10-Q 1 a36458.txt OMNICARE, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-8269 OMNICARE, INC. -------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 31-1001351 ----------------------------------- ------------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization)
100 East RiverCenter Boulevard, Covington, Kentucky 41011 --------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (859) 392-3300 -------------- (Registrant's Telephone Number, Including Area Code) 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 --------- ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No --------- ------ COMMON STOCK OUTSTANDING
Number of Shares Date ------ ---- Common Stock, $1 par value 102,438,681 September 30, 2003
OMNICARE, INC. AND SUBSIDIARY COMPANIES INDEX
PAGE ---- PART I. FINANCIAL INFORMATION: ------------------------------ ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Consolidated Statements of Income - Three and nine months ended - September 30, 2003 and 2002 3 Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 4 Consolidated Statements of Cash Flows - Nine months ended - September 30, 2003 and 2002 5 Notes to Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37 ITEM 4. CONTROLS AND PROCEDURES 38 PART II. OTHER INFORMATION: -------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 39
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED
(In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------------ -------------------------- 2003 2002 2003 2002 -------- -------- ---------- ---------- Sales $896,099 $657,270 $2,532,035 $1,936,386 Reimbursable out-of-pockets 5,555 7,448 19,513 20,801 -------- -------- ---------- ---------- Total net sales 901,654 664,718 2,551,548 1,957,187 -------- -------- ---------- ---------- Cost of sales 668,844 481,703 1,875,842 1,425,685 Reimbursed out-of-pocket expenses 5,555 7,448 19,513 20,801 -------- -------- ---------- ---------- Total direct costs 674,399 489,151 1,895,355 1,446,486 -------- -------- ---------- ---------- Gross profit 227,255 175,567 656,193 510,701 Selling, general and administrative expenses 123,592 103,888 380,610 306,007 Restructuring charges (Note 5) -- 11,096 -- 23,195 -------- -------- ---------- ---------- Operating income 103,663 60,583 275,583 181,499 Investment income 880 651 2,634 2,116 Interest expense (Note 8) (26,316) (14,339) (64,647) (42,990) -------- -------- ---------- ---------- Income before income taxes 78,227 46,895 213,570 140,625 Income taxes 29,397 17,829 80,816 53,425 -------- -------- ---------- ---------- Net income $ 48,830 $ 29,066 $ 132,754 $ 87,200 =========== =========== =========== =========== Earnings per share: Basic $ 0.48 $ 0.31 $ 1.36 $ 0.93 =========== =========== =========== =========== Diluted $ 0.47 $ 0.31 $ 1.34 $ 0.92 =========== =========== =========== =========== Weighted average number of common shares outstanding: Basic 101,965 94,245 97,490 94,129 =========== =========== =========== =========== Diluted 102,944 94,710 103,017 94,920 =========== =========== =========== =========== Dividends per share $ 0.0225 $ 0.0225 $ 0.0675 $ 0.0675 =========== =========== =========== =========== Comprehensive income $ 48,396 $ 31,030 $ 134,574 $ 91,010 =========== =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements. 3 CONSOLIDATED BALANCE SHEETS OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (In thousands, except share data)
September 30, December 31, 2003 2002 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 268,250 $ 137,936 Restricted cash 5,819 3,147 Accounts receivable, less allowances of $92,311 (2002 - $68,593) 620,156 522,857 Unbilled receivables 20,526 25,062 Inventories 296,289 190,464 Deferred income tax benefits 11,371 18,621 Other current assets 121,424 103,471 ---------- ---------- Total current assets 1,343,835 1,001,558 Properties and equipment, at cost less accumulated depreciation of $194,964 (2002 - $177,870) 149,631 139,908 Goodwill 1,706,269 1,188,907 Other noncurrent assets 130,659 97,212 ---------- ---------- Total assets $3,330,394 $2,427,585 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 290,374 $ 175,648 Current debt 18,899 110 Accrued employee compensation 29,849 22,627 Deferred revenue 22,116 25,254 Income taxes payable 23,752 6,837 Other current liabilities 74,806 66,174 ---------- ---------- Total current liabilities 459,796 296,650 Long-term debt 141,791 187 5.0% convertible subordinated debentures, due 2007 -- 345,000 8.125% senior subordinated notes, due 2011 375,000 375,000 6.125% senior subordinated notes, due 2013 232,784 -- 4.0% contingent convertible notes, due 2033 345,000 -- Deferred income tax liabilities 98,734 84,071 Other noncurrent liabilities 71,978 51,615 ---------- ---------- Total liabilities 1,725,083 1,152,523 ---------- ---------- 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, 104,288,700 shares issued (2002 - 95,441,400 shares issued) 104,289 95,441 Paid-in capital 962,749 737,421 Retained earnings 625,047 498,856 ---------- ---------- 1,692,085 1,331,718 Treasury stock, at cost - 1,850,000 shares (2002 - 1,139,900 shares) (45,599) (23,471) Deferred compensation (38,828) (29,018) Accumulated other comprehensive income (2,347) (4,167) ---------- ---------- Total stockholders' equity 1,605,311 1,275,062 ---------- ---------- Total liabilities and stockholders' equity $3,330,394 $2,427,585 ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (In thousands)
Nine Months Ended September 30, --------------------------- 2003 2002 --------- --------- Cash flows from operating activities: Net income $ 132,754 $ 87,200 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 28,369 24,920 Amortization 9,960 9,444 Provision for doubtful accounts 34,676 22,114 Deferred tax provision 21,756 12,342 Write-off of debt issuance costs 3,755 -- Non-cash portion of restructuring charges -- 9,060 Changes in assets and liabilities, net of effects from acquisition of businesses: Accounts receivable and unbilled receivables (28,131) (25,621) Inventories (58,703) (539) Current and noncurrent assets 3,782 (32,526) Accounts payable 59,200 20,736 Accrued employee compensation 281 (527) Deferred revenue (3,138) (13,060) Current and noncurrent liabilities (22,198) 17,056 --------- --------- Net cash flows from operating activities 182,363 130,599 --------- --------- Cash flows from investing activities: Acquisition of businesses, net of cash received (599,689) (115,893) Capital expenditures (11,241) (16,762) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust (2,672) (3,400) Other 58 263 --------- --------- Net cash flows from investing activities (613,544) (135,792) --------- --------- Cash flows from financing activities: Borrowings on line of credit facilities and term loans 749,000 90,000 Payments on line of credit facilities and term loans (589,000) (80,000) Proceeds from long-term borrowings 595,000 -- Payments on long-term borrowings and obligations (354,242) (64) Fees paid for financing arrangements (29,366) -- Gross proceeds from stock offering 188,629 -- Proceeds from stock awards and exercise of stock options, net of stock tendered in payment 5,834 352 Dividends paid (6,559) (6,364) Other 122 72 --------- --------- Net cash flows from financing activities 559,418 3,996 --------- --------- Effect of exchange rate changes on cash 2,077 2,083 --------- --------- Net increase in cash and cash equivalents 130,314 886 Cash and cash equivalents at beginning of period - unrestricted 137,936 168,396 --------- --------- Cash and cash equivalents at end of period - unrestricted $ 268,250 $ 169,282 ========= =========
The Notes to Consolidated Financial Statements are an integral part of these statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED 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 5 and 8) 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, 2002. Certain reclassifications of prior year amounts have been made to conform with the current year presentation. 2. Stock-Based Employee Compensation At September 30, 2003, the Company had three stock-based employee compensation plans. As permitted under U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), the Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations. No stock-based employee compensation cost for stock options is reflected in net income as all options granted under the plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123" ("SFAS 148"), for stock options (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, September 30, ------------------- --------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income, as reported $48,830 $29,066 $132,754 $87,200 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all options, net of related tax effects (2,160) (2,476) (6,820) (5,359) ------- ------- -------- ------- Pro forma net income $46,670 $26,590 $125,934 $81,841 ======= ======= ======== ======= Earnings per share: Basic - as reported $ 0.48 $ 0.31 $ 1.36 $ 0.93 ======= ======= ======== ======= Basic - pro forma $ 0.46 $ 0.28 $ 1.29 $ 0.87 ======= ======= ======== ======= Diluted - as reported $ 0.47 $ 0.31 $ 1.34 $ 0.92 ======= ======= ======== ======= Diluted - pro forma $ 0.45 $ 0.28 $ 1.27 $ 0.86 ======= ======= ======== =======
6 The fair value of each option at the grant date is estimated using the Black-Scholes option-pricing model, with the following weighted average assumptions used for grants:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ----------------------------- 2003 2002 2003 2002 ----------- ---------- ----------- --------- Volatility 60% 63% 60% 63% Risk-free interest rate 2.9% 2.9% 2.9% 2.9% Dividend yield 0.2% 0.4% 0.2% 0.4% Expected term of options (in years) 5.2 5.4 5.2 5.4 Weighted average fair value per option $17.91 $11.88 $15.63 $14.23
The above pro forma information is based on the circumstances and assumptions in effect for each of the respective periods and, therefore, is not necessarily representative of the actual effect of SFAS 123 on net income or earnings per share in future years. 3. Recently Issued Accounting Pronouncements Effective January 1, 2003, the Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"), SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") and FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). All accounting and disclosure relevant to this authoritative guidance has been incorporated into this Quarterly Report on Form 10-Q. The adoption of SFAS 145, SFAS 146, FIN 45 and FIN 46 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In October 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 147, "Acquisition of Certain Financial Institutions." This pronouncement is not applicable to the Company. In December 2002, the FASB issued SFAS 148. While limited in scope, SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS 123. The standard is intended to encourage the adoption of the provisions of SFAS 123 by providing three transitional implementation methodologies. Even for those companies choosing not to adopt the provisions of SFAS 123, SFAS 148 includes new annual and interim disclosure requirements related to a company's issuance of stock compensation. The transition and disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The disclosure provisions of SFAS 148 have been incorporated into the notes to consolidated financial statements, and Omnicare currently intends to continue accounting for stock-based compensation plans in accordance with APB 25 and related Interpretations, as permitted by U.S. GAAP. 7 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement was effective for the Company beginning July 1, 2003. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) in the statement of financial position. This Statement was effective for the Company for financial instruments entered into or modified after May 31, 2003. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. 4. 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 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 47 states in the United States of America ("USA") at September 30, 2003. 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 29 countries around the world, including the USA, at September 30, 2003. The table below presents information about the reportable segments as of and for the three and nine months ended September 30, 2003 and 2002 and should be read in conjunction with the paragraph that follows (in thousands):
