | | | 171,779 | | | 69,976 | | | 32,445 | | | 274,200 | |
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents at end of period | | $ | 135,886 | | $ | 52,234 | | $ | 19,914 | | $ | 208,034 | |
| |
|
| |
|
| |
|
| |
|
| |
37
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 June 30, 2009 and December 31, 2008 for the balance sheets as well as the three and six months ended June 30, 2009 and 2008 for the statements of income, and the statements of cash flows for the six months ended June 30, 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.
38
Note 13 - Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income - Unaudited
(in thousands)
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | |
| |
|
|
2009: | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating/
Eliminating
Adjustments | | Omnicare,
Inc. and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | | $ | — | | $ | — | | $ | 1,540,507 | | $ | — | | $ | 1,540,507 | |
Cost of sales | | | — | | | — | | | 1,168,778 | | | — | | | 1,168,778 | |
Heartland matters | | | — | | | — | | | 815 | | | — | | | 815 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Gross profit | | | — | | | — | | | 370,914 | | | — | | | 370,914 | |
Selling, general and administrative expenses | | | 1,603 | | | 396 | | | 201,492 | | | — | | | 203,491 | |
Provision for doubtful accounts | | | — | | | — | | | 22,710 | | | — | | | 22,710 | |
Restructuring and other related charges | | | — | | | — | | | 5,883 | | | — | | | 5,883 | |
Litigation and other related professional fees | | | — | | | — | | | 28,357 | | | — | | | 28,357 | |
Repack matters | | | — | | | — | | | 381 | | | — | | | 381 | |
Acquisition and other related costs | | | — | | | — | | | 2,011 | | | — | | | 2,011 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) | | | (1,603 | ) | | (396 | ) | | 110,080 | | | — | | | 108,081 | |
Investment income | | | 100 | | | — | | | 932 | | | — | | | 1,032 | |
Interest expense, including amortization of discount on convertible notes | | | (36,513 | ) | | — | | | (189 | ) | | — | | | (36,702 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) from continuing operations before income taxes | | | (38,016 | ) | | (396 | ) | | 110,823 | | | — | | | 72,411 | |
Income tax (benefit) expense | | | (14,519 | ) | | (154 | ) | | 45,090 | | | — | | | 30,417 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income from continuing operations | | | (23,497 | ) | | (242 | ) | | 65,733 | | | — | | | 41,994 | |
Loss from discontinued operations, including impairment charge of $12,065 aftertax | | | — | | | — | | | (13,275 | ) | | — | | | (13,275 | ) |
Equity in net income of subsidiaries | | | 52,216 | | | — | | | — | | | (52,216 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 28,719 | | $ | (242 | ) | $ | 52,458 | | $ | (52,216 | ) | $ | 28,719 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
2008: | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | | $ | — | | $ | — | | $ | 1,522,712 | | $ | — | | $ | 1,522,712 | |
Cost of sales | | | — | | | — | | | 1,149,864 | | | — | | | 1,149,864 | |
Heartland matters | | | — | | | — | | | 1,560 | | | — | | | 1,560 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Gross profit | | | — | | | — | | | 371,288 | | | — | | | 371,288 | |
Selling, general and administrative expenses | | | 2,349 | | | 346 | | | 224,256 | | | — | | | 226,951 | |
Provision for doubtful accounts | | | — | | | — | | | 24,093 | | | — | | | 24,093 | |
Restructuring and other related charges | | | — | | | — | | | 10,784 | | | — | | | 10,784 | |
Litigation and other related professional fees | | | — | | | — | | | 16,022 | | | — | | | 16,022 | |
Repack matters | | | — | | | — | | | 180 | | | — | | | 180 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) | | | (2,349 | ) | | (346 | ) | | 95,953 | | | — | | | 93,258 | |
Investment income | | | 817 | | | — | | | 1,142 | | | — | | | 1,959 | |
Interest expense, including amortization of discount on convertible notes | | | (41,033 | ) | | — | | | (1,081 | ) | | — | | | (42,114 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) from continuing operations before income taxes | | | (42,565 | ) | | (346 | ) | | 96,014 | | | — | | | 53,103 | |
Income tax (benefit) expense | | | (15,985 | ) | | (130 | ) | | 35,724 | | | — | | | 19,609 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income from continuing operations | | | (26,580 | ) | | (216 | ) | | 60,290 | | | — | | | 33,494 | |
Loss from discontinued operations | | | — | | | — | | | (559 | ) | | — | | | (559 | ) |
Equity in net income of subsidiaries | | | 59,515 | | | — | | | — | | | (59,515 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 32,935 | | $ | (216 | ) | $ | 59,731 | | $ | (59,515 | ) | $ | 32,935 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
39
Note 13 - Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income - Unaudited
(in thousands)
| | | | | | | | | | | | | | | | |
| | Six months ended June 30, | |
| |
|
|
2009: | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating/
Eliminating
Adjustments | | Omnicare,
Inc. and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | | $ | — | | $ | — | | $ | 3,082,612 | | $ | — | | $ | 3,082,612 | |
Cost of sales | | | — | | | — | | | 2,320,546 | | | — | | | 2,320,546 | |
Heartland matters | | | — | | | — | | | 1,917 | | | — | | | 1,917 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Gross profit | | | — | | | — | | | 760,149 | | | — | | | 760,149 | |
Selling, general and administrative expenses | | | 8,541 | | | 817 | | | 410,266 | | | — | | | 419,624 | |
Provision for doubtful accounts | | | — | | | — | | | 47,981 | | | — | | | 47,981 | |
Restructuring and other related charges | | | — | | | — | | | 12,800 | | | — | | | 12,800 | |
Litigation and other related professional fees | | | — | | | — | | | 70,022 | | | — | | | 70,022 | |
Repack matters | | | — | | | — | | | 1,272 | | | — | | | 1,272 | |
Acquisition and other related costs | | | — | | | — | | | 2,850 | | | — | | | 2,850 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) | | | (8,541 | ) | | (817 | ) | | 214,958 | | | — | | | 205,600 | |
Investment income | | | 536 | | | — | | | 2,903 | | | — | | | 3,439 | |
Interest expense, including amortization of discount on convertible notes | | | (74,341 | ) | | — | | | (445 | ) | | — | | | (74,786 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) from continuing operations before income taxes | | | (82,346 | ) | | (817 | ) | | 217,416 | | | — | | | 134,253 | |
Income tax (benefit) expense | | | (31,489 | ) | | (315 | ) | | 91,835 | | | — | | | 60,031 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income from continuing operations | | | (50,857 | ) | | (502 | ) | | 125,581 | | | — | | | 74,222 | |
Loss from discontinued operations, including impairment charge of $12,065 aftertax | | | — | | | — | | | (14,609 | ) | | — | | | (14,609 | ) |
Equity in net income of subsidiaries | | | 110,470 | | | — | | | — | | | (110,470 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 59,613 | | $ | (502 | ) | $ | 110,972 | | $ | (110,470 | ) | $ | 59,613 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
2008: | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | | $ | — | | $ | — | | $ | 3,053,150 | | $ | — | | $ | 3,053,150 | |
Cost of sales | | | — | | | — | | | 2,309,445 | | | — | | | 2,309,445 | |
