FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended September 30, 2001
Commission File Number 1-8269
OMNICARE, INC.
Incorporated under the laws of the I.R.S. Employer Identification
State of Delaware No. 31-1001351
100 East RiverCenter Boulevard, Covington, Kentucky 41011
---------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (859) 392-3300
------------------------------------------------------------------
Indicate by check mark whether the registrant:
1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports) and
2) has been subject to such filing requirement for the past 90 days.
Yes X No
----- ------
COMMON STOCK OUTSTANDING
Number of
Shares Date
------ ----
Common Stock, $1 par value 93,421,105 September 30, 2001
OMNICARE, INC. AND
SUBSIDIARY COMPANIES
INDEX
PAGE
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statement of Income -
Three and nine months ended -
September 30, 2001 and 2000 3
Consolidated Balance Sheet -
September 30, 2001 and December 31, 2000 4
Consolidated Statement of Cash Flows -
Nine months ended -
September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 27
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Statement of Income
UNAUDITED
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- -------------- ---------------- ---------------
Sales $ 541,193 $ 491,262 $ 1,594,903 $ 1,464,798
Cost of sales 395,662 361,141 1,167,045 1,075,266
--------- --------- ----------- -----------
Gross profit 145,531 130,121 427,858 389,532
Selling, general and administrative expenses 94,752 90,687 284,758 273,879
Restructuring and other related charges (Note 3) 15,409 4,263 15,409 14,691
Other expense (Note 5) - - 4,817 -
--------- --------- ----------- -----------
Operating income 35,370 35,171 122,874 100,962
Investment income 701 472 1,923 1,288
Interest expense (14,201) (14,204) (42,525) (41,003)
--------- --------- ----------- -----------
Income before income taxes 21,870 21,439 82,272 61,247
Income taxes 8,310 7,930 31,272 22,669
--------- --------- ----------- -----------
Net income $ 13,560 $ 13,509 $ 51,000 $ 38,578
========= ========= =========== ===========
Earnings per share:
Basic $ 0.15 $ 0.15 $ 0.55 $ 0.42
========= ========= =========== ===========
Diluted $ 0.14 $ 0.15 $ 0.54 $ 0.42
========= ========= =========== ===========
Weighted average number of
common shares outstanding:
Basic 93,345 92,160 92,992 91,972
========= ========= =========== ===========
Diluted 94,117 92,160 93,622 91,972
========= ========= =========== ===========
Comprehensive income $ 14,825 $ 13,040 $ 51,750 $ 37,404
========= ========= =========== ===========
The Notes to Consolidated Financial Statements are an integral part of this
statement.
3
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet
UNAUDITED
(In thousands, except share data)
September 30, December 31,
2001 2000
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 124,871 $ 111,607
Restricted cash 6,375 2,300
Accounts receivable, less allowance of $44,363 (2000-$40,497) 445,572 440,785
Unbilled receivables 26,080 18,933
Inventories 164,604 129,404
Deferred income tax benefits 22,593 26,338
Other current assets 103,295 88,371
---------- ----------
Total current assets 893,390 817,738
Properties and equipment, at cost less accumulated
depreciation of $153,217 (2000-$132,308) 154,956 158,535
Goodwill, less accumulated amortization of $140,215 (2000-$115,832) 1,148,080 1,168,151
Other noncurrent assets 78,023 65,794
---------- ----------
Total assets $2,274,449 $2,210,218
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 137,671 $ 118,941
Amounts payable pursuant to acquisition agreements 6,176 4,372
Current debt 308 1,619
Accrued employee compensation 23,508 30,113
Deferred revenue 25,236 28,333
Income taxes payable 7,072 14,238
Other current liabilities 71,517 59,393
---------- ----------
Total current liabilities 271,488 257,009
Long-term debt 40,650 435,706
5.0% convertible subordinated debentures, due 2007 345,000 345,000
8.125% senior subordinated notes, due 2011 375,000 -
Deferred income taxes 78,614 63,579
Amounts payable pursuant to acquisition agreements 6,093 12,675
Other noncurrent liabilities 31,323 27,826
---------- ----------
Total liabilities 1,148,168 1,141,795
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized,
none issued and outstanding - -
Common stock, $1 par value, 200,000,000 shares authorized,
94,271,700 shares issued (2000-92,730,600 shares issued) 94,272 92,731
Paid-in capital 717,062 692,695
Retained earnings 360,345 315,638
---------- ----------
1,171,679 1,101,064
Treasury stock, at cost-850,600 shares (2000-574,200 shares) (16,967) (10,808)
Deferred compensation (26,263) (18,915)
Accumulated other comprehensive income (2,168) (2,918)
---------- ----------
Total stockholders' equity 1,126,281 1,068,423
---------- ----------
Total liabilities and stockholders' equity $2,274,449 $2,210,218
========== ==========
The Notes to Consolidated Financial Statements are an integral part of this
statement.
4
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Statement of Cash Flow
UNAUDITED
(In thousands)
Nine Months Ended
September 30,
------------------------------------
2001 2000
----------------- -----------------
Cash flows from operating activities:
Net income $ 51,000 $ 38,578
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 24,356 24,538
Amortization 30,777 31,416
Provision for doubtful accounts 20,116 19,591
Deferred tax provision 19,805 6,508
Non-cash portion of restructuring charges 1,229 1,860
Changes in assets and liabilities, net of effects from acquisition of
businesses:
Accounts receivable and unbilled receivables (16,683) (16,607)
Inventories (28,655) (5,772)
Current and noncurrent assets (16,523) (14,537)
Accounts payable 9,514 23,734
Accrued employee compensation (5,154) (18,762)
Deferred revenue (3,097) 3,252
Current and noncurrent liabilities 3,177 24,290
----------------- -----------------
Net cash flows from operating activities 89,862 118,089
----------------- -----------------
Cash flows from investing activities:
Acquisition of businesses (16,207) (31,973)
Capital expenditures (19,293) (24,772)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust (4,075) (5,117)
Other 314 320
----------------- -----------------
Net cash flows from investing activities (39,261) (61,542)
----------------- -----------------
Cash flows from financing activities:
Borrowings on line of credit facilities 70,000 -
Payments on line of credit facilities (465,000) (20,000)
Proceeds from long-term borrowings 375,000 -
Principal payments on long-term obligations (2,808) (1,717)
Fees paid for financing arrangements (14,418) (629)
Proceeds from and (payments) for exercise of stock options,
net of stock tendered in payment 6,057 (722)
Dividends paid (6,293) (6,221)
----------------- -----------------
Net cash flows from financing activities (37,462) (29,289)
----------------- -----------------
Effect of exchange rate changes on cash 125 (157)
----------------- -----------------
Net increase in cash and cash equivalents 13,264 27,101
Cash and cash equivalents at beginning of period - unrestricted 111,607 97,267
----------------- -----------------
Cash and cash equivalents at end of period - unrestricted $ 124,871 $ 124,368
================= ==================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
5
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
1. Interim Financial Data
The interim financial data is unaudited; however, in the opinion of the
management of Omnicare, Inc., the interim data includes all adjustments (which
include only normal adjustments, except as described in Notes 3 and 5)
considered necessary for a fair presentation of the consolidated financial
position, results of operations and cash flows of Omnicare, Inc. and its
consolidated subsidiaries ("Omnicare" or the "Company"). These financial
statements should be read in conjunction with the Consolidated Financial
Statements and related notes included in Omnicare's Annual Report on Form 10-K
for the year ended December 31, 2000.