Three Months Ended September 30, ---------------------------------------------------------- Corporate Pharmacy CRO and Consolidated 2003: Services Services Consolidating Totals ------------------------------------------------------------------------------------------------------ Net sales $ 865,923 $ 35,731 $ -- $ 901,654 Depreciation and amortization 11,832 468 580 12,880 Operating income (expense) 111,587 1,646 (9,570) 103,663 Total assets 2,941,061 115,232 274,101 3,330,394 Capital expenditures 3,861 91 134 4,086 ------------------------------------------------------------------------------------------------------ 2002: ------------------------------------------------------------------------------------------------------ Net sales $ 623,241 $ 41,477 $ -- $ 664,718 Depreciation and amortization 10,176 524 662 11,362 Restructuring charges (2,911) (8,185) -- (11,096) Operating income (expense) 72,173 (2,831) (8,759) 60,583 Total assets 2,079,031 147,949 208,550 2,435,530 Capital expenditures 7,560 217 158 7,935 ------------------------------------------------------------------------------------------------------
8
Nine Months Ended September 30, ------------------------------------------------------------------ Corporate Pharmacy CRO and Consolidated 2003: Services Services Consolidating Totals ------------------------------------------------------------------------------------------------------- Net sales $2,431,905 $119,643 $ -- $2,551,548 Depreciation and amortization 35,206 1,369 1,754 38,329 Operating income (expense) 292,782 10,861 (28,060) 275,583 Total assets 2,941,061 115,232 274,101 3,330,394 Capital expenditures 9,946 796 499 11,241 ------------------------------------------------------------------------------------------------------- 2002: ------------------------------------------------------------------------------------------------------- Net sales $1,829,918 $127,269 $ -- $1,957,187 Depreciation and amortization 30,559 1,734 2,071 34,364 Restructuring charges (6,769) (16,426) -- (23,195) Operating income (expense) 208,134 (884) (25,751) 181,499 Total assets 2,079,031 147,949 208,550 2,435,530 Capital expenditures 15,370 531 861 16,762 -------------------------------------------------------------------------------------------------------
In accordance with Emerging Issues Task Force ("EITF") Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred," the Company included in its reported CRO segment net sales amounts of $5.6 million and $19.5 million for the three and nine months ended September 30, 2003, respectively ($7.4 million and $20.8 million for the comparable prior year periods ended September 30, 2002, respectively). 5. Restructuring Charges --------------------- In 2001, the Company announced the implementation of a second phase of the productivity and consolidation initiative (the "Phase II Program"). The Phase II Program, completed in September 2002, further streamlined operations, increased efficiencies and helped enhance the Company's position as a high-quality, cost-effective provider of pharmaceutical services. Building on previous efforts, the Phase II Program included the merging or closing of seven pharmacy locations and the reconfiguration in size and function of an additional ten locations. The Phase II Program also included 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 Phase II Program encompassed a net reduction of approximately 460 employees, or about 5% of the Company's total work force, across both the Pharmacy Services and CRO Services segments. In connection with the Phase II Program, the Company expensed a total of $18.3 million pretax ($11.4 million aftertax, or $0.12 per diluted share) for restructuring charges during the year ended December 31, 2001. Further, approximately $23.2 million pretax ($14.4 million aftertax, or $0.15 per diluted share) was recorded during the year ended December 31, 2002, when the amounts were required to be recognized in accordance with U.S. GAAP. Of the total amount recorded during the year ended December 31, 2002, $11.1 million and $23.2 million pretax ($6.9 million and $14.4 million aftertax, or $0.07 and $0.15 per diluted share, respectively) were recorded in the three and nine months ended September 30, 2002, respectively. The restructuring charges included severance pay, the buy-out of employment 9 agreements, the buy-out of lease obligations, the write-off of leasehold improvements and other assets, and related fees and facility exit costs. Details of the year-to-date September 30, 2003 and December 31, 2002 activity relating to the Phase II Program follow (in thousands):
Balance at 2002 Utilized Balance at Utilized Balance at December 31, Provision/ during December 31, during September 30, 2001 Accrual 2002 2002 2003 2003 ------------ ---------- ---------- ------------ -------- ------------- Restructuring charges: Employee severance $1,642 $ 2,177 $ (2,655) $1,164 $(1,141) $ 23 Employment agreement buy-outs 508 -- (214) 294 (263) 31 Lease terminations 606 5,862 (1,846) 4,622 (899) 3,723 Other assets, fees and facility exit costs 3,027 15,156 (14,690) 3,493 (2,157) 1,336 ------- -------- -------- ------ ------- ------ Total restructuring charges $5,783 $23,195 $(19,405) $9,573 $(4,460) $5,113 ======= ======== ======== ====== ======= ======
As of September 30, 2003, the Company had paid approximately $8.5 million of severance and other employee-related costs relating to the reduction of approximately 460 employees. The remaining liabilities recorded at September 30, 2003 represent amounts not yet paid or settled relating to actions taken, and will be adjusted in future periods as these matters are finalized. In connection with the previously disclosed first phase of its productivity and consolidation initiative (the "Phase I Program"), the Company had liabilities of $0.6 million at December 31, 2002 of which $0.3 million was utilized in the nine months ended September 30, 2003. The remaining liabilities at September 30, 2003 of $0.3 million represent amounts not yet paid relating to actions taken (consisting of remaining lease payments), and will be adjusted as these matters are settled. 6. Acquisitions ------------ On July 15, 2003, Omnicare completed the acquisition of the SunScript pharmacy services business from Sun Healthcare Group, Inc. The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $79 million. The Company funded the acquisition of SunScript from existing cash balances. An additional $15.0 million is payable post closing, subject to reduction. The Company is using an independent valuation firm to assist with the determination of the initial purchase price allocation, including the identification of goodwill and other identifiable intangible assets. At the time of the acquisition, SunScript provided pharmaceutical products and related consulting services for skilled nursing and assisted living facilities comprised of approximately 43,000 beds located in 19 states (excluding beds in Sun Healthcare facilities that Sun Healthcare is divesting). SunScript served these facilities through its network of 31 long-term care pharmacies. Omnicare expects to achieve certain economies of scale and operational efficiencies from the acquisition. The net assets and operating results of SunScript have been included from the date of acquisition in the Company's financial statements. 10 On January 15, 2003, Omnicare closed its $5.50 per share cash tender offer for all of the issued and outstanding shares of Class A common stock and Class B common stock of NCS HealthCare, Inc. ("NCS"). Omnicare accepted, on January 15, 2003, all validly tendered shares for payment (totaling 17,510,126 shares of Class A common stock, representing approximately 94% of the then-outstanding Class A common stock, and 5,038,996 shares of Class B common stock, representing 100% of the then-outstanding Class B common stock). Omnicare subsequently acquired the remaining shares of Class A common stock of NCS. The acquisition of NCS, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $500 million. The cash consideration included the payoff of certain NCS debt totaling approximately $325.5 million, which was retired by Omnicare immediately following the acquisition. The Company initially financed the acquisition with available cash, working capital and borrowings under its three-year, $500.0 million revolving credit facility. The Company later refinanced the borrowings under its three-year, $500.0 million revolving credit facility, as described further under "Debt and Issuance of Common Stock." The Company is using an independent valuation firm to assist with the purchase price allocation, including the identification of goodwill and other identifiable intangible assets. The Company also continues to evaluate the tax effects of the NCS acquisition. At the time of the acquisition, NCS provided professional pharmacy and related services to long-term care facilities, including skilled nursing centers and assisted living facilities in 33 states and managed hospital pharmacies in 10 states. NCS added approximately 182,000 beds served in the first quarter of 2003. Omnicare is achieving certain economies of scale and operational efficiencies from the acquisition, while broadening Omnicare's geographical reach. The net assets and operating results of NCS have been included from the date of acquisition in the Company's financial statements. In January 2002, Omnicare completed the acquisition of the assets comprising the pharmaceutical business of American Pharmaceutical Services, Inc. and related entities (collectively, "APS"). At the time of the acquisition, APS provided professional pharmacy-related consulting services to approximately 60,000 residents of skilled nursing and assisted living facilities through its network of 32 pharmacies in 15 states, as well as respiratory and Medicare Part B services for residents of long-term care facilities. The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs which aggregated approximately $132 million (including an adjustment based on the closing balance sheet review, a $6.0 million deferred payment made in the first quarter of 2003 and an additional $12.0 million in deferred payments made in the third quarter of 2003, satisfying all future contingent payments under the acquisition agreement). The Company has completed its purchase price allocation, including the identification of goodwill and other intangible assets based on an appraisal performed by an independent valuation firm. In connection with the purchase of APS, the Company acquired amortizable intangible assets composed of non-compete agreements and customer relationship assets totaling $1.3 million and $3.1 million, respectively. Amortization periods for the non-compete agreements and customer relationship assets are 10.0 years and 4.7 years, respectively, and 6.3 years on a weighted-average basis. At September 30, 2003, the Company has also recorded goodwill 11 totaling approximately $78 million (all of which is tax deductible) in connection with the acquisition. Unaudited pro forma combined results of operations of the Company and NCS for the three and nine months ended September 30, 2002 are presented below. Such pro forma presentation has been prepared assuming that the NCS acquisition had been made as of January 1, 2002. Pro forma information is not presented for the three and nine months ended September 30, 2003 as the results of NCS are included in those of the Company from the closing date of January 15, 2003, and the difference from the beginning of the period is not significant. The unaudited pro forma presentation excludes the impact of SunScript, due to the lack of significance on the pro forma combined results. The unaudited pro forma combined financial information follows (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, 2002 September 30, 2002 ------------------ ------------------ Net sales $824,864 $2,435,963 Net income $ 25,100 $ 78,174 Earnings per share: Basic $ 0.27 $ 0.83 Diluted $ 0.27 $ 0.82