Heartland matters | | | — | | | — | | | 3,134 | | | — | | | 3,134 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Gross profit | | | — | | | — | | | 740,571 | | | — | | | 740,571 | |
Selling, general and administrative expenses | | | 4,297 | | | 646 | | | 448,235 | | | — | | | 453,178 | |
Provision for doubtful accounts | | | — | | | — | | | 52,245 | | | — | | | 52,245 | |
Restructuring and other related charges | | | — | | | — | | | 17,232 | | | — | | | 17,232 | |
Litigation and other related professional fees | | | — | | | — | | | 37,664 | | | — | | | 37,664 | |
Repack matters | | | — | | | — | | | 499 | | | — | | | 499 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) | | | (4,297 | ) | | (646 | ) | | 184,696 | | | — | | | 179,753 | |
Investment income | | | 1,391 | | | — | | | 3,179 | | | — | | | 4,570 | |
Interest expense, including amortization of discount on convertible notes | | | (82,084 | ) | | — | | | (3,143 | ) | | — | | | (85,227 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) from continuing operations before income taxes | | | (84,990 | ) | | (646 | ) | | 184,732 | | | — | | | 99,096 | |
Income tax (benefit) expense | | | (32,753 | ) | | (250 | ) | | 71,068 | | | — | | | 38,065 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income from continuing operations | | | (52,237 | ) | | (396 | ) | | 113,664 | | | — | | | 61,031 | |
Loss from discontinued operations | | | — | | | — | | | (1,946 | ) | | — | | | (1,946 | ) |
Equity in net income of subsidiaries | | | 111,322 | | | — | | | — | | | (111,322 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 59,085 | | $ | (396 | ) | $ | 111,718 | | $ | (111,322 | ) | $ | 59,085 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
40
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
| | | | | | | | | | | | | | | | |
As of June 30, 2009 (Unaudited): | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating/
Eliminating
Adjustments | | Omnicare,
Inc. and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 215,404 | | $ | — | | $ | 58,362 | | $ | — | | $ | 273,766 | |
Restricted cash | | | — | | | — | | | 2,484 | | | — | | | 2,484 | |
Accounts receivable, net (including intercompany) | | | — | | | 40 | | | 1,270,946 | | | (40 | ) | | 1,270,946 | |
Unbilled receivables, CRO | | | — | | | — | | | 23,093 | | | — | | | 23,093 | |
Inventories | | | — | | | — | | | 338,453 | | | — | | | 338,453 | |
Deferred income tax benefits, net-current | | | — | | | — | | | 144,718 | | | (2,676 | ) | | 142,042 | |
Other current assets | | | 1,209 | | | — | | | 179,975 | | | — | | | 181,184 | |
Current assets from discontinued operations | | | — | | | — | | | 31,696 | | | — | | | 31,696 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total current assets | | | 216,613 | | | 40 | | | 2,049,727 | | | (2,716 | ) | | 2,263,664 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Properties and equipment, net | | | — | | | 23 | | | 210,222 | | | — | | | 210,245 | |
Goodwill | | | — | | | — | | | 4,235,328 | | | — | | | 4,235,328 | |
Identifiable intangible assets, net | | | — | | | — | | | 311,793 | | | — | | | 311,793 | |
Other noncurrent assets | | | 31,222 | | | 19 | | | 227,909 | | | — | | | 259,150 | |
Noncurrent assets from discontinued operations | | | — | | | — | | | 45,846 | | | — | | | 45,846 | |
Investment in subsidiaries | | | 5,958,578 | | | — | | | — | | | (5,958,578 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total assets | | $ | 6,206,413 | | $ | 82 | | $ | 7,080,825 | | $ | (5,961,294 | ) | $ | 7,326,026 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
Current liabilities (including intercompany) | | $ | 21,143 | | $ | 3 | | $ | 526,616 | | $ | (40 | ) | $ | 547,722 | |
Long-term debt, notes and convertible debentures | | | 2,210,166 | | | — | | | 1,948 | | | — | | | 2,212,114 | |
Deferred income tax liabilities, net-noncurrent | | | 241,349 | | | — | | | 314,880 | | | (2,676 | ) | | 553,553 | |
Other noncurrent liabilities | | | — | | | — | | | 278,829 | | | — | | | 278,829 | |
Noncurrent liabilities from discontinued operations | | | — | | | — | | | 53 | | | — | | | 53 | |
Stockholders’ equity | | | 3,733,755 | | | 79 | | | 5,958,499 | | | (5,958,578 | ) | | 3,733,755 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total liabilities and stockholders’ equity | | $ | 6,206,413 | | $ | 82 | | $ | 7,080,825 | | $ | (5,961,294 | ) | $ | 7,326,026 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
41
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets - (Continued)
(in thousands)
| | | | | | | | | | | | | | | | |
As of December 31, 2008: | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating/
Eliminating
Adjustments | | Omnicare,
Inc. and
Subsidiaries | |
|
|
|
|
|
|
|
|
|
|
| |
ASSETS | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 145,178 | | $ | — | | $ | 69,490 | | $ | — | | $ | 214,668 | |
Restricted cash | | | — | | | — | | | 1,891 | | | — | | | 1,891 | |
Accounts receivable, net (including intercompany) | | | — | | | 56 | | | 1,337,558 | | | (56 | ) | | 1,337,558 | |
Unbilled receivables, CRO | | | — | | | — | | | 22,329 | | | — | | | 22,329 | |
Inventories | | | — | | | — | | | 449,023 | | | — | | | 449,023 | |
Deferred income tax benefits, net-current | | | 1,202 | | | — | | | 136,399 | | | (3,352 | ) | | 134,249 | |
Other current assets | | | 1,270 | | | — | | | 175,719 | | | — | | | 176,989 | |
Current assets from discontinued operations | | | — | | | — | | | 34,986 | | | — | | | 34,986 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total current assets | | | 147,650 | | | 56 | | | 2,227,395 | | | (3,408 | ) | | 2,371,693 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Properties and equipment, net | | | — | | | 29 | | | 208,498 | | | — | | | 208,527 | |
Goodwill | | | — | | | — | | | 4,211,221 | | | — | | | 4,211,221 | |
Identifiable intangible assets, net | | | — | | | — | | | 329,446 | | | — | | | 329,446 | |
Other noncurrent assets | | | 40,171 | | | 19 | | | 231,923 | | | — | | | 272,113 | |
Noncurrent assets from discontinued operations | | | — | | | — | | | 57,245 | | | — | | | 57,245 | |
Investment in subsidiaries | | | 6,075,308 | | | — | | | — | | | (6,075,308 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total assets | | $ | 6,263,129 | | $ | 104 | | $ | 7,265,728 | | $ | (6,078,716 | ) | $ | 7,450,245 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
Current liabilities (including intercompany) | | $ | 28,460 | | $ | 16 | | $ | 612,369 | | $ | (56 | ) | $ | 640,789 | |
Long-term debt, notes and convertible debentures | | | 2,350,227 | | | — | | | 2,597 | | | — | | | 2,352,824 | |
Deferred income tax liabilities, net-noncurrent | | | 229,573 | | | — | | | 299,205 | | | (3,352 | ) | | 525,426 | |
Other noncurrent liabilities | | | — | | | — | | | 276,284 | | | — | | | 276,284 | |
Noncurrent liabilities from discontinued operations | | | — | | | — | | | 53 | | | — | | | 53 | |
Stockholders’ equity | | | 3,654,869 | | | 88 | | | 6,075,220 | | | (6,075,308 | ) | | 3,654,869 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total liabilities and stockholders’ equity | | $ | 6,263,129 | | $ | 104 | | $ | 7,265,728 | | $ | (6,078,716 | ) | $ | 7,450,245 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
42
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows - Unaudited
(in thousands)
| | | | | | | | | | | | | |
| | Six months ended June 30, | |
| |
| |
2009: | | Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Omnicare, Inc.