2. Segment Information
Based on the "management approach," as defined by Statement of
Financial Accounting Standards ("SFAS") No. 131, Omnicare has two business
segments. The Company's largest segment is Pharmacy Services. Pharmacy Services
provides distribution of pharmaceuticals, related pharmacy consulting, data
management services and medical supplies to long-term care facilities in 43
states in the United States of America ("USA"). The Company's other reportable
segment is Contract Research Organization ("CRO") Services, which provides
comprehensive product development services to client companies in
pharmaceutical, biotechnology, medical devices and diagnostics industries in 27
countries around the world, including the USA.
The table below presents information about the reportable segments as
of and for the three and nine months ended September 30, 2001 and 2000 (in
thousands):
Three Months Ended September 30,
--------------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2001: Services Services Consolidating Totals
- -------------------------------------------------------------------------------------------------------------------
Sales $ 509,816 $ 31,377 $ - $ 541,193
Depreciation and amortization 17,317 952 450 18,719
Operating income (loss), excluding restructuring
and other related charges 54,914 3,327 (7,462) 50,779
Restructuring and other related charges (6,840) (8,569) - (15,409)
Operating income (loss) 48,074 (5,242) (7,462) 35,370
Total assets 2,000,800 124,885 148,764 2,274,449
Expenditures for additions to long-lived assets 6,839 744 308 7,891
===================================================================================================================
2000:
- -------------------------------------------------------------------------------------------------------------------
Sales $ 464,944 $ 26,318 $ - $ 491,262
Depreciation and amortization 16,006 802 306 17,114
Operating income (loss), excluding restructuring
and other related charges 45,026 1,246 (6,838) 39,434
Restructuring and other related charges (2,326) (1,937) - (4,263)
Operating income (loss) 42,700 (691) (6,838) 35,171
Total assets 1,928,731 122,653 144,926 2,196,310
Expenditures for additions to long-lived assets 6,557 813 1,178 8,548
===================================================================================================================
6
Nine Months Ended September 30,
---------------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2001: Services Services Consolidating Totals
- -------------------------------------------------------------------------------------------------------------------
Sales $ 1,503,395 $ 91,508 $ - $ 1,594,903
Depreciation and amortization 50,907 3,009 1,217 55,133
Operating income (loss), excluding restructuring
and other related charges and other (expenses) 156,441 8,140 (21,481) 143,100
Restructuring and other related charges (6,840) (8,569) - (15,409)
Other (expense) (4,817) - - (4,817)
Operating income (loss) 144,784 (429) (21,481) 122,874
Total assets 2,000,800 124,885 148,764 2,274,449
Expenditures for additions to long-lived assets 17,354 1,118 821 19,293
===================================================================================================================
2000:
- -------------------------------------------------------------------------------------------------------------------
Sales $ 1,378,814 $ 85,984 $ - $ 1,464,798
Depreciation and amortization 52,277 2,834 843 55,954
Operating income (loss), excluding restructuring
and other related charges 131,370 5,020 (20,737) 115,653
Restructuring and other related charges (10,928) (3,763) - (14,691)
Operating income (loss) 120,442 1,257 (20,737) 100,962
Total assets 1,928,731 122,653 144,926 2,196,310
Expenditures for additions to long-lived assets 20,290 2,916 1,566 24,772
===================================================================================================================
3. Restructuring and Other Related Charges
Phase I Program
In 2000, the Company completed its previously disclosed productivity
and consolidation program ("Phase I Program"). As part of the Phase I Program,
the roster of pharmacies and other operating locations was reconfigured through
the consolidation, relocation, closure and opening of sites, resulting in a net
reduction of 59 locations. The Phase I Program also resulted in the reduction of
the Company's work force by 16%, or approximately 1,800 full and part-time
employees, and annualized pretax savings in excess of $46 million upon
completion.
Details of the year-to-date September 30, 2001 and December 31, 2000
activity relating to the Phase I Program follow (in thousands):
Balance at Utilized Balance at
December 31, during September 30,
2000 2001 2001
------------------- ----------------- ------------------
Restructuring accrual:
Employee severance $ 3,390 $ (2,688) $ 702
Employment agreement buy-outs 676 (676) -
Lease terminations 2,593 (1,456) 1,137
Other assets and facility exit costs 2,538 (2,280) 258
------------------- ------------------ ------------------
Total restructuring accrual $ 9,197 $ (7,100) $ 2,097
=================== ================== ==================
7
Balance at Utilized Balance at
December 31, 2000 during December 31,
1999 Provision 2000 2000
------------- ------------- ----------- -------------
Restructuring provision/accrual:
Employee severance $ 8,461 $ 3,296 $ (8,367) $ 3,390
Employment agreement buy-outs 3,363 1,048 (3,735) 676
Lease terminations 4,523 1,881 (3,811) 2,593
Other assets and facility exit costs 1,648 10,627 (9,737) 2,538
------------- ------------- ----------- -------------
Total restructuring provision/accrual $ 17,995 16,852 $ (25,650) $ 9,197
============= =========== =============
Other related charges 10,347
-------------
Total restructuring and other
related charges $ 27,199
=============
In connection with the Phase I Program, Omnicare expensed a total of
$4.3 million and $14.7 million pretax ($2.7 million and $9.3 million after
taxes, or $0.03 and $0.10 per diluted share, respectively) in the three and nine
months ended September 2000, respectively. Additionally, $62.6 million pretax
($39.8 million after taxes) was incurred for restructuring and other related
charges over the duration of the entire Phase I Program (including 1999
activity). The restructuring charges included severance pay, the buy-out of
employment agreements, the buy-out of lease obligations, the write-off of other
assets (representing approximately $11.0 million of pretax non-cash items over
the life of the program) and facility exit costs. The other related charges were
primarily comprised of consulting fees and duplicate costs associated with the
Phase I Program, as well as the write-off of certain non-core healthcare
investments. As of September 30, 2001, the Company paid approximately $22.6
million of severance and other employee-related costs relating to the employee
reductions. The remaining liabilities at September 30, 2001 represent amounts
not yet paid relating to actions taken in connection with the Phase I Program
(primarily severance payments and lease payments), and will be adjusted as these
matters are settled.
Phase II Program
In the third quarter of 2001, the Company announced that it is
implementing a second phase of the productivity and consolidation initiative
(the "Phase II Program"). The Phase II Program is intended to further streamline
operations, increase efficiency and enhance the Company's position as a high
quality, cost-effective provider of pharmaceutical services. Building on the
previous efforts, the Phase II Program will include the merging or closing of
seven pharmacy locations and the reconfiguration in size and function of an
additional 10 locations. Upon completion of the Phase II Program, the Company
expects to have 127 strategically located pharmacy units in 43 states positioned
to deliver the Company's innovative programs and services more efficiently. The
Phase II Program also includes a reduction in occupied building space in certain
locations and the rationalization or reduction of staffing levels in the CRO
business in order to better garner the efficiencies of the integration and
functional reorganization of that business. The Company expects the Phase II
Program measures to lead to a net reduction of approximately 460 employees, or
about 5% of its total workforce, across both the Pharmacy Services and CRO
Services segments.