Earnings per share is calculated independently for each separately reported period. Accordingly, the sum of the separately reported three months ended periods may not necessarily be equal to the per share amount for the corresponding nine months ended period, as independently calculated. 7. Goodwill and Other Intangible Assets ------------------------------------ Changes in the carrying amount of goodwill for the nine months ended September 30, 2003, by business segment, are as follows (in thousands):
Pharmacy CRO Services Services Total -------- -------- ----- Balance as of December 31, 2002 $1,149,939 $38,968 $1,188,907 Goodwill acquired in the nine months ended September 30, 2003 488,703 -- 488,703 Other 27,598 1,061 28,659 ---------- ------- ---------- Balance as of September 30, 2003 $1,666,240 $40,029 $1,706,269 ========== ======= ==========
The "Other" caption above includes the settlement of acquisition matters relating to pre-2003 acquisitions (including payments pursuant to acquisition agreements such as deferred payments, indemnification payments and payments originating from earnout provisions), as well as the effect of adjustments due to foreign currency translations, which relate solely to CRO Services. 12 During the third quarter of 2003, the Company completed its annual goodwill impairment assessment based on an evaluation of estimated undiscounted future cash flows and determined that goodwill was not impaired. The Company's other intangible assets have not changed significantly from the balances at December 31, 2002. The Company is using independent valuation firms to assist with the purchase price allocations for the NCS and SunScript acquisitions, including the identification of goodwill and other identifiable intangible assets. The Company is in the process of completing its allocations of the purchase price for NCS and SunScript and accordingly, the goodwill balance is preliminary and subject to change. 8. Debt and Issuance of Common Stock --------------------------------- During the second quarter of 2003, the Company completed its offering of $250.0 million aggregate principal amount of 6.125% senior subordinated notes due 2013 ("6.125% Senior Notes"), issued at par and 6,468,750 shares of common stock, $1 par value, at $29.16 per share for gross proceeds of $189 million and the offering, through Omnicare Capital Trust I, a statutory trust formed by the Company (the "Trust"), of $345 million aggregate principal amount of convertible trust preferred securities due 2033 ("trust PIERS" or "Preferred Income Equity Redeemable Securities"). In connection with the offering of the trust PIERS, the Company issued a corresponding amount of contingent convertible notes due 2033 to the Trust. The trust PIERS offer fixed cash distributions at a rate of 4.0% per annum payable quarterly, and a conversion price of $40.82 under a contingent conversion feature whereby the holders may convert their trust PIERS if the closing sales price of Omnicare common stock for a predetermined period, beginning with the quarter ending September 30, 2003, is more than 130% of the then-applicable conversion price or, during a predetermined period, if the daily average of the trading prices for the trust PIERS is less than 105% of the average of the conversion values for the trust PIERS through 2028 (98% for any period thereafter through maturity). The trust PIERS also will pay contingent distributions, commencing with the quarterly distribution period beginning June 15, 2009, if the average trading prices of the trust PIERS for a predetermined period equals 115% or more of the stated liquidation amount of the trust PIERS. Embedded in the trust PIERS are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision. The embedded derivatives are periodically valued by a third party advisor, and at September 30, 2003 the values of both derivatives were not material. However, the values are subject to change, based on market conditions, which could affect the Company's future results of operations. Omnicare irrevocably and unconditionally guarantees, on a subordinated basis, certain payments to be made by the Trust in connection with the trust PIERS. The Company used a portion of the net proceeds from the common stock offering and the net proceeds from the trust PIERS offering to redeem the entire outstanding $345 million aggregate principal amount of the Company's 5% convertible subordinated debentures due 2007 ("5% Convertible Debentures"), with remaining proceeds being used for general corporate purposes. A portion of the 5% Convertible Debentures (approximately $106.5 million) were redeemed in June 2003. In July 2003, the Company redeemed the remainder of the 5% Convertible Debentures (approximately $238.5 million) completing its early redemption of the entire $345 million aggregate principal amount of the outstanding 5% Convertible Debentures (which were convertible into 8,712,121 shares of common stock). The total redemption price, including the call premium, was approximately $353.9 million. The call premium, along with the write-off of unamortized debt issuance costs 13 associated with the 5% Convertible Debentures, were recognized ratably in the quarter in which they were redeemed. Accordingly, an $8.6 million pre-tax charge ($5.3 million aftertax, or $0.05 per diluted share) was recognized in interest expense during the quarter ended September 30, 2003 for the call premium and the write-off of remaining unamortized debt issuance costs associated with the redemption of the 5% Convertible Debentures. A charge of $4.1 million pretax ($2.5 million aftertax, or $0.02 per diluted share) was recorded in interest expense during the second quarter of 2003, representing the proportionate share of the call premium and unamortized debt issuance costs. In connection with the offerings, the Company also completed a new, four-year $750.0 million credit facility ("Credit Facility"), consisting of a $250 million term loan commitment and a $500 million revolving credit commitment. The Company used the net proceeds from the 6.125% Senior Notes offering and borrowings of $250.0 million under the term loan portion of the new Credit Facility to repay the balance of the Company's existing credit facility of $474 million, with remaining proceeds being used for general corporate purposes. The Company paid down $50.0 million and $40.0 million on the term loan during the second and third quarters, respectively. The $160.0 million outstanding at September 30, 2003 under the term loan is due in quarterly installments, in varying amounts, through 2007, with approximately $18.5 million due within one year. The new Credit Facility bears interest at the Company's option at a rate equal to either: (i) London Interbank Offered Rate ("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 prime rate or (b) the sum of the federal funds effective rate plus 0.50%. Additionally, the Company is charged a commitment fee on the unused portion of the revolving credit portion of the Credit Facility, which also varies depending on such ratings. At September 30, 2003, the interest rate was LIBOR plus 1.375% and the commitment fee was 0.375%. There is no utilization fee associated with the Credit Facility. During the second quarter of 2003, the Company entered into an interest rate swap agreement ("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 will receive a fixed rate of 6.125% and pay a floating rate based on LIBOR with a maturity of six months plus a spread of 2.27%. The floating rate is determined semi-annually two London Banking Days prior to the first of each December and June, commencing December 1, 2003. The estimated LIBOR-based floating rate was 3.45% at September 30, 2003. 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 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 liability and reduced the carrying value of the related 6.125% Senior Notes by $17.2 million as of September 30, 2003. 14 9. Guarantor Subsidiaries ---------------------- The Company's $375.0 million senior subordinated notes due 2011 and the 6.125% 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, 2003 and December 31, 2002 for the balance sheet, the statement of income for each of the three and nine month periods ended September 30, 2003 and 2002, and the statement of cash flows for the nine months ended September 30, 2003 and 2002. Separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information that 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. Summary Consolidating Statements of Income
(in thousands) Three Months Ended September 30, -------------------------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. 2003 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries ----------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $ 871,419 $ 30,235 $ -- $ 901,654 Total direct costs -- 649,848 24,551 -- 674,399 -------- --------- -------- -------- --------- Gross profit -- 221,571 5,684 -- 227,255 Selling, general and administrative expenses 1,372 117,406 4,814 -- 123,592 -------- --------- -------- -------- --------- Operating income (loss) (1,372) 104,165 870 -- 103,663 Investment income 427 440 13 -- 880 Interest expense (26,047) (213) (56) -- (26,316) -------- --------- -------- -------- --------- Income (loss) before income taxes (26,992) 104,392 827 -- 78,227 Income tax (benefit) expense (10,257) 39,340 314 -- 29,397 Equity in net income of subsidiaries 65,565 -- -- (65,565) -- -------- --------- -------- -------- --------- Net income (loss) $ 48,830 $ 65,052 $ 513 $(65,565) $ 48,830 ----------------------------------------------------------------------------------------------------------------------------- 2002 ----------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $ 636,159 $ 28,559 $ -- $ 664,718 Total direct costs -- 465,856 23,295 -- 489,151 -------- --------- -------- -------- --------- Gross profit -- 170,303 5,264 -- 175,567 Selling, general and administrative expenses 5,325 92,965 5,598 -- 103,888 Restructuring charges -- 11,096 -- -- 11,096 -------- --------- -------- -------- --------- Operating income (loss) (5,325) 66,242 (334) -- 60,583 Investment income 497 70 84 -- 651 Interest expense (14,332) (7) -- -- (14,339) -------- --------- -------- -------- --------- Income (loss) before income taxes (19,160) 66,305 (250) -- 46,895 Income tax (benefit) expense (7,281) 25,205 (95) -- 17,829 Equity in net income of subsidiaries 40,945 -- -- (40,945) -- -------- --------- -------- -------- --------- Net income (loss) $ 29,066 $ 41,100 $ (155) $(40,945) $ 29,066 -----------------------------------------------------------------------------------------------------------------------------