and
Subsidiaries | |
|
|
|
|
|
|
|
|
| |
Cash flows from operating activities: | | | | | | | | | | | | | |
Net cash flows from operating activities | | $ | (24,797 | ) | $ | — | | $ | 287,739 | | $ | 262,942 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Acquisition of businesses, net of cash received | | | — | | | — | | | (43,100 | ) | | (43,100 | ) |
Capital expenditures | | | — | | | — | | | (15,315 | ) | | (15,315 | ) |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust | | | — | | | — | | | 843 | | | 843 | |
Other | | | — | | | — | | | (2,233 | ) | | (2,233 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Net cash flows used in investing activities | | | — | | | — | | | (59,805 | ) | | (59,805 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | |
Payments on line of credit facilities and term A loan | | | (150,000 | ) | | — | | | — | | | (150,000 | ) |
Payments on long-term borrowings and obligations | | | (993 | ) | | — | | | — | | | (993 | ) |
(Decrease) increase in cash overdraft balance | | | (671 | ) | | — | | | 534 | | | (137 | ) |
Payments for stock awards and exercise of stock options, net of stock tendered in payment | | | 9,464 | | | — | | | — | | | 9,464 | |
Excess tax benefits from stock-based compensation | | | 2,366 | | | — | | | — | | | 2,366 | |
Dividends paid | | | (5,352 | ) | | — | | | — | | | (5,352 | ) |
Other | | | 240,209 | | | — | | | (240,209 | ) | | — | |
| |
|
| |
|
| |
|
| |
|
| |
Net cash flows used in financing activities | | | 95,023 | | | — | | | (239,675 | ) | | (144,652 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | — | | | — | | | 831 | | | 831 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 70,226 | | | — | | | (10,910 | ) | | 59,316 | |
Less increase in cash and cash equivalents of discontinued operations | | | — | | | — | | | 218 | | | 218 | |
| |
|
| |
|
| |
|
| |
|
| |
Increase (decrease) in cash and cash equivalents of continuing operations | | | 70,226 | | | — | | | (11,128 | ) | | 59,098 | |
Cash and cash equivalents at beginning of period | | | 145,178 | | | — | | | 69,490 | | | 214,668 | |
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents at end of period | | $ | 215,404 | | $ | — | | $ | 58,362 | | $ | 273,766 | |
| |
|
| |
|
| |
|
| |
|
| |
43
Note 13 - Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows - (Continued) - Unaudited
(in thousands)
| | | | | | | | | | | | | |
| | Six months ended June 30, | |
| |
| |
2008: | | Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Omnicare, Inc.
and
Subsidiaries | |
|
|
|
|
|
|
|
|
| |
Cash flows from operating activities: | | | | | | | | | | | | | |
Net cash flows from operating activities | | $ | (20,886 | ) | $ | — | | $ | 249,498 | | $ | 228,612 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Acquisition of businesses, net of cash received | | | — | | | — | | | (90,988 | ) | | (90,988 | ) |
Capital expenditures | | | — | | | — | | | (27,430 | ) | | (27,430 | ) |
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust | | | — | | | — | | | (11,589 | ) | | (11,589 | ) |
Other | | | — | | | — | | | (1,044 | ) | | (1,044 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Net cash flows used in investing activities | | | — | | | — | | | (131,051 | ) | | (131,051 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | |
Payments on line of credit facilities and term A loan | | | (50,000 | ) | | — | | | — | | | (50,000 | ) |
Payments on long-term borrowings and obligations | | | (1,606 | ) | | — | | | (119 | ) | | (1,725 | ) |
(Decrease) increase in cash overdraft balance | | | (4,032 | ) | | — | | | 426 | | | (3,606 | ) |
Payments for Omnicare common stock repurchase | | | (100,165 | ) | | — | | | — | | | (100,165 | ) |
Payments for stock awards and exercise of stock options, net of stock tendered in payment | | | (3,803 | ) | | — | | | — | | | (3,803 | ) |
Excess tax benefits from stock-based compensation | | | 82 | | | — | | | — | | | 82 | |
Dividends paid | | | (5,412 | ) | | — | | | — | | | (5,412 | ) |
Other | | | 149,929 | | | — | | | (149,810 | ) | | 119 | |
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Net cash flows used in financing activities | | | (15,007 | ) | | — | | | (149,503 | ) | | (164,510 | ) |
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Effect of exchange rate changes on cash | | | — | | | — | | | 1,231 | | | 1,231 | |
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Net increase (decrease) in cash and cash equivalents | | | (35,893 | ) | | — | | | (29,825 | ) | | (65,718 | ) |
Less increase in cash and cash equivalents of discontinued operations | | | — | | | — | | | 448 | | | 448 | |
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Increase (decrease) in cash and cash equivalents of continuing operations | | | (35,893 | ) | | — | | | (30,273 | ) | | (66,166 | ) |
Cash and cash equivalents at beginning of period | | | 171,779 | | | — | | | 102,421 | | | 274,200 | |
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Cash and cash equivalents at end of period | | $ | 135,886 | | $ | — | | $ | 72,148 | | $ | 208,034 | |
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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. All amounts disclosed herein relate to the Company’s continuing operations unless otherwise stated.
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Overview of Three and Six Months Ended June 30, 2009 and Results of Operations |
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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 June 30, 2009, Omnicare served long-term care facilities as well as chronic care and other settings comprising approximately 1,384,000 beds relating to continuing operations, including approximately 59,000 patients served by the patient assistance programs of its specialty pharmacy services business. The comparable number at December 31, 2008 was 1,390,000 relating to continuing operations (including approximately 68,000 patients served by patient assistance programs). The comparable number at June 30, 2008 was 1,392,000 relating to continuing operations (including approximately 70,000 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 June 30, 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 and six months ended June 30, 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”).