8
The Phase II Program will result in a pretax restructuring charge of
approximately $24.2 million ($15.0 million aftertax, or $0.16 per diluted
share), of which approximately $3.9 million pretax ($2.4 million aftertax, or
$0.03 per diluted share) will be non-cash items. Approximately $15.4 million
($9.6 million aftertax, or $0.10 per diluted share) was recorded in the third
quarter ending September 30, 2001. The remaining approximately $8.8 million
($5.4 million aftertax, or $0.06 per diluted share) will be taken over the
following four quarters when the amounts are required to be recognized in
accordance with generally accepted accounting principles. The restructuring
charge primarily includes severance pay, lease terminations, the write-off of
leasehold improvements and other assets, and related fees and expenses. Details
of the $15.4 million pretax charge recorded in the third quarter of 2001
relating to the Phase II Program follow (in thousands):
Initial
Provision/
Accrual
---------
Restructuring provision/accrual:
Employee severance $ 4,244
Employment agreement buy-outs 2,054
Lease terminations 2,214
Other assets, fees and facility exit costs 6,897
---------
Total provision/accrual $ 15,409
=========
4. Long-Term Debt
On March 20, 2001, the Company completed the offering of $375.0 million
of 8.125% senior subordinated notes due 2011 (the "Senior Notes"), issued at par
through a private placement. On October 24, 2001, the Company's offer to
exchange the originally issued Senior Notes for Senior Notes which have been
registered under the Securities Act of 1933 expired with all Senior Notes having
been exchanged. Concurrent with the original issuance of the Senior Notes, the
Company entered into a new three-year syndicated $495.0 million revolving credit
facility (the "Revolving Credit Facility"), including a $25.0 million letter of
credit subfacility, with various lenders. Net proceeds from the Senior Notes of
approximately $365.0 million and borrowings under the new credit facility of
$70.0 million were used to repay outstanding indebtedness under the Company's
existing credit facilities, which totaled $435.0 million at December 31, 2000,
and such existing facilities were terminated. Subsequent to the closing of the
Revolving Credit Facility, the Company received commitments from additional
banks that allowed it to increase the size of the Revolving Credit Facility to
$500.0 million. The Revolving Credit Facility bears interest at the Company's
option at a rate equal to either: (i) LIBOR plus a margin that varies depending
on certain ratings on the Company's senior long-term debt; or (ii) the higher of
(a) the administrative agent's prime rate, or (b) the sum of the federal funds
rate plus 0.50%. Additionally, the Company is charged a commitment fee on the
unused portion of the Revolving Credit Facility, which also varies depending on
such ratings. At September 30, 2001, the interest rate was LIBOR plus 1.375% and
the commitment fee was 0.375%. There is no utilization fee associated with the
Revolving Credit Facility.
9
5. Other Expense
Included in the year-to-date September 2001 results are other expense
items totaling $1.8 million pretax ($1.1 million aftertax, or $0.01 per diluted
share) and $3.0 million pretax ($1.9 million aftertax, or $0.02 per diluted
share). The $1.8 million one-time charge recorded in the first quarter of 2001
represents a repayment to the Medicare Part B program of overpayments made to
one of the Company's pharmacy units during the period from January 1997 through
April 1998. As part of its corporate compliance program, the Company learned of
the overpayments, which related to Medicare Part B claims that contained
documentation errors, and notified the Health Care Financing Administration for
review and determination of the amount of overpayment. The $3.0 million one-time
charge recorded in the second quarter of 2001 represents a settlement during
June 2001 of certain contractual issues with a customer, which issues and amount
relate to prior year periods.
6. Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142").
SFAS 141, which supercedes Accounting Principles Board ("APB") Opinion
No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises", requires that all business combinations
entered into after the effective date of July 1, 2001 be accounted for by the
purchase method, defines criteria for recognition of intangible assets apart
from goodwill, and further defines disclosure requirements for business
combinations. Omnicare does not expect this standard to have a significant
impact on the Company's consolidated financial position, results of operations
and cash flows.
SFAS 142, which replaces APB Opinion No. 17, "Intangible Assets",
defines new accounting treatment for goodwill and other intangible assets. This
standard eliminates the amortization of goodwill and other intangible assets
that have indefinite lives, establishes a requirement that goodwill and
intangible assets with indefinite lives be tested annually for impairment,
provides specific guidance on the process for this testing at the reporting unit
level and requires disclosures of information about goodwill and other
intangible assets in the years subsequent to their acquisition that was not
previously required. SFAS 142 is effective for fiscal years beginning after
December 15, 2001, except that goodwill and intangible assets acquired after
June 30, 2001 will be immediately subject to the new provisions. The Company is
currently evaluating the impact of this new standard on Omnicare's consolidated
financial position, results of operations and cash flows. However, based on a
preliminary assessment, it is anticipated that this new standard will serve to
increase the Company's pretax earnings by approximately $32 million to $33
million (or approximately $20 million aftertax, or $0.21 per diluted share).
Additionally, the results of a preliminary impairment analysis suggest that no
adjustment to the carrying value of goodwill will be necessary as a change in
accounting principle upon initial adoption of SFAS 142 in 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is not applicable to the Company.
10
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144, supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121") and amends APB Opinion No. 30,
"Reporting Results of Operations-Reporting the Effects of Disposal of a Segment
of a Business" ("APB 30"). This statement develops one accounting model (based
on the model in SFAS 121) for long-lived assets that are disposed of by sale, as
well as addresses the principal implementation issues. It eliminates APB 30's
requirement that discontinued operations be measured at net realizable value or
that entities include under "discontinued operations" in the financial
statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. This statement is effective for fiscal
years beginning after December 15, 2001. Management does not expect this
standard to have any material impact on the Company's consolidated financial
position, results of operations and cash flows.
7. Guarantor Subsidiaries
The Company's Senior Notes 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
September 30, 2001 and December 31, 2000 for the balance sheet, the statement of
income for each of the three and nine month periods ended September 30, 2001 and
2000, and the statement of cash flows for the nine months ended September 30,
2001 and 2000 (in thousands). Separate complete financial statements of the
respective Guarantor Subsidiaries would not provide additional information which
would be useful in assessing the financial condition of the Guarantor
Subsidiaries and thus are not presented. No eliminations column is presented for
the condensed consolidating statement of cash flows since there were no
significant eliminating amounts during the periods presented.
11
Summary Consolidating Statement of Income
Three Months Ended September 30,
----------------------------------------------------------------------------
Omnicare, Inc.
Guarantor Non-Guarantor and
2001: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ -- $ 518,609 $ 34,035 $ (11,451) $ 541,193
Cost of sales -- 378,454 28,659 (11,451) 395,662
--------- --------- --------- --------- ---------
Gross profit -- 140,155 5,376 -- 145,531
Selling, general and administrative expenses 4,337 85,510 4,905 -- 94,752
Restructuring and other related charges -- 15,409 -- -- 15,409
--------- --------- --------- --------- ---------
Operating income (loss) (4,337) 39,236 471 -- 35,370
Investment income 383 258 60 -- 701
Interest expense (13,467) (529) (205) -- (14,201)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (17,421) 38,965 326 -- 21,870
Income taxes (6,620) 14,806 124 -- 8,310
Equity in net income of subsidiaries 24,361 -- -- (24,361) --
--------- --------- --------- --------- ---------
Net income $ 13,560 $ 24,159 $ 202 $ (24,361) $ 13,560
============================================================================================================================
2000:
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ -- $ 467,194 $ 37,776 $ (13,708) $ 491,262
Cost of sales -- 342,827 32,022 (13,708) 361,141
--------- --------- --------- --------- ---------
Gross profit -- 124,367 5,754 -- 130,121
Selling, general and administrative expenses 3,016 80,790 6,881 -- 90,687
Restructuring and other related charges -- 3,920 343 -- 4,263
--------- --------- --------- --------- ---------
Operating income (loss) (3,016) 39,657 (1,470) -- 35,171
Investment income 435 (74) 111 -- 472
Interest expense (13,880) (296) (28) -- (14,204)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (16,461) 39,287 (1,387) -- 21,439
Income taxes (6,090) 14,255 (235) -- 7,930
Equity in net income of subsidiaries 23,880 -- -- (23,880) --
--------- --------- --------- --------- ---------
Net income $ 13,509 $ 25,032 $ (1,152) $ (23,880) $ 13,509
============================================================================================================================
12
Summary Consolidating Statement of Income
Nine Months Ended September 30,
---------------------------------------------------------------------------
Omnicare, Inc.