15 9. Guarantor Subsidiaries (Continued) ---------------------------------- Summary Consolidating Statements of Income
(in thousands) Nine Months Ended September 30, --------------------------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. 2003 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries ----------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $ 2,455,620 $ 95,928 $ -- $ 2,551,548 Total direct costs -- 1,817,631 77,724 -- 1,895,355 --------- ----------- -------- --------- ----------- Gross profit -- 637,989 18,204 -- 656,193 Selling, general and administrative expenses 4,740 358,397 17,473 -- 380,610 --------- ----------- -------- --------- ----------- Operating income (loss) (4,740) 279,592 731 -- 275,583 Investment income 1,773 796 65 -- 2,634 Interest expense (63,039) (1,393) (215) -- (64,647) --------- ----------- -------- --------- ----------- Income (loss) before income taxes (66,006) 278,995 581 -- 213,570 Income tax (benefit) expense (25,082) 105,677 221 -- 80,816 Equity in net income of subsidiaries 173,678 -- -- (173,678) -- --------- ----------- -------- --------- ----------- Net income (loss) $ 132,754 $ 173,318 $ 360 $(173,678) $ 132,754 ----------------------------------------------------------------------------------------------------------------------------- 2002 ----------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $ 1,874,148 $ 83,039 $ -- $ 1,957,187 Total direct costs -- 1,378,724 67,762 -- 1,446,486 --------- ----------- -------- --------- ----------- Gross profit -- 495,424 15,277 -- 510,701 Selling, general and administrative expenses 17,089 272,522 16,396 -- 306,007 Restructuring charges -- 22,397 798 -- 23,195 --------- ----------- -------- --------- ----------- Operating income (loss) (17,089) 200,505 (1,917) -- 181,499 Investment income 1,537 389 190 -- 2,116 Interest expense (42,573) (235) (182) -- (42,990) --------- ----------- -------- --------- ----------- Income (loss) before income taxes (58,125) 200,659 (1,909) -- 140,625 Income tax (benefit) expense (22,088) 76,293 (780) -- 53,425 Equity in net income of subsidiaries 123,237 -- -- (123,237) -- --------- ----------- -------- --------- ----------- Net income (loss) $ 87,200 $ 124,366 $ (1,129) $(123,237) $ 87,200 -----------------------------------------------------------------------------------------------------------------------------
16 9. Guarantor Subsidiaries (Continued) ---------------------------------- Condensed Consolidating Balance Sheets (in thousands)
Omnicare, Inc. Guarantor Non-Guarantor and As of September 30, 2003: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 232,500 $ 30,196 $ 5,554 $ -- $ 268,250 Restricted cash -- 5,819 -- -- 5,819 Accounts receivable, net (including intercompany) -- 617,979 14,313 (12,136) 620,156 Inventories -- 291,459 4,830 -- 296,289 Other current assets 853 150,611 1,857 -- 153,321 ---------- ---------- -------- ----------- ---------- Total current assets 233,353 1,096,064 26,554 (12,136) 1,343,835 ---------- ---------- -------- ----------- ---------- Properties and equipment, net -- 139,570 10,061 -- 149,631 Goodwill -- 1,638,675 67,594 -- 1,706,269 Other noncurrent assets 35,710 89,763 5,186 -- 130,659 Investment in subsidiaries 2,499,593 -- -- (2,499,593) -- ---------- ---------- -------- ----------- ---------- Total assets $2,768,656 $2,964,072 $109,395 $(2,511,729) $3,330,394 ========== ========== ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ 70,561 $ 389,914 $ 11,457 $ (12,136) $ 459,796 Long-term debt 140,000 1,091 700 -- 141,791 8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000 6.125% senior subordinated notes, due 2013 232,784 -- -- -- 232,784 4.0% contingent convertible notes, due 2033 345,000 -- -- -- 345,000 Other noncurrent liabilities -- 170,686 26 -- 170,712 Stockholders' equity 1,605,311 2,402,381 97,212 (2,499,593) 1,605,311 ---------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity $2,768,656 $2,964,072 $109,395 $(2,511,729) $3,330,394 ----------------------------------------------------------------------------------------------------------------------------- As of December 31, 2002: ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 95,693 $ 36,191 $ 6,052 $ -- $ 137,936 Restricted cash -- 3,147 -- -- 3,147 Accounts receivable, net (including intercompany) -- 524,290 13,610 (15,043) 522,857 Inventories -- 185,521 4,943 -- 190,464 Other current assets 1,399 144,399 1,356 -- 147,154 ---------- ---------- -------- ----------- ---------- Total current assets 97,092 893,548 25,961 (15,043) 1,001,558 ---------- ---------- -------- ----------- ---------- Properties and equipment, net 2,931 126,452 10,525 -- 139,908 Goodwill -- 1,121,728 67,179 -- 1,188,907 Other noncurrent assets 31,234 65,029 949 -- 97,212 Investment in subsidiaries 1,903,357 -- -- (1,903,357) -- ---------- ---------- -------- ----------- ---------- Total assets $2,034,614 $2,206,757 $104,614 $(1,918,400) $2,427,585 ========== ========== ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ 37,363 $ 255,691 $ 18,639 $ (15,043) $ 296,650 Long-term debt -- 187 -- -- 187 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 2,189 132,577 920 -- 135,686 Stockholders' equity 1,275,062 1,818,302 85,055 (1,903,357) 1,275,062 ---------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity $2,034,614 $2,206,757 $104,614 $(1,918,400) $2,427,585 -----------------------------------------------------------------------------------------------------------------------------
17 9. Guarantor Subsidiaries (Continued) ---------------------------------- Condensed Consolidating Statements of Cash Flows
(in thousands) Nine Months Ended September 30, ---------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. 2003: Parent Subsidiaries Subsidiaries and Subsidiaries ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 33,977 $ 699 $ 34,676 Other (24,731) 170,086 2,332 147,687 --------- --------- ------- --------- Net cash flows from operating activities (24,731) 204,063 3,031 182,363 --------- --------- ------- --------- Cash flows from investing activities: Acquisition of businesses, net of cash received -- (594,113) (5,576) (599,689) Capital expenditures -- (11,134) (107) (11,241) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- (2,672) -- (2,672) Other -- 43 15 58 --------- --------- ------- --------- Net cash flows from investing activities -- (607,876) (5,668) (613,544) --------- --------- ------- --------- Cash flows from financing activities: Borrowings on line of credit facilities and term loans 749,000 -- -- 749,000 Payments on line of credit facilities and term loans (589,000) -- -- (589,000) Proceeds from long-term borrowings 595,000 -- -- 595,000 Payments on long-term borrowings and obligations (354,242) -- -- (354,242) Fees paid for financing arrangements (29,366) -- -- (29,366) Gross proceeds from stock offerings 188,629 -- -- 188,629 Other (398,483) 397,818 62 (603) --------- --------- ------- --------- Net cash flows from financing activities 161,538 397,818 62 559,418 --------- --------- ------- --------- Effect of exchange rate changes on cash -- -- 2,077 2,077 --------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents 136,807 (5,995) (498) 130,314 Cash and cash equivalents at beginning of period - unrestricted 95,693 36,191 6,052 137,936 --------- --------- ------- --------- Cash and cash equivalents at end of period - unrestricted $ 232,500 $ 30,196 $ 5,554 $ 268,250 ----------------------------------------------------------------------------------------------------------------------------- 2002: ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 21,440 $ 674 $ 22,114 Other (25,868) 133,934 419 108,485 --------- --------- ------- --------- Net cash flows from operating activities (25,868) 155,374 1,093 130,599 --------- --------- ------- --------- Cash flows from investing activities: Acquisition of businesses -- (114,643) (1,250) (115,893) Capital expenditures -- (16,523) (239) (16,762) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- (3,400) -- (3,400) Other -- 146 117 263 --------- --------- ------- --------- Net cash flows from investing activities -- (134,420) (1,372) (135,792) --------- --------- ------- --------- Cash flows from financing activities: Borrowings on line of credit facilities 90,000 -- -- 90,000 Payments on line of credit facilities (80,000) -- -- (80,000) Other 13,558 (19,562) -- (6,004) --------- --------- ------- --------- Net cash flows from financing activities 23,558 (19,562) -- 3,996 --------- --------- ------- --------- Effect of exchange rate changes on cash -- -- 2,083 2,083 --------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents (2,310) 1,392 1,804 886 Cash and cash equivalents at beginning of period - unrestricted 127,110 37,304 3,982 168,396 --------- --------- ------- --------- Cash and cash equivalents at end of period - unrestricted $ 124,800 $ 38,696 $ 5,786 $ 169,282 -----------------------------------------------------------------------------------------------------------------------------
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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." Results of Operations -------------------------------------------------------------------------------- The following table presents consolidated net sales and results of operations for Omnicare, Inc. ("Omnicare" or the "Company"), for each of the three and nine months ended September 30, 2003 and 2002 (in thousands, except per share amounts).
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Total net sales $901,654 $664,718 $2,551,548 $1,957,187 ======== ======== ========== ========== Net income $ 48,830 $ 29,066 $ 132,754 $ 87,200 ======== ======== ========== ========== Earnings per share: Basic $ 0.48 $ 0.31 $ 1.36 $ 0.93 ======== ======== ========== ========== Diluted $ 0.47 $ 0.31 $ 1.34 $ 0.92 ======== ======== ========== ==========
19 The Company believes that certain investors find earnings before interest, income taxes, depreciation and amortization ("EBITDA") to be a useful tool for measuring a company's ability to service its debt. However, EBITDA does not represent net cash flows from operating activities, as defined by United States Generally Accepted Accounting Principles ("U.S. GAAP"), and should not be considered as a substitute for net income as an indicator of the Company's operating performance or operating cash flows as a measure of liquidity. The Company's calculation of EBITDA may differ from the calculation of EBITDA by others.