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| | | | | | | | | | | | | |
| | Three months ended,
June 30, | | Six months ended
June 30, | |
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| | 2009 (b) | | 2008 as
adjusted (a)(b) | | 2009 (b) | | 2008 as
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Net sales | | $ | 1,540,507 | | $ | 1,522,712 | | $ | 3,082,612 | | $ | 3,053,150 | |
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Income from continuing operations | | $ | 41,994 | | $ | 33,494 | | $ | 74,222 | | $ | 61,031 | |
Discontinued operations, including impairment charge of $12,065 aftertax for the 2009 periods(b) | | | (13,275 | ) | | (559 | ) | | (14,609 | ) | | (1,946 | ) |
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Net income | | $ | 28,719 | | $ | 32,935 | | $ | 59,613 | | $ | 59,085 | |
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Earnings (loss) per common share - Basic:(c) | | | | | | | | | | | | | |
Continuing operations | | $ | 0.36 | | $ | 0.28 | | $ | 0.64 | | $ | 0.51 | |
Discontinued operations(b) | | | (0.11 | ) | | (0.00 | ) | | (0.13 | ) | | (0.02 | ) |
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Net income | | $ | 0.25 | | $ | 0.28 | | $ | 0.51 | | $ | 0.50 | |
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Earning (loss) per common share - Diluted:(c) | | | | | | | | | | | | | |
Continuing operations | | $ | 0.36 | | $ | 0.28 | | $ | 0.63 | | $ | 0.51 | |
Discontinued operations(b) | | | (0.11 | ) | | (0.00 | ) | | (0.12 | ) | | (0.02 | ) |
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Net income | | $ | 0.24 | | $ | 0.28 | | $ | 0.51 | | $ | 0.50 | |
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EBITDA from continuing operations(d) | | $ | 136,991 | | $ | 120,058 | | $ | 263,229 | | $ | 234,684 | |
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EBITDA from continuing operations reconciliation to net cash flows from operating activities: | | | | | | | | | | | | | |
EBITDA from continuing operations(d) | | $ | 136,991 | | $ | 120,058 | | $ | 263,229 | | $ | 234,684 | |
(Subtract)/Add: | | | | | | | | | | | | | |
Interest expense, net of investment income | | | (28,743 | ) | | (33,734 | ) | | (57,623 | ) | | (67,936 | ) |
Income tax provision | | | (30,417 | ) | | (19,609 | ) | | (60,031 | ) | | (38,065 | ) |
Changes in assets and liabilities, net of effects from acquisition and divestitures of businesses | | | 63,672 | | | 18,937 | | | 116,705 | | | 98,562 | |
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Net cash flows from operating activities of continuing operations | | $ | 141,503 | | $ | 85,652 | | $ | 262,280 | | $ | 227,245 | |
Net cash flows from operating activities of discontinued operations | | | 521 | | | 696 | | | 662 | | | 1,367 | |
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Net cash flows from operating activities | | $ | 142,024 | | $ | 86,348 | | $ | 262,942 | | $ | 228,612 | |
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| (a) | Effective January 1, 2009, Omnicare adopted the provisions of Financial Accounting Standards Board (“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 all prior periods presented have been restated for this change in accounting. |
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| (b) | In the second quarter of 2009, the Company commenced activities to divest certain home healthcare and related ancillary businesses (“the disposal group”) that are non-strategic in nature. The disposal group, historically part of Omnicare’s Pharmacy Services segment, primarily represents ancillary businesses which accompanied other more strategic assets obtained by Omnicare in connection with the Company’s institutional pharmacy acquisition program. The results from continuing operations for all periods presented have been revised to reflect the results of the disposal group as discontinued operations, including certain expenses of the Company related to the divestiture. The Company |
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| | anticipates completing the divestiture within the following twelve months. See further discussion at the “Discontinued Operations” note of the Notes to Consolidated Financial Statements. |
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| (c) | Earnings per share is reported independently for each amount presented. Accordingly, the sum of the individual amounts may not necessarily equal the separately calculated amounts for the corresponding period. |
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| (d) | “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. |
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Three Months Ended June 30, 2009 vs. 2008 |
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Total net sales for the three months ended June 30, 2009 increased to $1,540.5 million from $1,522.7 million in the comparable prior-year period. Income from continuing operations for the three months ended June 30, 2009 was $42.0 million versus $33.5 million earned in the comparable 2008 period. Diluted earnings per share from continuing operations for the three months ended June 30, 2009 were $0.36 versus $0.28 in the same prior-year period. In total, including discontinued operations, net income for the three months ended June 30, 2009 was $28.7 million, or $0.24 per share, as compared with $32.9 million, or $0.28 per share, earned in the comparable prior-year period. EBITDA from continuing operations totaled $137.0 million for the three months ended June 30, 2009 as compared with $120.1 million for the same period of 2008. In the second quarter of 2009, the Company commenced activities to divest certain home healthcare and related ancillary businesses that are non-strategic in nature. The disposal group, historically part of Omnicare’s Pharmacy Services segment, primarily represents ancillary businesses which accompanied other more strategic assets obtained by Omnicare in connection with the Company’s institutional pharmacy acquisition program. The results from continuing operations for all periods presented have been revised to reflect the results of the disposal group as discontinued operations, including certain expenses of the Company related to the divestiture. The Company anticipates completing the divestiture within the following twelve months.
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 and lower sales in the Company’s clinical research business. See discussion of sales and operating profit results in more detail at the “Pharmacy Services Segment” and “CRO Services Segment” captions below.
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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 second quarter of 2009 by approximately $26 million (approximately $16 million aftertax), and cumulatively since April 2006 by approximately $343 million (approximately $213 million aftertax). This matter is currently the subject of litigation initiated by Omnicare and is before the federal appellate court in the Seventh Circuit Court of Appeals. See further discussion at the “Legal Proceedings” section at Part II, Item 1 of this Filing.
The Company’s consolidated gross profit of $370.9 million for the three months ended June 30, 2009, was relatively consistent with the same prior-year period amount of $371.3 million. Gross profit as a percentage of total net sales of 24.1% in the three months ended June 30, 2009, was slightly lower than the 24.4% experienced during the comparable 2008 period. Gross profit was favorably affected in the 2009 period largely by 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. 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 June 30, 2009 of $203.5 million were lower than the comparable prior-year amount of $227.0 million by $23.5 million. Operating expenses as a percentage of net sales amounted to 13.2% in the second quarter of 2009, representing a decrease from the 14.9% experienced in the comparable prior-year period. Operating expenses for the quarter ended June 30, 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 June 30, 2009 was $22.7 million versus $24.1 million in the comparable prior-year period.
Investment income for the three months ended June 30, 2009 of $1.0 million was lower than the $2.0 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 June 30, 2009 of $29.8 million is lower than the $35.7 million in the comparable prior-year period, primarily due to lower debt outstanding resulting from payments aggregating $150 million on the Company’s senior term A loan facility, maturing on July 28, 2010 (the “Term Loans”) during the second quarter of 2008 through the second 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.
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The effective income tax rate was 42.0% for the three months ended June 30, 2009, as compared to the second quarter of 2008 rate of 36.9%. 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:
Financial results for the three months ended June 30, 2009 from continuing operations included the following charges totaling approximately $45.8 million pretax ($32.8 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 $5.9 million pretax ($3.6 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 “Repack Matters”). In addressing and resolving these Repack Matters, the Company continues to experience increased costs and, as a result, the three months ended June 30, 2009 included special charges of $1.2 million pretax (approximately $0.8 million and $0.4 million was recorded in the cost of sales and operating expense sections of the Consolidated Statements of Income, respectively) ($0.7 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 June 30, 2009, the Company has received no material insurance recoveries.
(iii) Operating income included special litigation and other related professional fees of $28.4 million pretax ($22.0 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. Also included in the $28.4 million is a charge of $23 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
49
Standards (“SFAS”) No. 5, “Accounting for Contingencies.” (“SFAS 5”) The Company cannot predict the ultimate outcome of this matter. 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) Operating income included acquisition and other related costs of approximately $2.0 million pretax ($1.3 million aftertax) 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 2009 acquisitions. See further discussion at the “Acquisition” note of the Notes to Consolidated Financial Statements.
(v) Operating expenses included approximately $1.4 million in pretax charges ($0.9 million aftertax) 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 $6.9 million non-cash increase in pretax interest expense ($4.3 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.
Financial results for the three months ended June 30, 2008 from continuing operations included the following charges totaling approximately $35.0 million pretax ($21.9 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 $10.8 million pretax ($6.7 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) In addressing and resolving the Repack Matters, the Company continues to experience increased costs and as a result, the three months ended June 30, 2008 included special charges of $1.7 million pretax (approximately $1.5 million and $0.2 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 June 30, 2008, no receivables for insurance recoveries had been recorded by the Company.
(iii) Operating income included special litigation and other related professional fees of $16.0 million pretax ($10.1 million aftertax) for litigation-related professional expenses primarily in
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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 $6.4 million non-cash increase in pretax interest expense ($4.0 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
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| | Three months ended
June 30, | |
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| | 2009 | | 2008 as
adjusted (a) | |
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Net sales | | $ | 1,499,704 | | $ | 1,469,081 | |
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Operating income from continuing operations | | $ | 129,557 | | $ | 118,415 | |
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(a) | As discussed elsewhere herein, during the second quarter of 2009, the Company commenced activities to divest certain non-core businesses within its pharmacy services segment. The financial results have been revised to reflect such businesses as discontinued operations. |
Omnicare’s Pharmacy Services segment recorded sales of $1,499.7 million for the three months ended June 30, 2009, an increase from the comparable 2008 amount of $1,469.1 million by $30.6 million, or 2.1%. At June 30, 2009, Omnicare served long-term care facilities as well as chronic care and other settings comprising approximately 1,384,000 beds relating to continuing operations, including approximately 59,000 patients served by the patient assistance programs of its specialty pharmacy business. The comparable number at June 30, 2008 was 1,392,000 relating to continuing operations (including approximately 70,000 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, 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 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, along with a year-over-year shift in mix towards assisted living, which typically has lower penetration rates than skilled nursing facilities. 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.