Guarantor Non-Guarantor and
2001: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Sales $ -- $ 1,526,573 $ 118,508 $ (50,178) $ 1,594,903
Cost of sales -- 1,113,713 103,510 (50,178) 1,167,045
----------- ----------- ----------- ----------- -----------
Gross profit -- 412,860 14,998 -- 427,858
Selling, general and administrative expenses 12,282 255,195 17,281 -- 284,758
Restructuring and other related charges -- 15,409 -- -- 15,409
Other expense -- 4,817 -- -- 4,817
----------- ----------- ----------- ----------- -----------
Operating income (loss) (12,282) 137,439 (2,283) -- 122,874
Investment income 1,395 355 173 -- 1,923
Interest expense (40,485) (1,415) (625) -- (42,525)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (51,372) 136,379 (2,735) -- 82,272
Income taxes (19,521) 51,677 (884) -- 31,272
Equity in net income of subsidiaries 82,851 -- -- (82,851) --
----------- ----------- ----------- ----------- -----------
Net income $ 51,000 $ 84,702 $ (1,851) $ (82,851) $ 51,000
============================================================================================================================
2000:
- ----------------------------------------------------------------------------------------------------------------------------
Sales $ -- $ 1,392,055 $ 118,970 $ (46,227) $ 1,464,798
Cost of sales -- 1,020,455 101,038 (46,227) 1,075,266
----------- ----------- ----------- ----------- -----------
Gross profit -- 371,600 17,932 -- 389,532
Selling, general and administrative expenses 9,219 243,237 21,423 -- 273,879
Restructuring and other related charges -- 13,584 1,107 -- 14,691
----------- ----------- ----------- ----------- -----------
Operating income (loss) (9,219) 114,779 (4,598) -- 100,962
Investment income 1,216 (170) 242 -- 1,288
Interest expense (40,379) (497) (127) -- (41,003)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (48,382) 114,112 (4,483) -- 61,247
Income taxes (17,901) 41,284 (714) -- 22,669
Equity in net income of subsidiaries 69,059 -- -- (69,059) --
----------- ----------- ----------- ----------- -----------
Net income $ 38,578 $ 72,828 $ (3,769) $ (69,059) $ 38,578
============================================================================================================================
13
Condensed Consolidating Balance Sheet
Omnicare, Inc.
Guarantor Non-Guarantor and
September 30, 2001 Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 81,519 $ 36,842 $ 6,510 $ -- $ 124,871
Restricted cash -- 6,375 -- -- 6,375
Accounts receivable, net (including intercompany) -- 433,877 25,864 (14,169) 445,572
Inventories -- 159,653 4,951 -- 164,604
Other current assets 1,370 149,581 1,017 -- 151,968
----------- ----------- ----------- ----------- -----------
Total current assets 82,889 786,328 38,342 (14,169) 893,390
----------- ----------- ----------- ----------- -----------
Properties and equipment, net 3,226 139,737 11,993 -- 154,956
Goodwill, net -- 1,084,037 64,043 -- 1,148,080
Other noncurrent assets 32,086 45,680 257 -- 78,023
Investment in subsidiaries 1,786,838 -- -- (1,786,838) --
----------- ----------- ----------- ----------- -----------
Total assets $ 1,905,039 $ 2,055,782 $ 114,635 $(1,801,007) $ 2,274,449
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other current liabilities (including intercompany) $ 17,952 $ 246,029 $ 21,676 $ (14,169) $ 271,488
----------- ----------- ----------- ----------- -----------
Total current liabilities 17,952 246,029 21,676 (14,169) 271,488
----------- ----------- ----------- ----------- -----------
Long-term debt 40,000 589 61 -- 40,650
5.0% convertible subordinated debentures, due 2007 345,000 -- -- -- 345,000
8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000
Other noncurrent liabilities 806 114,814 410 -- 116,030
Stockholders' equity 1,126,281 1,694,350 92,488 (1,786,838) 1,126,281
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,905,039 $ 2,055,782 $ 114,635 $(1,801,007) $ 2,274,449
=============================================================================================================================
December 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 48,663 $ 59,274 $ 3,670 $ -- $ 111,607
Restricted cash -- 2,300 -- -- 2,300
Accounts receivable, net (including intercompany) -- 433,061 30,150 (22,426) 440,785
Inventories -- 120,519 8,885 -- 129,404
Other current assets 580 127,341 5,721 -- 133,642
----------- ----------- ----------- ----------- -----------
Total current assets 49,243 742,495 48,426 (22,426) 817,738
----------- ----------- ----------- ----------- -----------
Properties and equipment, net 4,277 141,429 12,829 -- 158,535
Goodwill, net -- 1,101,120 67,031 -- 1,168,151
Other noncurrent assets 29,640 35,251 903 -- 65,794
Investment in subsidiaries 1,778,655 -- -- (1,778,655) --
----------- ----------- ----------- ----------- -----------
Total assets $ 1,861,815 $ 2,020,295 $ 129,189 $(1,801,081) $ 2,210,218
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other current liabilities (including intercompany) $ 12,716 $ 230,415 $ 36,304 $ (22,426) $ 257,009
----------- ----------- ----------- ----------- -----------
Total current liabilities 12,716 230,415 36,304 (22,426) 257,009
----------- ----------- ----------- ----------- -----------
Long-term debt 435,000 633 73 -- 435,706
5.0% convertible subordinated debentures, due 2007 345,000 -- -- -- 345,000
Other noncurrent liabilities 676 102,405 999 -- 104,080
Stockholders' equity 1,068,423 1,686,842 91,813 (1,778,655) 1,068,423
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,861,815 $ 2,020,295 $ 129,189 $(1,801,081) $ 2,210,218
=============================================================================================================================
14
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30,
---------------------------------------------------------
Omnicare, Inc.