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- (in thousands) 2003 2002 2003 2002 ---- ---- ---- ---- EBITDA calculation: Net income $ 48,830 $ 29,066 $132,754 $ 87,200 Add: Interest expense, net of investment income 25,436 13,688 62,013 40,874 Income taxes 29,397 17,829 80,816 53,425 Depreciation and amortization 12,880 11,362 38,329 34,364 -------- -------- -------- -------- EBITDA $116,543 $ 71,945 $313,912 $215,863 ======== ======== ======== ======== EBITDA reconciliation to net cash flows from operating activities: EBITDA $116,543 $ 71,945 $313,912 $215,863 (Subtract)/Add: Interest expense, net of investment income (25,436) (13,688) (62,013) (40,874) Income taxes (29,397) (17,829) (80,816) (53,425) Changes in assets and liabilities, net of effects from acquisition of businesses (16,481) (12,462) (48,907) (34,481) Provision for doubtful accounts 11,496 7,938 34,676 22,114 Deferred tax provision 3,017 7,967 21,756 12,342 Write-off of debt issuance costs 2,591 -- 3,755 -- Non-cash portion of restructuring charges -- 3,427 -- 9,060 -------- -------- -------- -------- Net cash flows from operating activities $ 62,333 $ 47,298 $182,363 $130,599 ======== ======== ======== ========
Quarter Ended September 30, 2003 vs. 2002 -------------------------------------------------------------------------------- Consolidated Total net sales for the three months ended September 30, 2003 increased to $901.7 million from $664.7 million in the comparable prior year period. Diluted earnings per share for the three months ended September 30, 2003 were $0.47 versus $0.31 in the same prior year period. Net income for the 2003 third quarter was $48.8 million versus $29.1 million earned in the comparable 2002 period. EBITDA for the three months ended September 30, 2003 totaled $116.5 million in comparison with $71.9 million for the same period of 2002. 20 Included in the 2003 third quarter interest expense was a charge of $8.6 million pretax ($5.3 million aftertax, or $0.05 per diluted share), relating to the call premium and write-off of unamortized debt issuance costs associated with the Company's early redemption and retirement of the remaining outstanding portion of its 5% convertible subordinated debentures, further discussed below. Included in the 2002 third quarter was a charge of $11.1 million pretax ($6.9 million aftertax, or $0.07 per diluted share), relating to the Phase II productivity and consolidation program described under the "Restructuring Charges" caption below. Pharmacy Services Segment Omnicare's Pharmacy Services segment recorded sales of $865.9 million for the third quarter of 2003, exceeding the 2002 amount of $623.2 million by $242.7 million. At September 30, 2003, Omnicare served long-term care facilities comprising approximately 994,000 beds as compared with approximately 746,000 beds served at September 30, 2002. The increase in revenues and in beds served was primarily a result of the acquisitions of NCS HealthCare, Inc. ("NCS") and the SunScript pharmacy services businesses, as discussed below. Additionally, Pharmacy Services sales increased due to growth in new contracts, the continued implementation and expansion of the Company's clinical and other service programs, drug price inflation, and the increased market penetration of newer branded drugs targeted at the diseases of the elderly, which often carry higher prices but are significantly more effective in reducing overall healthcare costs than those they replace. Lower government reimbursement formulas in some states and the increasing number and usage of generic drugs partially offset the increase in pharmacy sales. Operating income of the Pharmacy Services segment was $111.6 million in the third quarter of 2003, a $39.4 million improvement as compared with the $72.2 million earned in the comparable period of 2002. The improved operating income was primarily the result of increased sales, as discussed above, a lower operating cost structure reflecting principally the impact of the productivity and consolidation initiative completed at the end of the third quarter of 2002 (the "Phase II Program"), the ongoing integration of NCS and the $2.9 million pretax impact of a restructuring charge in the third quarter of 2002, partially offset by the initial impact of the lower-margin SunScript business added during the third quarter of 2003, which impact is expected to diminish as the Company achieves economies of scale, drug purchasing improvements, and consolidates redundant pharmacy locations. On July 15, 2003, Omnicare completed the acquisition of the SunScript pharmacy services business from Sun Healthcare Group, Inc. The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $79 million. The Company funded the acquisition of SunScript from existing cash balances. An additional $15.0 million is payable post closing, subject to reduction. The Company is using an independent valuation firm to assist with the determination of the initial purchase price allocation, including the identification of goodwill and other identifiable intangible assets. 21 At the time of the acquisition, SunScript provided pharmaceutical products and related consulting services for skilled nursing and assisted living facilities comprised of approximately 43,000 beds located in 19 states (excluding beds in Sun Healthcare facilities that Sun Healthcare is divesting). SunScript served these facilities through its network of 31 long-term care pharmacies. Omnicare expects to achieve certain economies of scale and operational efficiencies from the acquisition. The net assets and operating results of SunScript have been included from the date of acquisition in the Company's financial statements. On January 15, 2003, Omnicare closed its $5.50 per share cash tender offer for all of the issued and outstanding shares of Class A common stock and Class B common stock of NCS. Omnicare accepted, on January 15, 2003, all validly tendered shares for payment (totaling 17,510,126 shares of Class A common stock, representing approximately 94% of the then-outstanding Class A common stock and 5,038,996 shares of Class B common stock, representing 100% of the then-outstanding Class B common stock). Omnicare subsequently acquired the remaining shares of Class A common stock of NCS. The acquisition of NCS, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $500 million. The cash consideration included the payoff of certain NCS debt totaling approximately $325.5 million, which was retired by Omnicare immediately following the acquisition. The Company initially financed the acquisition with available cash, working capital and borrowings under its three-year, $500.0 million revolving credit facility (the "Revolving Credit Facility"). The Company later refinanced the borrowings under its Revolving Credit Facility, as described further under the "Financial Condition, Liquidity and Capital Resources" caption below. The Company is using an independent valuation firm to assist with the purchase price allocation, including the identification of goodwill and other intangible assets. The Company also continues to evaluate the tax effects of the NCS acquisition. At the time of the acquisition, NCS provided professional pharmacy and related services to long-term care facilities, including skilled nursing centers and assisted living facilities in 33 states and managed hospital pharmacies in 10 states. NCS added approximately 182,000 beds served in the first quarter of 2003. Omnicare is achieving certain economies of scale and operational efficiencies from the acquisition, while broadening Omnicare's geographical reach. The net assets and operating results of NCS have been included from the date of acquisition in the Company's financial statements. In January 2002, Omnicare completed the acquisition of the assets comprising the pharmaceutical business of American Pharmaceutical Services, Inc. and related entities (collectively, "APS"). At the time of the acquisition, APS provided professional pharmacy-related consulting services to approximately 60,000 residents of skilled nursing and assisted living facilities through its network of 32 pharmacies in 15 states, as well as respiratory and Medicare Part B services for residents of long-term care facilities. The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs, which aggregated approximately $132 million (including an adjustment based on the closing balance sheet review, a $6.0 million deferred payment made in the first quarter of 2003 and an additional 22 $12.0 million in deferred payments made in the third quarter of 2003, satisfying all future contingent payments under the acquisition agreement). 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. As disclosed in the Company's previous public filings, certain payment increases to skilled nursing facilities ("SNFs") provided under the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA") acts expired on October 1, 2002 with no further action taken by Congress to date. The impact of these expirations on the Company's customers has not had a significant impact on Omnicare to date. Nonetheless, the loss of revenues associated with the expiration of these payments or future changes in SNF payments could, in the future, have an adverse effect on the financial condition of the Company's SNF clients which could, in turn, adversely affect the timing or level of their payments to Omnicare. Partially offsetting the October 1, 2002 expiration of certain payment increases under BBRA and BIPA as discussed above, the Centers for Medicare & Medicaid Services ("CMS") published, on August 4, 2003, a final rule announcing that it is adopting a 3.0% market basket increase in SNF prospective payment system ("PPS") rates for fiscal year 2004, which begins October 1, 2003. In addition, the rule increases fiscal year 2004 rates by an additional 3.26% to reflect cumulative forecast errors since the start of the SNF PPS on July 1, 1998. Together, CMS estimates that these adjustments will result in an estimated $850 million increase in Medicare payments to SNFs in fiscal year 2004. Moreover, the final rule does not adopt refinements to the current patient classification system for fiscal year 2004, which results in the continuation of the temporary add-on payment for certain high-acuity patients established by the BBRA. CMS estimates that these temporary payments will equal approximately $1 billion in fiscal year 2004. In June 2003, the U.S. House of Representatives and Senate adopted separate Medicare reform bills that would, if enacted, expand Medicare prescription drug coverage, modify payments to various Medicare providers, modify the current Part B drug reimbursement mechanism to further limit payments and institute administrative reforms to improve Medicare program operations. It is uncertain at this time whether Congress ultimately will enact Medicare reform legislation, what form any such legislation would take, or the impact such legislation would have on the Company. Other healthcare funding issues remain, including pressures on federal and state Medicaid budgets due to the economic downturn, which has led to decreasing reimbursement rates in certain states. On May 28, 2003, President Bush signed into law the "Jobs and Growth Reconciliation Tax Act," which includes $20 billion in temporary aid to the states, $10 billion of which is earmarked for state Medicaid programs. Nevertheless, many states continue to experience budget shortfalls, which may prompt them to consider implementing reductions in Medicaid reimbursement. While the Company has managed to adjust to these pricing pressures to date, such pressures are likely to continue or escalate if economic recovery does not emerge and there can be no assurance that such occurrence will not have an adverse impact on the Company's business. 