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Operating income of the Pharmacy Services segment was $129.6 million in the second quarter of 2009, an $11.2 million increase as compared with the $118.4 million earned in the comparable period of 2008. As a percentage of the segment’s sales, operating income was 8.6% for the second quarter of 2009, compared with 8.1% 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 services, 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 increased 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. On May 12, 2009, CMS published its proposed SNF PPS rule for fiscal year 2010 that would reduce Medicare SNF PPS payments by $390 million, or 1.2 percent, compared to fiscal year 2009 levels. CMS is again proposing a recalibration of the case mix weights that would reduce SNF PPS payments by 3.3 percent, which would more than offset a proposed 2.1 percent market basket update. The rule has not yet been finalized. If these or other reimbursement changes are adopted in the future that have an adverse effect on the financial condition of the Company’s SNF clients, it could, in turn, adversely affect the timing or level of their payments to Omnicare.
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.
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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 six months ended June 30, 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 renegotiated 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 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 June 30, 2009, copays outstanding from
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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.
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.
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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 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. According to a tentative schedule CMS announced at a public meeting on June 4, 2009, while bidding for the new round one of the program will take place later this year, CMS does not expect the program to go into effect until January 1,
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2011. 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, many states are facing budget pressures that could result in increased cost containment efforts on healthcare providers. 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, 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 wholesale acquisition cost) to 250 percent of the lowest average
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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, Congressional action, 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 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
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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. Provisions of the rule were repeatedly delayed; currently the enforcement is delayed until June 30, 2010. Second, on May 29, 2007, CMS published a 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 would save $120 million during the first year and $3.87 billion over five years, but Congress blocked the rule through April 1, 2009. The American Recovery and Reinvestment Act of 2009 expressed 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 healthcare policy have been proposed by President Obama and are currently under consideration by Congress. Specifically, on February 26, 2009, the Obama Administration released its proposed federal budget for fiscal year 2010, which would establish a reserve fund of $633.8 billion over 10 years to finance comprehensive health reform.
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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. Many provisions of the proposed budget would require Congressional approval to implement and would take effect after fiscal year 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 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. Congressional committees currently are considering a variety of comprehensive plans, which are subject to extensive revision during the legislative process before a final plan emerges. Given the ongoing 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 the Company’s business.
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
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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 were filed by several entities, and motions to intervene in the case on appeal have also been filed with the appellate court; briefing for the appeal was completed on July 13, 2009 and oral argument was held on July 28, 2009. The appeal is being considered on an expedited basis. Motions for a stay of the District Court’s order pending appeal have not been granted, but such a motion is subject to reconsideration by the panel hearing the appeal. First DataBank and Medi-Span have indicated that they will implement the changes in AWP on September 26, 2009. These changes or their timing may be affected by a decision or stay by the Court of Appeals.
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.
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.
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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 any of these 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
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Revenues | | $ | 40,803 | | $ | 53,631 | |
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Operating income | | $ | 967 | | $ | 3,800 | |
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Omnicare’s CRO Services segment recorded revenues of $40.8 million for the three months ended June 30, 2009, which decreased by $12.8 million, or 23.9% from the $53.6 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 $5.2 million and $8.8 million of reimbursable out-of-pockets in its CRO Services segment reported revenue and cost of sales amounts for the three months ended June 30, 2009 and 2008, respectively. Revenues for 2009 were lower than in the same prior-year period primarily due to lower levels of new business added along with the early termination and client-driven delays in the commencement of certain projects.
Operating income in the CRO Services segment was $1.0 million in the second quarter of 2009 compared with $3.8 million in 2008, a decrease of $2.8 million or 73.7%. As a percentage of the segment’s revenue, operating income was 2.4% in the second quarter of 2009 compared with 7.1% in the same period of 2008. This decrease is primarily attributable to the aforementioned reduction in sales. Backlog at June 30, 2009 was $259.6 million, representing a decrease of $43.3 million from the December 31, 2008 backlog of $302.9 million, and a decrease of $77.8 million from the June 30, 2008 backlog of $337.4 million.
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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.
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Six Months Ended June 30, 2009 vs. 2008 |
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Total net sales for the six months ended June 30, 2009 increased to $3,082.6 million from $3,053.2 million in the comparable prior-year period. Income from continuing operations for the six months ended June 30, 2009 was $74.2 million versus $61.0 million earned in the comparable 2008 period. Diluted earnings per share from continuing operations for the six months ended June 30, 2009 were $0.63 versus $0.51 in the same prior-year period. In total, including discontinued operations, net income for the six months ended June 30, 2009 was $59.6 million, or $0.51 per share, as compared with $59.1 million, or $0.50 per share, earned in the comparable prior-year period. EBITDA from continuing operations totaled $263.2 million for the six months ended June 30, 2009 as compared with $234.7 million for the same period of 2008. In the second quarter of 2009, the Company commenced activities to divest certain home healthcare and related ancillary businesses that are non-strategic in nature. The disposal group, historically part of Omnicare’s Pharmacy Services segment, primarily represents ancillary businesses which accompanied other more strategic assets obtained by Omnicare in connection with the Company’s institutional pharmacy acquisition program. The results from continuing operations for all periods presented have been revised to reflect the results of the disposal group as discontinued operations, including certain expenses of the Company related to the divestiture. The Company anticipates completing the divestiture within the following twelve months.
Net sales for the six months ended June 30, 2009 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, a year-over-year shift in mix towards assisted living and lower sales in the Company’s clinical research business. 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 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 six months of 2009 by approximately $48 million (approximately $29 million aftertax), and cumulatively since April 2006 by approximately $343 million (approximately $213 million aftertax). This matter is currently the subject of litigation initiated by Omnicare and is before the federal appellate court in the Seventh
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Circuit Court of Appeals. See further discussion at the “Legal Proceedings” section at Part II, Item 1 of this Filing.
The Company’s consolidated gross profit of $760.1 million increased $19.5 million for the six months ended June 30, 2009, from the same prior-year period amount of $740.6 million. Gross profit as a percentage of total net sales of 24.7% in the six months ended June 30, 2009, was higher than the 24.3% 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 operating expenses for the six months ended June 30, 2009 of $419.6 million were lower than the comparable prior-year amount of $453.2 million by $33.6 million. Operating expenses as a percentage of net sales amounted to 13.6% in the first half of 2009, representing a decrease from the 14.8% experienced in the comparable prior-year period. Operating expenses for the six months ended June 30, 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 six months ended June 30, 2009 was $48.0 million versus $52.2 million in the comparable prior-year period.
Investment income for the six months ended June 30, 2009 of $3.4 million was lower than the $4.6 million earned in the comparable prior-year period, primarily due to lower interest rates versus the prior year.
Interest expense for the six months ended June 30, 2009 of $61.1 million is lower than the $72.5 million in the comparable prior-year period, primarily due to lower debt outstanding resulting from payments aggregating $200 million on the Term Loans throughout 2008 and through the first six months 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 44.7% for the six months ended June 30, 2009, as compared to the rate of 38.4% for the same prior year period. 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).