Guarantor Non-Guarantor and
2001: Parent Subsidiaries Subsidiaries Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 19,092 $ 1,024 $ 20,116
Other (55,848) 121,317 4,277 69,746
--------- --------- --------- ---------
Net cash flows from operating activities (55,848) 140,409 5,301 89,862
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (16,207) -- (16,207)
Capital expenditures (703) (16,102) (2,488) (19,293)
Transfer of cash to trusts for employee health and severance --
costs, net of payments out of the trust -- (4,075) -- (4,075)
Other -- 162 152 314
--------- --------- --------- ---------
Net cash flows from investing activities (703) (36,222) (2,336) (39,261)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 70,000 -- -- 70,000
Payments on line of credit facilities (465,000) -- -- (465,000)
Proceeds from long-term borrowings 375,000 -- -- 375,000
Fees paid for financing arrangements (14,418) -- -- (14,418)
Other 123,825 (126,619) (250) (3,044)
--------- --------- --------- ---------
Net cash flows from financing activities 89,407 (126,619) (250) (37,462)
--------- --------- --------- ---------
Effect of exchange rate changes on cash -- -- 125 125
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 32,856 (22,432) 2,840 13,264
Cash and cash equivalents at beginning of period - unrestricted 48,663 59,274 3,670 111,607
--------- --------- --------- ---------
Cash and cash equivalents at end of period - unrestricted $ 81,519 $ 36,842 $ 6,510 $ 124,871
===========================================================================================================================
2000:
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 18,588 $ 1,003 $ 19,591
Other (36,770) 133,391 1,877 98,498
--------- --------- --------- ---------
Net cash flows from operating activities (36,770) 151,979 2,880 118,089
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (31,973) -- (31,973)
Capital expenditures (1,211) (21,252) (2,309) (24,772)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (5,117) -- (5,117)
Other -- 734 (414) 320
--------- --------- --------- ---------
Net cash flows from investing activities (1,211) (57,608) (2,723) (61,542)
--------- --------- --------- ---------
Cash flows from financing activities:
Payments on line of credit facilities (20,000) -- -- (20,000)
Other 68,595 (77,885) 1 (9,289)
--------- --------- --------- ---------
Net cash flows from financing activities 48,595 (77,885) 1 (29,289)
--------- --------- --------- ---------
Effect of exchange rate changes on cash -- -- (157) (157)
--------- --------- --------- ---------
Net increase in cash and cash equivalents 10,614 16,486 1 27,101
Cash and cash equivalents at beginning of period - unrestricted 52,009 39,274 5,984 97,267
--------- --------- --------- ---------
Cash and cash equivalents at end of period - unrestricted $ 62,623 $ 55,760 $ 5,985 $ 124,368
===========================================================================================================================
15
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion should be read in conjunction with the
consolidated financial statements, related notes and other financial information
appearing elsewhere in this Filing. In addition, consideration should be given
to the disclosures at the "Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995 Regarding Forward-Looking Information" caption
below.
Results of Operations
Quarter Ended September 30, 2001 vs. 2000
Consolidated
Diluted earnings per share for the three months ended September 30,
2001 were $0.14 versus $0.15 earned in the same prior year period, including the
impact of restructuring and other related charges in both periods, as discussed
below. Net income for the 2001 third quarter was $13.6 million versus $13.5
million earned in the comparable 2000 period. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") totaled $54.1 million for the three
months ended September 30, 2001 as compared with EBITDA of $52.3 million in the
same period of 2000. Sales for the three months ended September 30, 2001 rose to
$541.2 million from the $491.3 million recorded in the comparable prior year
period.
Diluted earnings per share for the third quarter of 2001 were $0.25,
excluding the impact of restructuring charges associated with the second phase
of a productivity and consolidation initiative (the "Phase II Program"), as
compared with $0.18 earned in the prior year quarter, excluding restructuring
and other related charges associated with a productivity and consolidation
initiative completed in 2000 (the "Phase I Program"). The Phase I Program and
the Phase II Program are further discussed at the "Restructuring and Other
Related Charges" section of the "Year-to-Date September 2001 vs. 2000" caption
below. Net income for the 2001 third quarter, on that basis, was $23.1 million
versus the $16.2 million earned in the comparable 2000 quarter. EBITDA, on the
same basis, totaled $69.5 million for the three months ended September 30, 2001
as compared with $56.5 million in the third quarter of 2000.
Included in the 2001 and 2000 third quarters were charges of $15.4
million and $4.3 million pretax ($9.6 million and $2.7 million aftertax, or
$0.10 and $0.03 per diluted share, respectively) related to the Phase II and
Phase I productivity and consolidation programs, respectively.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $509.8 million
for the third quarter of 2001 as compared to $464.9 million recorded in the same
prior year period, representing an increase of $44.9 million. Operating profit
in this segment reached $54.9 million, representing an increase of $9.9 million
above the prior year quarter amount of $45.0 million (excluding restructuring
and other related charges from both periods). Owing to the efforts of the
Company's National Sales & Marketing Group and pharmacy staff in developing new
contracts, net of the elimination of certain high credit risk or uneconomic
accounts, the
16
number of residents served at September 30, 2001 increased to approximately
655,400, from 631,500 one year earlier. Additionally, the continued
implementation of the Company's clinical programs along with the increasing
market penetration of newer drugs, which often carry higher prices but are
significantly more effective in reducing overall healthcare costs than those
they replace, served to increase pharmacy sales. The increase in sales in
relation to a lower operating cost structure brought about by the completion of
the Phase I productivity and consolidation program in 2000, produced increased
operating margins in the Pharmacy Services segment. These factors, along with a
gradually improving operating environment in the skilled nursing facility
market, due in part to higher reimbursements under the Balanced Budget
Refinement Act of 1999 and the Benefits Improvement and Protection Act of 2000,
favorably impacted the performance of the Pharmacy Services segment during the
quarter.
CRO Services Segment
Omnicare's Clinical Research ("CRO Services") segment recorded revenues
of $31.4 million during the third quarter of 2001 as compared to $26.3 million
recorded in the same prior year period, representing an increase of $5.1
million. Furthermore, operating profit in this segment for the third quarter of
2001 was $3.3 million, an increase of $2.1 million in comparison to the same
prior year quarter operating profit of $1.2 million (excluding restructuring and
other related charges from both periods). The improvements in revenue, owing to
strong business gains in prior quarters and the recovery of the overall drug
research market, coupled with efforts made to integrate and streamline the
organization, produced these substantial increases in profitability. Given an
improved operating environment in the CRO Services segment due, in part, to
reduced merger activity in the pharmaceutical industry, the backlog of new
projects increased approximately 9% from September 30, 2000, to approximately
$191 million at September 30, 2001.
Consolidated
The Company's consolidated gross profit as a percentage of sales
increased to 26.9% in the third quarter of 2001 from 26.5% in 2000, representing
a year-to-year increase in gross profit of $15.4 million to $145.5 million.
Positively impacting overall gross profit was the Company's purchasing leverage
associated with the procurement of pharmaceuticals and benefits realized from
the Company's formulary compliance program, as well as the leveraging of fixed
and variable overhead costs at the Company's pharmacies and the reduced cost
structure brought about by the Phase I productivity and consolidation program
completed in 2000. These favorable factors were offset in part by the previously
mentioned shift in mix towards newer, branded drugs which typically produce
higher gross profit, but lower gross profit margins.
Omnicare's selling, general and administrative ("operating") expenses
for the quarter ended September 30, 2001 of $94.8 million were higher than the
comparable prior year amount of $90.7 million, by $4.1 million, due to the
overall growth of the business. However, operating expenses as a percentage of
sales totaled 17.5% in the 2001 third quarter, representing a decline from the
18.5% experienced in the comparable prior year period. This decline is primarily
due to improved leveraging of fixed and variable overhead costs over a higher
sales base in the 2001 third quarter, and the year-over-year favorable impact of
the Phase I productivity and consolidation program which was successfully
completed in late 2000.
17
Investment income for the three months ended September 30, 2001 was
$0.7 million, an improvement of $0.2 million over the same period of 2000.
Larger average invested cash balances in the third quarter of 2001 versus the
comparable prior year period was the primary driver of the year-to-year increase
in investment income.