23 CRO Services Segment Omnicare's Contract Research Organization ("CRO") Services segment recorded revenues of $35.7 million for the third quarter of 2003 compared with the $41.5 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 $5.6 million and $7.4 million of reimbursable out-of-pockets in its CRO Services segment reported revenue and direct cost amounts for the three months ended September 30, 2003 and 2002, respectively. Under EITF No. 01-14, in cases where a company acts as a principal, reimbursements received for "out-of-pocket" expenses incurred are required to be characterized as revenue and the associated costs are required to be included as expenses in the Company's income statement. As a result of this accounting pronouncement, which affects only the CRO business, CRO revenues and direct costs may fluctuate significantly based on the timing of when reimbursable expenses are incurred. Revenues for the quarter ended September 30, 2003 were lower than the prior-year third quarter revenues primarily due to client-driven start-up delays in certain projects. Operating income in the CRO Services segment was $1.6 million in the third quarter of 2003 compared with an operating loss of $2.8 million in the same 2002 period. The improvement in operating income was attributable to the year-over-year impact of restructuring charges associated with the Phase II productivity and consolidation program, which totaled $8.2 million pretax in the 2002 third quarter, partially offset by the impact on operating income of the lower revenues discussed above. Backlog at September 30, 2003 was $207.9 million, representing an increase of $6.9 million from the September 30, 2002 backlog of $201.0 million, and $26.3 million from the December 31, 2002 backlog of $181.6 million due to an increase in new business. Consolidated The Company's consolidated gross profit of $227.3 million increased $51.7 million during the third quarter of 2003 from the same prior-year period amount of $175.6 million. Gross profit as a percentage of total net sales of 25.2% in the three months ended September 30, 2003 was lower than the 26.4% experienced during the same period of 2002. Positively impacting overall gross profit were the Company's purchasing leverage associated with the procurement of pharmaceuticals due, in part, to the ongoing integration of the NCS business and benefits realized from the Company's formulary compliance program, as well as the increased use of generic drugs, leveraging of fixed and variable overhead costs at the Company's pharmacies as a result of the reduced cost structure brought about by the Phase II Program completed in the third quarter of 2002, and the integration of the NCS business. These favorable factors were more than offset by the previously mentioned shift in mix toward newer, branded drugs targeted at the diseases of the elderly that typically produce higher gross profit but lower gross profit margins, the effects of lower government reimbursement formulas in some states, lower gross profit margins in the CRO business, and the impact of the lower-margin SunScript business in the 2003 period, which impact is expected to diminish as the Company achieves economies of scale, drug purchasing improvements, and consolidates redundant pharmacy locations. 24 Omnicare's selling, general and administrative ("operating") expenses for the quarter ended September 30, 2003 of $123.6 million were higher than the comparable year amount of $103.9 million by $19.7 million, due to the overall growth of the business, including the acquisitions of NCS and SunScript. Operating expenses as a percentage of total net sales totaled 13.7% in the third quarter 2003, representing a decrease from the 15.6% experienced in the comparable prior year period. This decrease is primarily due to the year-over-year favorable impact of the Phase II Program completed at the end of the third quarter of 2002 as well as realization of synergies from the APS acquisition, and the leveraging of fixed and variable overhead costs over a larger sales base in 2003 than that which existed in 2002. Investment income for the three months ended September 30, 2003 was $0.9 million, an increase of $0.2 million from the same period of 2002. Higher cash balances on hand as a result of the Company's second quarter 2003 refinancing and third quarter 2003 operating results was the primary driver of the year-over-year increase in investment income. Interest expense for the three months ended September 30, 2003 was $26.3 million compared with $14.3 million in the comparable prior-year period. The increase related to the previously mentioned financing of the NCS acquisition in January 2003, initially through borrowings on the Revolving Credit Facility of $499.0 million (partially offset by a $25.0 million repayment in the 2003 first quarter). The interest expense for the three month period ended September 30, 2003 also included a call premium and the write-off of unamortized debt issuance costs aggregating $8.6 million before taxes ($5.3 million aftertax, or $0.05 per diluted share). The call premium and the write-off of the unamortized debt issuance costs related to the completion of the Company's early redemption and retirement of its $345 million aggregate principal amount of 5%, convertible subordinated debentures in the third quarter of 2003, in connection with its refinancing transactions, as further described at the "Financial Condition, Liquidity and Capital Resources" caption below. Partially offsetting this increase was reduced interest expense associated with Omnicare's repayment of $40.0 million on the term loan during the third quarter of 2003. The effective income tax rate was 38% in the third quarter of 2003, consistent with the comparable prior year period. The effective tax rates in 2003 and 2002 are higher than the federal statutory rate largely as a result of the combined impact of state and local income taxes, various nondeductible expenses and tax-accrual adjustments. 25 Nine Months Ended September 30, 2003 vs. 2002 -------------------------------------------------------------------------------- Consolidated Total net sales for the nine months ended September 30, 2003 rose to $2,551.5 million from $1,957.2 million in the comparable prior year period. Diluted earnings per share for the nine months ended September 30, 2003 were $1.34 versus $0.92 in the same prior year period. Net income for the nine months ended September 30, 2003 was $132.8 million versus $87.2 million earned in the comparable 2002 period. EBITDA totaled $313.9 million for the nine months ended September 30, 2003 as compared with $215.9 million for the same period of 2002. Included in interest expense during the year-to-date September 30, 2003 period was a charge of $12.7 million pretax ($7.9 million aftertax, or $0.08 per diluted share), relating to the call premium and write-off of unamortized debt issuance costs associated with the Company's early redemption of its 5% convertible subordinated debentures discussed below. Included in the year-to-date September 30, 2002 period was a charge of $23.2 million pretax ($14.4 million aftertax, or $0.15 per diluted share), relating to the Phase II productivity and consolidation program described under the "Restructuring Charges" caption below. Pharmacy Services Segment Omnicare's Pharmacy Services segment recorded sales of $2,431.9 million for the nine months ended September 30, 2003, exceeding the comparable prior period amount for 2002 of $1,829.9 million by $602.0 million. The increase in revenues was primarily a result of the acquisition of NCS and to a lesser extent, the addition of the SunScript business during the third quarter of 2003. Additionally, Pharmacy Services sales increased due to the continued implementation and expansion of the Company's clinical and other service programs, drug price inflation, and the increased market penetration of newer branded drugs targeted at the diseases of the elderly, which often carry higher prices but are significantly more effective in reducing overall healthcare costs than those they replace. Lower government reimbursement formulas in some states and the increasing number and usage of generic drugs partially offset the increase in pharmacy sales. Operating income of the Pharmacy Services segment was $292.8 million for the nine months ended September 30, 2003, an increase of $84.7 million from the $208.1 million earned in the comparable period of 2002. The improved operating income was primarily the result of increased sales, as discussed above, a lower operating cost structure reflecting principally the impact of the Phase II Program started in 2001 and completed in the third quarter of 2002, the completion of the integration of APS and the $6.8 million pretax impact of restructuring charges in the 2002 period, partially offset by the initial impact of the lower-margin NCS and SunScript business added in the first and third quarters of 2003, respectively, which impact is expected to diminish as the Company achieves economies of scale, drug purchasing improvements, and consolidates redundant pharmacy locations. 26 As previously disclosed, certain payment increases provided under the BBRA and the BIPA acts expired on October 1, 2002 with no further action taken by Congress to date. The impact of these expirations on the Company's customers did not result in a significant impact to Omnicare in the first nine months of 2003. CRO Services Segment Omnicare's CRO Services segment recorded revenues of $119.6 million during the nine months ended September 30, 2003 compared with the $127.3 million recorded in the same prior year period. In accordance with EITF No. 01-14, the Company included $19.5 million and $20.8 million of reimbursable out-of-pockets in its CRO Services segment reported revenue and direct cost amounts for the nine months ended September 30, 2003 and 2002, respectively. Revenues for the nine months ended September 30, 2003 were lower than the same prior-year period revenues largely due to client-driven delays in commencement and continuation of certain projects. Operating income in the CRO Services segment was $10.9 million for the nine months ended September 30, 2003 compared with an operating loss of $0.9 million in the same 2002 period. The improvement in operating income was attributable to the year-over-year realization of benefits from the Company's initiatives to integrate and streamline the organization and the year-over-year impact of restructuring charges associated with the Phase II productivity and consolidation program, which totaled $16.4 million pretax in the year-to-date 2002 period, partially offset by the impact on operating income of the lower revenues discussed above. Consolidated The Company's consolidated gross profit of $656.2 million increased $145.5 million during the nine months ended September 30, 2003 from the same prior-year period amount of $510.7 million. Gross profit as a percentage of total net sales of 25.7% in the nine months ended September 30, 2003, was slightly lower than the 26.1% experienced during the same period of 2002. Positively impacting overall gross profit were the Company's purchasing leverage associated with the procurement of pharmaceuticals due, in part, to the completion of the integration of the APS business and benefits realized from the Company's formulary compliance program, as well as the increased use of generic drugs, leveraging of fixed and variable overhead costs at the Company's pharmacies as a result of the reduced cost structure brought about by the Phase II Program, and the integration of the APS business. These favorable factors were offset primarily by the initial impact of the lower-margin NCS and SunScript business (which impact is expected to diminish as the Company achieves economies of scale, drug purchasing improvements, and consolidates redundant pharmacy locations) and, to a lesser extent, by the previously mentioned shift in mix toward newer, branded drugs targeted at the diseases of the elderly that typically produce higher gross profit but lower gross profit margins, and the effects of lower government reimbursement formulas in some states. Omnicare's operating expenses for the nine months ended September 30, 2003 of $380.6 million were higher than the comparable year amount of $306.0 million by $74.6 million, due to the overall growth of the business, including the acquisitions of NCS and SunScript in the first 27 and third quarters of 2003, respectively. Operating expenses as a percentage of total net sales totaled 14.9% in the nine months ended September 30, 2003, lower than the 15.6% experienced during the comparable prior year period. This decrease is primarily due to the year-over-year favorable impact of the Phase II Program completed at the end of the third quarter of 2002 as well as realization of synergies from the APS acquisition, and the leveraging of fixed and variable overhead costs over a larger