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Special Items and Accounting Changes:
Financial results for the six months ended June 30, 2009 from continuing operations included the following charges totaling approximately $105.8 million pretax ($76.6 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 $12.8 million pretax ($7.9 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 “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 previously mentioned Repack Matters, the Company continues to experience increased costs and, as a result, the six months ended June 30, 2009 included special charges of $3.2 million pretax (approximately $1.9 million and $1.3 million was recorded in the cost of sales and operating expense sections of the Consolidated Statements of Income, respectively) ($2.0 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 June 30, 2009, the Company has received no material insurance recoveries.
(iii) Operating income included special litigation and other related professional fees of $70.0 million pretax ($54.5 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 $70.0 million is a charge of $58 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 SFAS 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, 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 $2.9 million pretax ($1.7 million aftertax) related to the implementation of the SFAS 141R accounting change. These expenses were primarily related to professional fees from 2009 acquisitions. See further discussion at the “Acquisition” note of the Notes to Consolidated Financial Statements.
(v) Operating expenses included approximately $3.2 million in pretax charges ($2.0 million aftertax) relating to the prior implementation of the SFAS 123R accounting change, which primarily relate to stock
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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 $13.7 million non-cash increase in pretax interest expense ($8.5 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.
Financial results for the six months ended June 30, 2008 from continuing operations included the following charges totaling approximately $71.3 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 $17.2 million pretax ($10.6 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) In addressing and resolving the Repack Matters, the Company continues to experience increased costs and as a result, the six months ended June 30, 2008 included special charges of $3.6 million pretax (approximately $3.1 million and $0.5 million was recorded in the cost of sales and operating expense sections of the Consolidated Statements of Income, respectively) ($2.2 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 June 30, 2008, no receivables for insurance recoveries had been recorded by the Company.
(iii) Operating income included special litigation and other related professional fees of $37.7 million pretax ($23.1 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 $12.7 million non-cash increase in pretax interest expense ($8.0 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.
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Pharmacy Services Segment
| | | | | | | |
| | Six months ended
June 30, | |
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| |
| | 2009 | | 2008 as
adjusted (a) | |
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| | | | | | | |
Net sales | | $ | 2,997,066 | | $ | 2,950,346 | |
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Operating income from continuing operations | | $ | 250,739 | | $ | 229,901 | |
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(a) | As discussed elsewhere herein, during the second quarter of 2009, the Company commenced activities to divest certain non-core businesses within its pharmacy services segment. The financial results have been revised to reflect such businesses as discontinued operations. |
Omnicare’s Pharmacy Services segment recorded sales of $2,997.1 million for the six months ended June 30, 2009, an increase from the comparable 2008 amount of $2,950.3 million by $46.8 million, or 1.6%. At June 30, 2009, Omnicare served long-term care facilities as well as chronic care and other settings comprising approximately 1,384,000 beds relating to continuing operations, including approximately 59,000 patients served by the patient assistance programs of its specialty pharmacy business. The comparable number at June 30, 2008 was 1,392,000 relating to continuing operations (including approximately 70,000 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, 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 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 towards assisted living, which typically has lower penetration rates than skilled nursing facilities. 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 $250.7 million in the first six months of 2009, a $20.8 million increase as compared with the $229.9 million earned in the comparable period of 2008. As a percentage of the segment’s sales, operating income was 8.4% for the first six months of 2009, compared with 7.8% in 2008. Operating income in 2009 was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, growth in specialty pharmacy services, 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.
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CRO Services Segment
| | | | | | | |
| | Six months ended
June 30, | |
| |
| |
| | 2009 | | 2008 | |
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| |
| | | | | | | |
Revenues | | $ | 85,546 | | $ | 102,804 | |
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Operating income | | $ | 3,959 | | $ | 6,468 | |
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Omnicare’s CRO Services segment recorded revenues of $85.5 million for the six months ended June 30, 2009, which decreased by $17.3 million, or 16.8% from the $102.8 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 $10.9 million and $16.2 million of reimbursable out-of-pockets in its CRO Services segment reported revenue and cost of sales amounts for the six months ended June 30, 2009 and 2008, respectively. Revenues for 2009 were lower than in the same prior-year period primarily due to lower levels of new business added along with the early termination and client-driven delays in the commencement of certain projects.
Operating income in the CRO Services segment was $4.0 million in the first six months of 2009 compared with $6.5 million in 2008, a decrease of $2.5 million or 38.5%. As a percentage of the segment’s revenue, operating income was 4.6% in the first six months of 2009 compared with 6.3% in the same period of 2008. This decrease is primarily attributable to the aforementioned reduction in sales.
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”)
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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 $106 million over this implementation period. The Company recorded restructuring and other related charges for the Omnicare Full Potential Plan of approximately $6 million and $13 million pretax (approximately $4 million and $8 million aftertax) during the three and six months ended June 30, 2009, respectively, and approximately $36 million pretax during the year ended December 31, 2008 (approximately $11 million and $17 million pretax in the three and six months ended June 30, 2008), or cumulative aggregate restructuring and other related charges of approximately $96 million before taxes through the second 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 500 positions had been eliminated as of June 30, 2009. The foregoing reductions do not include additional savings expected from lower levels of overtime and reduced temporary labor. The aforementioned savings anticipated upon completion of the program also include reductions in overtime, excess hours and temporary help, and other productivity gains, equal to an additional 820 full-time equivalents. In addition, in July 2009, the Company implemented a temporary payroll containment and reduction program across the organization designed to facilitate the achievement of the productivity and efficiency goals associated with the Full Potential Plan.
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
68
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.
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Financial Condition, Liquidity and Capital Resources |
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Cash and cash equivalents and restricted cash at June 30, 2009 were $276.3 million compared with $216.6 million at December 31, 2008 (including restricted cash amounts of $2.5 million and $1.9 million, respectively).
The Company generated positive net cash flows from operating activities of continuing operations of $262.3 million during the six months ended June 30, 2009, compared with net cash flows from operating activities of $227.2 million during the six months ended June 30, 2008. Compared to the same prior-year period, cash flow from operating activities was favorably impacted by a reduction in inventory and accounts receivable during the period.
Net cash used in investing activities of continuing operations was $59.4 million and $130.0 million for the six months ended June 30, 2009 and 2008, respectively. Acquisitions of businesses, primarily funded by operating cash flows, required outlays of $43.1 million (including amounts payable pursuant to acquisition agreements relating to pre-2009 acquisitions) in the first six months of 2009. Acquisitions of businesses during the first six months of 2008 required $91.0 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 of continuing operations was $144.7 million for the six months ended June 30, 2009 as compared to $164.6 million for the comparable prior-year period. During the first six months of 2009 and 2008, the Company paid down $150 million and $50 million, respectively, on the Term Loans.
At June 30, 2009, there were no outstanding borrowings under the $800 million revolving credit facility, and $250 million in borrowings were outstanding under Term Loans.
On May 22, 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 $5.4 million during the six month period ended June 30, 2009 were relatively consistent with those paid in the comparable prior-year period.
On March 27, 2008, the Company announced that its Board of Directors authorized a program to repurchase, from time to time, shares of Omnicare’s outstanding common stock having an aggregate value of up to $100 million, depending on market conditions and other factors. During the first half of 2008, the Company repurchased approximately 4.1 million shares at a cost of approximately $100 million. Accordingly, the Company has utilized the full amount of share repurchase authority and completed the program. These repurchases were made in open market or privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18 and other applicable legal requirements.