Interest expense for the three months ended September 30, 2001 of
$14.2 million was consistent with the comparable prior year quarter.
The increase in the effective tax rate to 38.0% in the third quarter of
2001 from 37.0% in the comparable prior year quarter is primarily attributable
to the full utilization in 2000 of certain benefits derived from the Company's
state tax planning program. While other state tax planning benefits will
continue, they will be realized at a different magnitude than was the case in
2000. The effective tax rates in the 2001 and 2000 third quarters are higher
than the federal statutory rate primarily due to state and local income taxes.
In connection with the Phase I and Phase II productivity and
consolidation programs discussed at the "Restructuring and Other Related
Charges" section of the "Year-to-Date September 2001 vs. 2000" caption below,
the Company recorded pretax restructuring and other related charges of $15.4
million and $4.3 million ($9.6 million and $2.7 million aftertax, or $0.10 and
$0.03 per diluted share, respectively) in the three months ended September 30,
2001 and 2000, respectively, primarily comprised of employee severance,
employment agreement buy-out costs, lease termination costs, other assets, fees
and facility exit costs, and other related charges.
Year-to-Date September 2001 vs. 2000
Consolidated
Diluted earnings per share were $0.54 for the nine months ended
September 30, 2001 versus $0.42 in the comparable period in 2000, including
restructuring and other related charges in both periods, as well as other
expense in the 2001 period. Net income for the year-to-date September 2001
period was $51.0 million versus $38.6 million in the same period of 2000. EBITDA
for the nine months ended September 30, 2001 was $178.0 million in comparison
to $156.9 million during the 2000 period. Sales for the year-to-date
September 30, 2001 period rose to $1,594.9 million from the $1,464.8 million
recorded during the comparable prior year period.
Diluted earnings per share for the nine months ended September 30, 2001
were $0.68, excluding the impact of one-time items classified as other expense
from the 2001 period and excluding restructuring and other related charges from
both periods, further discussed below, as compared with $0.52 earned in the
prior year period. Net income for the 2001 period, on that basis, was $63.5
million versus the $47.8 million earned in the comparable 2000 period. EBITDA,
on the same basis, totaled $198.2 million for the nine months ended September
30, 2001 as compared with $171.6 million in the same period of 2000.
Included in the year-to-date September 2001 results were other expense
items totaling $4.8 million pretax ($3.0 million aftertax, or $0.03 per diluted
share). In the first quarter of 2001, Omnicare recorded a $1.8 million pretax
($1.1 million aftertax, or $0.01 per diluted share)
18
one-time charge representing a repayment to the Medicare Part B program of
overpayments made to one of the Company's pharmacy units during the period from
January 1997 through April 1998. As part of its corporate compliance program,
the Company learned of the overpayments, which related to Medicare Part B claims
that contained documentation errors, and notified the Health Care Financing
Administration for review and determination of the amount of overpayment.
Further, the Company recorded a $3.0 million pretax ($1.9 million aftertax, or
$0.02 per diluted share) one-time charge in the second quarter of 2001,
representing a settlement in June 2001 of certain contractual issues with a
customer, which issues and amount relate to prior year periods.
Included in the 2001 and 2000 nine month periods were aggregate charges
of $15.4 million and $14.7 million pretax ($9.6 million and $9.3 million
aftertax, or $0.10 and $0.10 per diluted share, respectively) relating to the
Phase I and Phase II Programs, respectively.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $1,503.4 million
for the nine months ended September 30, 2001, ahead of the comparable prior-year
period amount of $1,378.8 million, by $124.6 million. Operating profit in this
segment reached $156.4 million, also ahead of the same prior-year period amount
of $131.4 million, by $25.0 million (excluding restructuring and other related
charges from both periods, as well as the previously mentioned one-time charges
from the 2001 period). The favorable year-to-year results largely relate to new
account growth owing to the efforts of the Company's National Sales & Marketing
Group and pharmacy staff in developing new contracts, net of the elimination of
certain high credit risk or uneconomic accounts. Additionally, higher drug
utilization, the expansion of clinical programs and drug price inflation
contributed to increased sales. Moreover, the increasing market penetration of
newer drugs, which often carry higher prices but are significantly more
effective in reducing overall healthcare costs than those they replace, served
to increase pharmacy sales. The increase in sales, in addition to a lower
operating cost structure brought about by the completion of the Phase I Program
in 2000, served to produce increased operating margins. Collectively, these
factors along with a gradually improving operating environment in the skilled
nursing facility market brought about by the implementation of the Balanced
Budget Refinement Act of 1999 and the Benefits Improvement and Protection Act of
2000, favorably impacted the performance of the Pharmacy Services segment during
the nine-month period.
CRO Services Segment
Omnicare's CRO Services segment recorded revenues of $91.5 million
during the nine months ended September 30, 2001, which were $5.5 million greater
than the $86.0 million recorded in the same prior year period. Operating profit
in this segment for the nine months ended September 30, 2001 was $8.1 million,
an increase of $3.1 million in comparison to the same prior year period
operating profit of $5.0 million (excluding restructuring and other related
charges from both periods). The year-to-date September 2001 improvement in
revenues and operating profit is the result of several favorable trends
experienced in the second and third quarters of 2001. These trends included
improvements in revenue, owing to strong business gains in prior quarters and
the recovery of the overall drug research market, coupled with efforts made
to integrate and streamline the organization, producing substantial increases
in profitability in the second and third quarters of 2001.
19
Consolidated
The Company's consolidated gross profit as a percentage of sales of
26.8% in the nine months ended September 30, 2001 improved as compared with the
rate of 26.6% experienced during the year-to-date September 30, 2000 period, and
represented a year-to-year increase in gross profit of approximately $38.3
million to $427.9 million. Positively impacting overall gross profit was the
Company's purchasing leverage associated with the procurement of pharmaceuticals
and benefits realized from the Company's formulary compliance program, as well
as the leveraging of fixed and variable overhead costs at the Company's
pharmacies and the full period impact of the reduced cost structure brought
about by the Phase I productivity and consolidation program completed in 2000.
These favorable factors were offset in part by the previously mentioned shift in
mix towards newer, branded drugs which typically produce higher gross profit,
but lower gross profit margins.
Omnicare's operating expenses for the nine months ended September 30,
2001 of $284.8 million were higher than the comparable prior year amount of
$273.9 million, by $10.9 million, due to the overall growth of the business.
Operating expenses as a percentage of sales, however, totaled 17.9% in the 2001
nine month period, representing a decline from the 18.7% experienced in the
comparable prior year period. This decline is primarily due to the full period
favorable impact of the Phase I productivity and consolidation program, which
was successfully completed in late 2000, the leveraging of fixed and variable
overhead costs over a larger sales base in 2001 than that which existed in the
comparable 2000 period, and the integration and streamlining of the CRO
business.
Investment income for the nine months ended September 30, 2001 was $1.9
million, an improvement of $0.6 million over the same period of 2000. Larger
average invested cash balances during 2001 as compared to the same 2000 period
was the primary driver of the year-to-year increase in investment income.
Interest expense during the nine months ended September 30, 2001 was
$42.5 million, an increase of $1.5 million versus the comparable prior year
period. This increase was largely due to the impact of an increase in debt
issuance cost amortization, classified as interest expense, relating to the
first quarter 2001 debt transactions discussed at the "Liquidity and Capital
Resources" section below. Also unfavorably impacting 2001 interest expense, on a
year-to-year basis, was a marginal increase in the weighted-average interest
rates paid on outstanding debt brought about by the aforementioned debt
transactions, which converted a majority of the related outstanding debt from
current to long-term in maturity.