sales base in 2003 than that which existed in 2002. Investment income for the nine months ended September 30, 2003 was $2.6 million, an increase of $0.5 million from the same period of 2002 due to the previously disclosed larger average invested cash balances in the 2003 period. Interest expense for the nine months ended September 30, 2003 was $64.6 million compared with $43.0 million in the comparable prior-year period. The increase related to the previously mentioned financing of the NCS acquisition in January 2003, initially through borrowings on the Revolving Credit Facility of $499.0 million (partially offset by a $25.0 million repayment in the 2003 first quarter). The increase also included the previously mentioned call premium and write-off of the unamortized debt issuance costs, aggregating $12.7 million before tax ($7.9 million aftertax, or $0.08 per diluted share). Partially offsetting this increase was reduced interest expense associated with Omnicare's repayment of $50.0 million and $40.0 million on the term loan during the second and third quarters of 2003, respectively. The effective income tax rate was 38% in the year-to-date 2003 period, consistent with the prior year period. The effective tax rates in 2003 and 2002 are higher than the federal statutory rate largely as a result of the combined impact of state and local income taxes, various nondeductible expenses and tax-accrual adjustments. Restructuring Charges -------------------------------------------------------------------------------- In 2001, the Company announced the implementation of the Phase II Program, the second phase of its productivity and consolidation initiative. The Phase II Program, completed in September 2002, further streamlined operations, increased efficiencies and helped enhance the Company's position as a high-quality, cost-effective provider of pharmaceutical services. Building on previous efforts, the Phase II Program included the merging or closing of seven pharmacy locations and the reconfiguration in size and function of an additional ten locations. The Phase II Program also included 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 Phase II Program encompassed a net reduction of approximately 460 employees, or about 5% of the Company's total work force, across both the Pharmacy Services and CRO Services segments. In connection with the Phase II Program, the Company expensed a total of $18.3 million pretax ($11.4 million aftertax, or $0.12 per diluted share) for restructuring charges during the year ended December 31, 2001. Further, approximately $23.2 million pretax ($14.4 million aftertax, or $0.15 per diluted share) was recorded during the year ended December 31, 2002, when the amounts were required to be recognized in accordance with U.S. GAAP. Of the total amount recorded during the year ended December 31, 2002, $11.1 million and $23.2 million 28 pretax ($6.9 million and $14.4 million aftertax, or $0.07 and $0.15 per diluted share, respectively) were recorded in the three and nine months ended September 30, 2002, respectively. The restructuring charges included severance pay, the buy-out of employment agreements, the buy-out of lease obligations, the write-off of leasehold improvements and other assets, and related fees and facility exit costs. Details of the year-to-date September 30, 2003 and December 31, 2002 activity relating to the Phase II Program follow (in thousands):
Balance at 2002 Utilized Balance at Utilized Balance at December 31, Provision/ during December 31, during September 30, 2001 Accrual 2002 2002 2003 2003 ------------ ---------- ------ ------------ ------ ------------- Restructuring charges: Employee severance $1,642 $ 2,177 $ (2,655) $1,164 $(1,141) $ 23 Employment agreement buy-outs 508 -- (214) 294 (263) 31 Lease terminations 606 5,862 (1,846) 4,622 (899) 3,723 Other assets, fees and facility exit costs 3,027 15,156 (14,690) 3,493 (2,157) 1,336 ------ ------- ------- ------ -------- ------- Total restructuring charges $5,783 $23,195 $(19,405) $9,573 $(4,460) $5,113 ====== ======= ======== ====== ======= =======
As of September 30, 2003, the Company had paid approximately $8.5 million of severance and other employee-related costs relating to the reduction of approximately 460 employees. The remaining liabilities recorded at September 30, 2003 represent amounts not yet paid or settled relating to actions taken, and will be adjusted in future periods as these matters are finalized. In connection with the previously disclosed first phase of its productivity and consolidation initiative (the "Phase I Program"), the Company had liabilities of $0.6 million at December 31, 2002 of which $0.3 million was utilized in the nine months ended September 30, 2003. The remaining liabilities at September 30, 2003 of $0.3 million represent amounts not yet paid relating to actions taken (consisting of remaining lease payments), and will be adjusted as these matters are settled. Financial Condition, Liquidity and Capital Resources -------------------------------------------------------------------------------- Cash and cash equivalents at September 30, 2003 were $274.1 million compared with $141.1 million at December 31, 2002 (including restricted cash amounts of $5.8 million and $3.1 million, respectively). The Company generated positive cash flows from operating activities of $182.4 million during the nine months ended September 30, 2003 compared with net cash flows from operating activities of $130.6 million during the nine months ended September 30, 2002. These operating cash flows, as well as new borrowings and common stock issuance proceeds (further discussed below), were used primarily for debt repayment, acquisition-related payments, capital expenditures and dividends in both periods. The increase in net cash flows from operating activities in the first nine months of 2003 was driven primarily by growth in earnings, as previously discussed in the "Results of Operations" section above. 29 Net cash used in investing activities was $613.5 million and $135.8 million for the nine months ended September 30, 2003 and 2002, respectively. Acquisition of businesses required cash payments of $599.7 million in the first nine months of 2003, which were primarily funded by borrowings and existing cash balances. Also included in acquisition of businesses were amounts payable pursuant to acquisition agreements relating to pre-2003 acquisitions. Acquisition of businesses required $115.9 million of cash payments during the nine months ended September 30, 2002 (including amounts payable pursuant to acquisition agreements relating to pre-2002 acquisitions), which were funded primarily by borrowings under the Revolving Credit Facility and operating cash flows. The Company's capital requirements are primarily comprised of its acquisition program, and capital expenditures, largely relating to investments in the Company's information technology systems. There were no material commitments and contingencies outstanding at September 30, 2003, other than certain acquisition-related payments potentially due in the future, including deferred payments, indemnification payments and payments originating from earnout provisions, that may become payable (including up to an additional $15.0 million relating to SunScript, payable post closing, subject to reduction). Net cash provided by financing activities was $559.4 million and $4.0 million for the nine months ended September 30, 2003 and 2002, respectively. In connection with the aforementioned NCS and APS acquisitions, the Company borrowed $499.0 million and $90.0 million, respectively, under its Revolving Credit Facility in the first quarters of 2003 and 2002, respectively. The Company also completed its refinancing plan in June 2003, as discussed below, in which it raised $1,033.6 million. Partially offsetting these borrowings were payments on line of credit facilities and term loans of $589.0 million and $80.0 million during the nine months ended September 30, 2003 and 2002, respectively, as well as the early redemption and retirement during the nine months ended September 30, 2003 of $345.0 million of 5% convertible subordinated debentures due 2007 ("5% Convertible Debentures"). On August 7, 2003, 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 common share for 2003, consistent with the prior year. Dividends paid of $6.6 million during the nine months ended September 30, 2003 were also consistent with those paid in the comparable prior year period. The Company's current ratio (defined as current assets divided by current liabilities) of 2.9 to 1.0 at September 30, 2003 is lower than the 3.4 to 1.0 in existence at December 31, 2002, largely as a result of the current portion of the term loan (approximately $18.5 million) as well as the use of cash for the Company's acquisition of businesses. The acquisition of the SunScript pharmacy services business, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $79.0 million at closing. An additional $15.0 million is payable post closing, subject to reduction. The Company funded the acquisition from existing cash balances. The acquisition of NCS, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $500 million. The cash consideration included the payoff of certain NCS debt totaling approximately $325.5 million, which was 30 retired by Omnicare immediately following the acquisition. The Company initially financed the acquisition with available cash, working capital and borrowings under its three-year, $500.0 million Revolving Credit Facility. As discussed below, the Company refinanced the initial borrowings over a longer term. During the second quarter of 2003, the Company completed its offering of $250.0 million aggregate principal amount of 6.125% senior subordinated notes due 2013 ("6.125% Senior Notes"), issued at par and 6,468,750 shares of common stock, $1 par value, at $29.16 per share for gross proceeds of $189 million and the offering, through Omnicare Capital Trust I, a statutory trust formed by the Company (the "Trust"), of $345 million aggregate principal amount of convertible trust preferred securities due 2033 ("trust PIERS" or "Preferred Income Equity Redeemable Securities"). In connection with the offering of the trust PIERS, the Company issued a corresponding amount of contingent convertible notes due 2033 to the Trust. The trust PIERS offer fixed cash distributions at a rate of 4.0% per annum payable quarterly, and a conversion price of $40.82 under a contingent conversion feature whereby the holders may convert their trust PIERS if the closing sales price of Omnicare common stock for a predetermined period, beginning with the quarter ending September 30, 2003, is more than 130% of the then-applicable conversion price or, during a predetermined period, if the daily average of the trading prices for the trust PIERS is less than 105% of the average of the conversion values for the trust PIERS through 2028 (98% for any period thereafter through maturity). The trust PIERS also will pay contingent distributions, commencing with the quarterly distribution period beginning June 15, 2009, if the average trading prices of the trust PIERS for a predetermined period equals 115% or more of the stated liquidation amount of the trust PIERS. Embedded in the trust PIERS are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision. The embedded derivatives are periodically valued by a third party advisor, and at September 30, 2003 the values of both derivatives were not material. However, the values are subject to change, based on market conditions, which could affect the Company's future results of operations. Omnicare irrevocably and unconditionally guarantees, on a subordinated basis, certain payments to be made by the Trust in connection with the trust PIERS. The Company used a portion of the net proceeds from the common stock offering and the net proceeds from the trust PIERS offering to redeem the entire outstanding $345 million aggregate principal amount of the Company's 5% Convertible Debentures, with remaining proceeds being used for general corporate purposes. A portion of the 5% Convertible Debentures (approximately $106.5 million) were redeemed in June 2003. In July 2003, the Company redeemed the remainder of the 5% Convertible Debentures (approximately $238.5 million) completing its early redemption of the entire $345 million aggregate principal amount