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There were no known material commitments and contingencies outstanding at June 30, 2009, other than the contractual obligations summarized in the “Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements” caption below; certain 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 June 30, 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):
| | | | | | | | | | | | | | | | |
| | Total | | Less Than 1
Year | | 1-3 Years | | 4-5 Years | | After 5 Years | |
| |
| |
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| |
| | | | | | | | | | | | | | | | |
Debt obligations | | $ | 2,572,500 | | $ | — | | $ | 250,000 | | $ | 475,000 | | $ | 1,847,500 | |
Capital lease obligations | | | 3,386 | | | 1,438 | | | 1,524 | | | 205 | | | 219 | |
Operating lease obligations | | | 147,512 | | | 41,317 | | | 46,517 | | | 31,632 | | | 28,046 | |
Purchase obligations | | | 57,321 | | | 44,122 | | | 12,184 | | | 1,015 | | | — | |
Other current obligations | | | 245,457 | | | 245,457 | | | — | | | — | | | — | |
Other long-term obligations | | | 278,829 | | | — | | | 230,000 | | | 23,495 | | | 25,334 | |
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Subtotal | | | 3,305,005 | | | 332,334 | | | 540,225 | | | 531,347 | | | 1,901,099 | |
Future interest costs relating to debt and capital lease obligations | | | 1,509,588 | | | 110,313 | | | 210,384 | | | 192,914 | | | 995,977 | |
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Total contractual cash obligations | | $ | 4,814,593 | | $ | 442,647 | | $ | 750,609 | | $ | 724,261 | | $ | 2,897,076 | |
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As of June 30, 2009, the Company had approximately $26 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals.
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Off-Balance Sheet Arrangements:
A description of the Company’s Off-Balance Sheet Arrangements, for which there were no significant changes during the 2009 second 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 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 78 days at June 30, 2009, which was lower than the December 31, 2008 amount of 79 days by approximately 1 day. 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. 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 $96 million (excluding interest and prior to any allowance for doubtful accounts) is owed to the Company by this group of customers as of June 30, 2009, of which approximately $90 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 $96 million represents approximately 6 days of the overall DSO at June 30, 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 June 30, 2009, copays outstanding from Part D Plans were
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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 June 30, 2009 was $322.4 million, compared with $319.4 million at December 31, 2008. The allowance for doubtful accounts represented 20.2% and 19.3% of gross receivables (net of contractual allowances) as of June 30, 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 June 30, 2009 would result in an increase to the provision for doubtful accounts and related allowance for doubtful accounts on the balance sheet of approximately $15.9 million pretax.
The following table is an aging of the Company’s June 30, 2009, March 31, 2009 and December 31, 2008 gross accounts receivable (net of allowances for contractual adjustments, and prior to allowances for doubtful accounts), aged based on payment terms and categorized based on the four primary overall types of accounts receivable characteristics (in thousands):
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| | | | | | | | | | |
| | June 30, 2009 | |
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| | Current and
0-180 Days
Past-Due | | 181 Days and
Over
Past-Due | | Total | |
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Medicare (Part D and Part B), Medicaid and Third-Party payors | | $ | 340,069 | | $ | 175,802 | | $ | 515,871 | |
Facility payors | | | 446,817 | | | 363,006 | | | 809,823 | |
Private Pay payors | | | 110,231 | | | 137,755 | | | 247,986 | |
CRO | | | 17,601 | | | 2,040 | | | 19,641 | |
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Total gross accounts receivable (net of contractual allowance adjustments) | | $ | 914,718 | | $ | 678,603 | | $ | 1,593,321 | |
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| | March 31, 2009 | |
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| | Current and
0-180 Days
Past-Due | | 181 Days and
Over
Past-Due | | Total | |
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Medicare (Part D and Part B), Medicaid and Third-Party payors | | $ | 378,371 | | $ | 175,916 | | $ | 554,287 | |
Facility payors | | | 476,854 | | | 363,254 | | | 840,108 | |
Private Pay payors | | | 111,723 | | | 132,241 | | | 243,964 | |
CRO | | | 21,656 | | | — | | | 21,656 | |
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Total gross accounts receivable (net of contractual allowance adjustments) | | $ | 988,604 | | $ | 671,411 | | $ | 1,660,015 | |
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| | December 31, 2008 | |
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| | Current and
0-180 Days
Past-Due | | 181 Days and
Over
Past-Due | | Total | |
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Medicare (Part D and Part B), Medicaid and Third-Party payors | | $ | 377,765 | | $ | 173,307 | | $ | 551,072 | |
Facility payors | | | 479,185 | | | 352,036 | | | 831,221 | |
Private Pay payors | | | 117,543 | | | 129,530 | | | 247,073 | |
CRO | | | 27,609 | | | — | | | 27,609 | |
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Total gross accounts receivable (net of contractual allowance adjustments) | | $ | 1,002,102 | | $ | 654,873 | | $ | 1,656,975 | |
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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.
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; 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 and $14 million during the three and six months ended June 30, 2009, respectively. 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.
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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.
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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information |
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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 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, including changes in calculation of average wholesale price; 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
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compared to eventual outcomes; events or circumstances which result in an impairment of assets, including but not limited to, goodwill and identifiable intangible assets; the final outcome of divestiture activities; 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.
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 June 30, 2009 include $250.0 million outstanding under the variable-rate Senior term A loan, due 2010, at an interest rate of 2.07% at June 30, 2009 (a 100 basis-point change in the interest rate would increase or decrease pretax interest expense by approximately $2.5 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 3.22% at June 30, 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
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the related 6.125% Senior Notes, and amounted to approximately $2.2 million at the end of the 2009 second quarter. Additionally, at June 30, 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):
Fair Value of Financial Instruments
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Financial Instrument: | | Book Value | | Market Value | | Book Value | | Market Value | |
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6.125% senior subordinated notes, due 2013, gross | | $ | 250,000 | | $ | 226,600 | | $ | 250,000 | | $ | 208,800 | |
6.75% senior subordinated notes, due 2013 | | | 225,000 | | | 203,600 | | | 225,000 | | | 189,000 | |
6.875% senior subordinated notes, due 2015 | | | 525,000 | | | 477,800 | | | 525,000 | | | 446,000 | |
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4.00% junior subordinated convertible debentures, due 2033 | | | | | | | | | | | | | |
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Carrying value | | | 198,030 | | | | | | 197,029 | | | | |
Unamortized debt discount | | | 146,970 | | | | | | 147,971 | | | | |
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Principal amount | | | 345,000 | | | 244,600 | | | 345,000 | | | 250,800 | |
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3.25% convertible senior debentures, due 2035 | | | | | | | | | | | | | |
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Carrying value | | | 759,908 | | | | | | 747,185 | | | | |
Unamortized debt discount | | | 217,592 | | | | | | 230,315 | | | | |
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Principal amount | | | 977,500 | | | 672,000 | | | 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
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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.
(b) There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS
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. On June 9, 2009, the Company filed its appellate brief in the Seventh Circuit Court of Appeals. On July 10, 2009, defendants filed their appellate brief, and on July 23, 2009, the Company filed its reply brief. 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
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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. (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
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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 subsequently stipulated that the Company shall have until September 29, 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 June 24, 2009, the Company reached an agreement in principle, without admitting liability, with the U.S. Attorney’s Office, District of Massachusetts, pursuant to which the Company would pay $98 million plus interest from June 24, 2009 to settle the claims raised in the two sealed complaints, the Maguire, Kammerer and Lisitza complaints and other similar claims. This agreement in principle is subject to approval by the Company’s board of directors and agreement on the terms of the settlement documentation, including with respect to the similar claims referred to above. There can be no assurance as to whether any final settlement will be reached. If any final settlement is reached, there can be no assurance as to the scope, terms or ultimate cost to the Company thereof.