The increase in the effective tax rate to 38.0% in the year-to-date
September 2001 period from 37.0% in the comparable prior year period is
primarily attributable to the full utilization in 2000 of certain benefits
derived from the Company's state tax planning program. While other state tax
planning benefits will continue, they will be realized at a different magnitude
than was the case in 2000. The effective tax rates in the 2001 and 2000 nine
months periods are higher than the federal statutory rate primarily due to state
and local income taxes.
20
Restructuring and Other Related Charges
Phase I Program
In 2000, the Company completed the Phase I Program. As part of the
Phase I Program, the roster of pharmacies and other operating locations was
reconfigured through the consolidation, relocation, closure and opening of
sites, resulting in a net reduction of 59 locations. The Phase I Program also
resulted in the reduction of the Company's work force by 16%, or approximately
1,800 full and part-time employees, and annualized pretax savings in excess of
$46 million upon completion.
Details of the year-to-date September 30, 2001 and December 31, 2000
activity relating to the Phase I Program follow (in thousands):
Balance at Utilized Balance at
December 31, during September 30,
2000 2001 2001
------------ -------- -------------
Restructuring accrual:
Employee severance $ 3,390 $ (2,688) $ 702
Employment agreement buy-outs 676 (676) -
Lease terminations 2,593 (1,456) 1,137
Other assets and facility exit costs 2,538 (2,280) 258
------- -------- --------
Total restructuring accrual $ 9,197 $ (7,100) $ 2,097
======= ======== ========
Balance at Utilized Balance at
December 31, 2000 during December 31,
1999 Provision 2000 2000
------------ --------- -------- ------------
Restructuring provision/accrual:
Employee severance $ 8,461 $ 3,296 $ (8,367) $ 3,390
Employment agreement buy-outs 3,363 1,048 (3,735) 676
Lease terminations 4,523 1,881 (3,811) 2,593
Other assets and facility exit costs 1,648 10,627 (9,737) 2,538
-------- -------- --------- -------
Total restructuring provision/accrual $ 17,995 16,852 $ (25,650) $ 9,197
======== ========= =======
Other related charges 10,347
--------
Total restructuring and other
related charges $ 27,199
========
In connection with the Phase I Program, Omnicare expensed a total of
$4.3 million and $14.7 million pretax ($2.7 million and $9.3 million after
taxes, or $0.03 and $0.10 per diluted share, respectively) in the three and nine
months ended September 2000, respectively. Additionally, $62.6 million pretax
($39.8 million after taxes) was incurred for restructuring and other related
charges over the duration of the entire Phase I Program (including 1999
activity). The restructuring charges included severance pay, the buy-out of
employment agreements, the buy-out of lease obligations, the write-off of other
assets (representing approximately $11.0 million of pretax non-cash items over
the life of the program) and facility exit costs. The other related charges were
primarily comprised of consulting fees and duplicate costs associated with
21
the Phase I Program, as well as the write-off of certain non-core healthcare
investments. As of September 30, 2001, the Company paid approximately $22.6
million of severance and other employee-related costs relating to the employee
reductions. The remaining liabilities at September 30, 2001 represent amounts
not yet paid relating to actions taken in connection with the Phase I Program
(primarily severance payments and lease payments), and will be adjusted as these
matters are settled.
Phase II Program
In the third quarter of 2001, the Company announced that it is
implementing the Phase II Program. The Phase II Program is intended to further
streamline operations, increase efficiency and enhance the Company's position as
a high quality, cost-effective provider of pharmaceutical services. Building on
the previous efforts, the Phase II Program will include the merging or closing
of seven pharmacy locations and the reconfiguration in size and function of an
additional 10 locations. Upon completion of the Phase II Program, the Company
expects to have 127 strategically located pharmacy units in 43 states positioned
to deliver the Company's innovative programs and services more efficiently. The
Phase II Program also includes a reduction in occupied building space in certain
locations and the rationalization or reduction of staffing levels in the CRO
business in order to better garner the efficiencies of the integration and
functional reorganization of that business. The Company expects the Phase II
Program measures to lead to a net reduction of approximately 460 employees, or
about 5% of its total workforce, across both the Pharmacy Services and CRO
Services segments.
The Phase II Program is expected to generate approximately $17.0
million in annual savings on a pretax basis ($10.5 million aftertax) upon full
implementation. It will result in a pretax restructuring charge of approximately
$24.2 million ($15.0 million aftertax, or $0.16 per diluted share), of which
approximately $3.9 million pretax ($2.4 million aftertax, or $0.03 per diluted
share) will be non-cash items. Approximately $15.4 million ($9.6 million
aftertax, or $0.10 per diluted share) was recorded in the third quarter ending
September 30, 2001. The remaining approximately $8.8 million ($5.4 million
aftertax, or $0.06 per diluted share) will be taken over the following four
quarters when the amounts are required to be recognized in accordance with
generally accepted accounting principles. The restructuring charge primarily
includes severance pay, lease terminations, the write-off of leasehold
improvements and other assets, and related fees and expenses. Details of the
$15.4 million pretax charge recorded in the third quarter of 2001 relating to
the Phase II Program follow (in thousands):
Initial
Provision/
Accrual
----------
Restructuring provision/accrual:
Employee severance $ 4,244
Employment agreement buy-outs 2,054
Lease terminations 2,214
Other assets, fees and facility exit costs 6,897
--------
Total provision/accrual $ 15,409
========
22
Liquidity and Capital Resources
Cash and cash equivalents (including restricted cash of $6,375) at
September 30, 2001 were $131.2 million compared to $113.9 million at
December 31, 2000. The Company generated positive net cash flows from
operating activities of $89.9 million (including the impact of purchasing
pharmaceuticals in advance of price increases, or "prebuys," of $58.5 million,
of which $24.4 million occurred in the third quarter of 2001) during the nine
months ended September 30, 2001. These funds were used primarily for debt
repayment, debt issuance costs, capital expenditures, acquisition-related
payments (including amounts payable pursuant to acquisition agreements
relating to pre-2001 acquisitions) and dividends. Higher net income primarily
contributed to the favorable cash flows from operations through
September 30, 2001.
On March 20, 2001, the Company completed the offering of $375.0 million
of 8.125% senior subordinated notes due 2011 (the "Senior Notes"), issued at par
through a private placement. On October 24, 2001, the Company's offer to
exchange the originally issued Senior Notes for Senior Notes which have been
registered under the Securities Act of 1933 expired with all Senior Notes having
been exchanged. Concurrent with the original issuance of the Senior Notes, the
Company entered into a new three-year syndicated $495.0 million revolving credit
facility (the "Revolving Credit Facility"), including a $25.0 million letter of
credit subfacility, with various lenders. Net proceeds from the Senior Notes of
approximately $365.0 million and borrowings under the new credit facility of
$70.0 million were used to repay outstanding indebtedness under the Company's
existing credit facilities, which totaled $435.0 million at December 31, 2000,
and such existing facilities were terminated. Subsequent to the closing of the
Revolving Credit Facility, the Company received commitments from additional
banks that allowed it to increase the size of the Revolving Credit Facility to
$500.0 million. As of September 30, 2001, the Revolving Credit Facility bears an
interest rate of LIBOR plus 1.375%, incurs commitment fees on the unused portion
at a rate of 0.375% and has no utilization fee.
The Company's capital requirements are primarily comprised of capital
expenditures, including those related to investments in the Company's
information technology systems, and ongoing payments originating from its
acquisition program. There are no material commitments and contingencies
outstanding at September 30, 2001, other than certain acquisition-related
payments potentially due in the future, including deferred payments,
indemnification payments and payments originating from earnout provisions.
The Company's current ratio of 3.3 to 1.0 at September 30, 2001
increased as compared to the 3.2 to 1.0 in existence at December 31, 2000. This
improvement is due primarily to the combined effect of higher cash balances and
inventory levels (due to prebuys), at September 30, 2001 than existed at
December 31, 2000, funded from the aforementioned favorable operating cash flows
experienced during the nine months ended September 30, 2001.
On August 1, 2001, the Company's Board of Directors declared a
quarterly cash dividend of 2.25 cents per share for an indicated annual rate of
9 cents per share in 2001. Dividends of $6.3 million paid during the nine months
ended September 30, 2001 were relatively consistent with those paid in the
comparable prior year period.
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The Company believes its sources of liquidity and capital are adequate
for its ongoing operating needs. Omnicare may in the future incur additional
indebtedness or issue additional equity. The Company believes that, if needed,
external sources of financing are readily available.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142").
SFAS 141, which supercedes Accounting Principles Board ("APB") Opinion
No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises", requires that all business combinations
entered into after the effective date of July 1, 2001 be accounted for by the
purchase method, defines criteria for recognition of intangible assets apart
from goodwill, and further defines disclosure requirements for business
combinations. Omnicare does not expect this standard to have a significant
impact on the Company's consolidated financial position, results of operations
and cash flows.
SFAS 142, which replaces APB Opinion No. 17, "Intangible Assets,"
defines new accounting treatment for goodwill and other intangible assets. This
standard eliminates the amortization of goodwill and other intangible assets
that have indefinite lives, establishes a requirement that goodwill and
intangible assets with indefinite lives be tested annually for impairment,
provides specific guidance on the process for this testing at the reporting unit
level and requires disclosures of information about goodwill and other
intangible assets in the years subsequent to their acquisition that was not
previously required. SFAS 142 is effective for fiscal years beginning after
December 15, 2001, except that goodwill and intangible assets acquired after
June 30, 2001 will be immediately subject to the new provisions. The Company is
currently evaluating the impact of this new standard on Omnicare's consolidated
financial position, results of operations and cash flows. However, based on a
preliminary assessment, it is anticipated that this new standard will serve to
increase the Company's pretax earnings by approximately $32 million to $33
million (or approximately $20 million aftertax, or $0.21 per diluted share).
Additionally, the results of a preliminary impairment analysis suggest that no
adjustment to the carrying value of goodwill will be necessary as a change in
accounting principle upon initial adoption of SFAS 142 in 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is not applicable to the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144, supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121") and amends APB Opinion No. 30,
"Reporting Results of Operations-Reporting the Effects of Disposal of a Segment
of a Business" ("APB 30"). This statement develops one accounting model (based
on the model in SFAS 121) for long-lived assets that are disposed of by sale, as
well as addresses the principal implementation issues. It eliminates APB 30's
requirement that discontinued operations be measured at net realizable value or
that entities include under "discontinued operations" in the financial
statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of
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discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
This statement is effective for fiscal years beginning after December 15, 2001.
Management does not expect this standard to have any material impact on the
Company's consolidated financial position, results of operations and cash flows.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Regarding Forward-Looking Information
In addition to historical information, this report contains
forward-looking statements and performance trends that are subject to certain
known and unknown risks, uncertainties, contingencies and other factors that
could cause actual results, performance or achievements to differ materially
from those stated. Such forward-looking statements and trends include those
relating to internal growth resulting from the development of new contracts; the
impact of clinical programs; the impact of penetration of new drugs; the impact
of the productivity and consolidation programs; the operating environment for
skilled nursing facilities; the impact of prior period business gains on current
quarter CRO performance; the operating environment in the CRO industry; the
impact of the integration and streamlining of the CRO organization; the impact
of merger activity in the pharmaceutical industry; purchasing leverage; the
formulary compliance program; the leveraging of costs; benefits from the
Company's state tax planning program; drug utilization rates; the expansion of
clinical programs; drug price inflation; the adequacy and availability of
Omnicare's sources of liquidity and capital; the availability of external
sources of financing; and the impact of new accounting rules and standards
including SFAS 141, SFAS 142, SFAS 143 and SFAS 144. Such risks, uncertainties,
contingencies and other factors, many of which are beyond the control of
Omnicare, include, but are not limited to: overall economic, financial and
business conditions; trends for the continued growth of the businesses of
Omnicare; the ability to implement productivity, consolidation and cost
reduction efforts and to realize anticipated benefits; delays in reimbursement
by the government and other payors to customers and to Omnicare; the overall
financial condition of Omnicare's customers; Omnicare's ability to assess and
react to the financial condition of customers; the impact of seasonality on the
business of Omnicare; the continued successful integration of the CRO business
and acquired companies; the effect of new government regulations, executive
orders and/or legislative initiatives including those relating to reimbursement
and drug pricing policies and in the interpretation and application of such
policies; government budgetary pressures and shifting priorities; the outcome of
litigation; the failure of Omnicare to obtain or maintain required regulatory
approvals or licenses; loss or delay of CRO contracts for regulatory or other
reasons; the ability of CRO projects to produce revenues in subsequent periods;
the ability to attract and retain needed management; the impact and pace of
technological advances; the ability to obtain or maintain rights to data,
technology and other intellectual property; the impact of consolidation in the
pharmaceutical and long-term care industries; the continued availability of
suitable acquisition candidates; changes in tax law and regulation; volatility
in Omnicare's stock price; access to capital and financing; the demand for
Omnicare's products and services; pricing and other competitive factors in the
industry; variations in costs or expenses; and changes in accounting rules and
standards.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have any financial instruments held for trading
purposes and does not hedge any of its market risks with derivative instruments.
Omnicare's primary market risk exposure relates to interest rate risk
exposure through its borrowings. The Company's debt obligations at September 30,
2001 include $40.0 million outstanding under its three-year, $500.0 million
variable-rate Revolving Credit Facility at an interest rate of LIBOR plus
1.375%, or 4.4% at September 30, 2001 (a one-hundred basis point change in the
interest rate would impact pretax interest expense by approximately $0.1 million
per quarter); $375.0 million outstanding under its 8.125% fixed rate Senior
Notes, due 2011; and $345.0 million outstanding under 5.0% fixed rate
convertible subordinated debentures, due 2007 ("Convertible Debentures"). At
September 30, 2001, the fair value of Omnicare's Revolving Credit Facility
approximates its carrying value, and the fair value of the Senior Notes and
Convertible Debentures is approximately $387 million and approximately $305
million, respectively.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
11 Computation of Earnings Per Common Share
(b) Reports on Form 8-K
During the quarter ended September 30, 2001, the Company filed
a Report on Form 8-K on September 28, 2001 reporting, under
Item 5, the implementation of the second phase of a
productivity and consolidation initiative that is intended to
streamline operations, increase efficiency and enhance the
Company's position as a high quality, cost effective provider
of pharmaceutical services.
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SIGNATURES
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: November 12, 2001 By: /s/David W. Froesel, Jr.
----------------- --------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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