Omnicare recorded a special litigation charge of $23 million and $58 million pretax in its financial results for the three and six months ended June 30, 2009, respectively, 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 $98 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.
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
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regulations to which the Company is subject, including reviews of individual Omnicare pharmacy’s reimbursement documentation and administrative practices.
ITEM 1A - RISK FACTORS
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 increased 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. On May 12, 2009, CMS published its proposed SNF PPS rule for fiscal year 2010 that would reduce Medicare SNF PPS payments by $390 million, or 1.2 percent, compared to fiscal year 2009 levels. CMS is again proposing a recalibration of the case mix weights that would reduce SNF PPS payments by 3.3 percent, which would more than offset a proposed 2.1 percent market basket update. The rule has not yet been finalized. If these or other reimbursement changes are adopted in the future that have an adverse effect on the financial condition of the Company’s SNF clients, it 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 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
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Medicaid programs. In the six months ended June 30, 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 June 30, 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 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
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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.
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
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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. According to a tentative schedule CMS announced at a public meeting on June 4, 2009, while bidding for the new round one of the program will take place later this year, CMS does not expect the program to go into effect until January 1, 2011. 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, many states are facing budget pressures that could result in increased cost containment efforts on healthcare providers. 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 wholesale acquisition cost) 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 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
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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, Congressional action, 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 reviewing the new law and assessing the potential impact of the various provisions on the Company.
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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. Provisions of the rule were repeatedly delayed; currently enforcement is delayed until June 30, 2010. Second, on May 21, 2007, CMS published a 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 would save $120 million during the first year and $3.87 billion over five years, 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 healthcare policy have been proposed by President Obama and are currently under consideration by Congress this year. Specifically, on February 26, 2009, the Obama Administration released its proposed federal budget for fiscal year 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 fiscal year 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 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. Congressional committees currently are considering a variety of comprehensive plans, which are subject to extensive revision during the legislative process before a final plan emerges. Given the ongoing 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.
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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 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 were filed by several entities, and motions to intervene in the case on appeal have also been filed with the appellate court; briefing for the appeal was completed on July 13, 2009 oral
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argument was held on July 28, 2009. The appeal is being considered on expedited basis. Motions for a stay of the District Court’s order pending appeal have not been granted, but such a motion is subject to reconsideration by the panel hearing the appeal. First DataBank and Medi-Span have indicated that they will implement the changes in AWP on September 26, 2009. These changes or their timing may be affected by a decision or stay by the Court of Appeals.
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 Companys 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
(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 June 30, 2009 is as follows (in thousands, except per share data):
| | | | | | | | | | | | | |
| | | | | | | | Total Number | | | | |
| | | | | | | | of Shares | | | | |
| | | | | | | | Purchased as | | Maximum Number (or | |
| | | | | | | | Part of | | Approximate Dollar | |
| | | | | | | | Publicly | | Value) of Shares that | |
| | Total Number | | Average | | Announced | | May Yet Be Purchased | |
| | of Shares | | Price Paid | | Plans or | | Under the Plans or | |
Period | | Purchased(a) | | per Share | | Programs | | Programs | |
| |
| |
| |
| |
| |
April 1 - 30, 2009 | | | 1 | | $ | 25.20 | | | — | | $ | — | |
May 1 - 31, 2009 | | | 97 | | | 27.89 | | | — | | | — | |
June 1 - 30, 2009 | | | 1 | | | 24.93 | | | — | | | — | |
| |
|
| | | | | |
| | | | |
Total | | | 99 | | $ | 27.84 | | | — | | $ | — | |
| |
|
| |
|
| |
|
| |
|
| |
| |
(a) | During the second quarter of 2009, the Company purchased 99 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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ITEM 4. – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Omnicare held its Annual Meeting of Stockholders on May 22, 2009.
(b) The names of each director elected at this Annual Meeting, as well as the corresponding number of shares voted for, against and abstained with respect to each nominee follows. There were no broker non-votes.
| | | | | | | | | | |
| | Votes For | | Votes Against | | Abstained | |
| |
| |
| |
| |
John T. Crotty | | | 94,706,240 | | | 13,512,366 | | | 540,776 | |
Joel F. Gemunder | | | 101,486,214 | | | 6,741,784 | | | 531,384 | |
Steven J. Heyer | | | 96,544,344 | | | 11,673,190 | | | 541,848 | |
Sandra E. Laney | | | 105,166,132 | | | 3,058,471 | | | 534,779 | |
Andrea R. Lindell, Ph.D., RN | | | 94,801,473 | | | 13,404,931 | | | 552,979 | |
James D. Shelton | | | 105,940,348 | | | 2,280,661 | | | 538,373 | |
John H. Timoney | | | 105,699,382 | | | 2,329,660 | | | 730,341 | |
Amy Wallman | | | 105,942,396 | | | 2,280,730 | | | 536,257 | |
(c) The Stockholders approved an amendment of Omnicare’s Annual Incentive Plan for Senior Executive Officers and re-approved the performance criteria thereunder. A total of 94,102,250 votes were cast in favor of the proposal; 14,026,580 votes were cast against it; 630,552 votes abstained; and there were no broker non-votes.
(d) The Stockholders re-approved the performance criteria under the Company’s 2004 Stock and Incentive Plan. A total of 103,377,548 votes were cast in favor of the proposal; 5,012,454 votes were cast against it; 409,380 votes abstained; and there were no broker non-votes.
(e) The Stockholders ratified the appointment by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as independent registered public accountants for the Company and its consolidated subsidiaries for the 2009 year. A total of 105,750,128 votes were cast in favor of the proposal; 2,887,720 votes were cast against it; 121,534 votes abstained; and there were no broker non-votes.
ITEM 6 - EXHIBITS
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.
| | | | |
| | | | Omnicare, Inc. |
| | | |
|
| | | | Registrant |
| | | | |
Date: July 30, 2009 | | By: | /s/ David W. Froesel, Jr. |
| | |
|
| | | David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |
INDEX OF EXHIBITS
| | | |
Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K) | | Document Incorporated by Reference from a Previous Filing, Filed Herewith or Furnished Herewith, as Indicated Below |
| |
|
| | | |
(3.1) | Restated Certificate of Incorporation of Omnicare, Inc. (as amended) | | Form 10-K
March 27, 2003 |
| | | |
(3.3) | Third Amended and Restated By-Laws of Omnicare, Inc. | | Form 8-K
December 23, 2008 |
| | | |
(10.1) | Letter, dated July 27, 2009, to Joel F. Gemunder Regarding Temporary Salary Reduction Program | | Filed Herewith |
| | | |
(10.2) | Letter, dated July 27, 2009, to Patrick E. Keefe Regarding Temporary Salary Reduction Program | | Filed Herewith |
| | | |
(10.3) | Letter, dated July 27, 2009, to David W. Froesel, Jr. Regarding Temporary Salary Reduction Program | | Filed Herewith |
| | | |
(10.4) | Letter, dated July 27, 2009, to Cheryl D. Hodges Regarding Temporary Salary Reduction Program | | Filed Herewith |
| | | |
(10.5) | Letter, dated July 27, 2009, to Jeffrey M. Stamps Regarding Temporary Salary Reduction Program | | Filed Herewith |
| | | |
(12) | Statement of Computation of Ratio of Earnings to Fixed Charges | | Filed Herewith |
| | | |
(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 |
| | | |
(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 |
| | | |
(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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| | | |
Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K) | | Document Incorporated by Reference from a Previous Filing, Filed Herewith or Furnished Herewith, as Indicated Below |
| |
|
| | | |
(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-2