of the outstanding 5% Convertible Debentures (which were convertible into 8,712,121 shares of common stock). The total redemption price, including the call premium, was approximately $353.9 million. The call premium, along with the write-off of unamortized debt issuance costs associated with the 5% Convertible Debentures were recognized ratably in the quarter in which they were redeemed. Accordingly, an $8.6 million pre-tax charge ($5.3 million aftertax, or $0.05 per diluted share) was recognized in interest expense during the quarter ended September 30, 2003 for the call premium and the write-off of remaining unamortized debt issuance costs associated with the redemption of the 5% Convertible Debentures. A charge of $4.1 million pretax ($2.5 million aftertax, or $0.02 per diluted share) 31 was recorded in interest expense during the second quarter of 2003, representing the proportionate share of the call premium and unamortized debt issuance costs. In connection with the offerings, the Company also completed a new, four-year $750.0 million credit facility ("Credit Facility") consisting of a $250 million term loan commitment and a $500 million revolving credit commitment. The Company used the net proceeds from the 6.125% Senior Notes offering and borrowings of $250.0 million under the term loan portion of the new Credit Facility to repay the balance of the Company's existing credit facility of $474 million, with remaining proceeds being used for general corporate purposes. The Company paid down $50.0 million and $40.0 million on the term loan during the second and third quarters, respectively. The $160.0 million outstanding at September 30, 2003 under the term loan is due in quarterly installments, in varying amounts, through 2007, with approximately $18.5 million due within one year. The new Credit Facility bears interest at the Company's option at a rate equal to either: (i) London Interbank Offered Rate ("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 prime rate or (b) the sum of the federal funds effective rate plus 0.50%. Additionally, the Company is charged a commitment fee on the unused portion of the revolving credit portion of the Credit Facility, which also varies depending on such ratings. At September 30, 2003, the interest rate was LIBOR plus 1.375% and the commitment fee was 0.375%. There is no utilization fee associated with the Credit Facility. During the second quarter of 2003, the Company entered into an interest rate swap agreement ("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 will receive a fixed rate of 6.125% and pay a floating rate based on LIBOR with a maturity of six months plus a spread of 2.27%. The floating rate is determined semi-annually two London Banking Days prior to the first of each December and June, commencing December 1, 2003. The estimated LIBOR-based floating rate was 3.45% at September 30, 2003. 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 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 liability and reduced the carrying value of the related 6.125% Senior Notes by $17.2 million as of September 30, 2003. The Company believes that net cash flows from operating activities, credit facilities and other short- and long-term debt financings, if any, 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. The Company may, in the future, refinance its indebtedness, issue additional indebtedness, or issue additional equity as deemed appropriate. The Company believes that, if needed, these additional external sources of financing are readily available. 32 Disclosures About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations -------------------------------------------------------------------------------- At September 30, 2003, the Company had one unconsolidated entity, Omnicare Capital Trust I, which was established for the purpose of facilitating the trust PIERS offering. For financial reporting purposes, the Omnicare Capital Trust I is treated as an equity method investment of Omnicare. The contingent convertible notes issued by the Company to the Trust in connection with the trust PIERS are presented as a separate line item on Omnicare's consolidated balance sheet, and the related disclosures concerning the trust PIERS, the guarantee and the contingent convertible notes are included in Omnicare's notes to consolidated financial statements. Omnicare records interest payable to the Trust as interest expense in its consolidated statement of income. At September 30, 2003, the Company had no other unconsolidated entities, or any financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements. The following summarizes the Company's contractual obligations at September 30, 2003, and the effect such obligations are expected to have on the Company's liquidity and cash flows in future periods (in thousands):
Less than After Total 1 year 1-3 years 4-5 years 5 years ----- ------ --------- --------- ------- Long-term debt obligations $1,130,000 $18,462 $ 59,487 $ 82,051 $970,000 Capital lease obligations 690 437 73 58 122 Operating lease obligations 119,833 20,388 41,309 37,899 20,237 ---------- ------- --------- -------- -------- Total contractual cash obligations $1,250,523 $39,287 $ 100,869 $120,008 $990,359 ========== ======= ========= ======== ========
Recently Issued Accounting Standards -------------------------------------------------------------------------------- Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"), SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") and FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). All accounting and disclosure relevant to this authoritative guidance has been incorporated into this Quarterly Report on Form 10-Q. The adoption of SFAS 145, SFAS 146, FIN 45 and FIN 46 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In October 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 147, "Acquisition of Certain Financial Institutions." This pronouncement is not applicable to the Company. 33 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of SFAS 123" ("SFAS 148"). While limited in scope, SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The standard is intended to encourage the adoption of the provisions of SFAS 123 by providing three transitional implementation methodologies. Even for those companies choosing not to adopt the provisions of SFAS 123, SFAS 148 includes new annual and interim disclosure requirements related to a company's issuance of stock compensation. The transition and disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The disclosure provisions of SFAS 148 have been incorporated into the notes to consolidated financial statements, and Omnicare currently intends to continue accounting for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations, as permitted by U.S. GAAP. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement was effective for the Company beginning July 1, 2003. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) in the statement of financial position. This Statement was effective for the Company for financial instruments entered into or modified after May 31, 2003. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations or 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 Omnicare's business outlook or position or future economic performance; the impact of the acquisitions of NCS and SunScript, including Omnicare's ability to enhance the lower margin NCS and SunScript businesses through economies of scale, operational efficiencies, drug purchasing improvements and pharmacy consolidations; potential tax and accounting effects from the NCS acquisition; the impact of new pharmacy services contracts; the impact of clinical and other service programs; the impact of drug price inflation; the impact of penetration of new drugs; the impact of lower government reimbursement formulas in some states; trends concerning the number and usage of generic drugs; the impact of the productivity and 34 consolidation programs; the impact and timing of the integration of the NCS and SunScript acquisitions; the impact of the expiration of certain payments under BBRA and BIPA and the potential loss of revenues associated with the expiration of such payments; CMS estimates of increased Medicare payments to skilled nursing facilities for the 2004 federal fiscal year; expectations concerning the current patient classification system by CMS; the impact of healthcare funding issues generally; the impact of Medicare reform legislation under Congressional consideration; governmental budgetary and pricing pressures due to the economic downturn, and Omnicare's ability to adjust to such pricing pressures; the impact of streamlining and cost reduction measures at the CRO organization; trends concerning CRO backlog; purchasing leverage for pharmaceuticals; the formulary compliance program; the impact of contractual obligations on future periods; future valuations of the trust PIERS instruments; 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. Such forward-looking statements involve actual known and unknown risks, uncertainties, contingencies and other factors that could cause actual results, performance or achievements to differ materially from those stated. 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 attract new clients and service contracts and retain existing clients and service contracts; the ability to implement and expand clinical and other service programs; the impact of Omnicare's formulary compliance program; trends in drug pricing, including the impact of current drug price inflation; the ability to enhance market penetration of newer, branded drugs; trends in the use of generic drugs; trends in state reimbursement formulas; the impact of pending federal Medicare legislation; trends in CMS Medicare payments to skilled nursing facilities; pressures on federal and state Medicaid budgets and the impact of budget shortfalls which may result in delays and reductions in Medicaid reimbursements; the effect of new government regulations, executive orders and/or legislative initiatives, including those relating to reimbursement and drug pricing policies and changes in the interpretation and application of such policies; efforts by payors to control costs; the overall financial condition of Omnicare's customers; Omnicare's ability to assess and react to the financial condition of customers; the ability to implement productivity, consolidation and cost reduction efforts and to realize anticipated benefits; the ability to effectively integrate NCS, SunScript and other acquired companies, including the ability to realize anticipated economies of scale, cost synergies, pharmacy consolidation savings and profitability; the continued availability of suitable acquisition candidates; fluctuations in gross profit margins due to acquisitions and a shift toward newer branded drugs with lower profit margins; the timing and impact of advance purchases of pharmaceuticals; the impact of tax and accounting rules in connection with acquisitions; pricing and other competitive factors in the industry; the impact of seasonal illness trends on the business of Omnicare; the ability of vendors and business partners to provide products and services to Omnicare; the outcome of litigation; the failure of Omnicare or the long-term care facilities it serves to obtain or maintain required regulatory approvals or licenses; trends concerning delays in project commencement or continuation by CRO clients, as well as those concerning backlog and new CRO business; Omnicare's ability to take effective cost-reduction measures in response to CRO client delays; volatility in the CRO business; the ability of CRO projects to produce revenues in future periods; market conditions which may affect the valuation of the trust PIERS instruments; the ability to attract and retain needed management; potential 35 liability for losses not covered by, or in excess of, insurance; competition for qualified staff in the healthcare industry; 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; competition in the pharmaceutical, long-term care and contract research industries; changes in tax laws and regulations; volatility in the market for Omnicare's stock and in the financial markets generally; access to capital and financing; changes in international, economic and political conditions; interest rate and foreign currency fluctuations; the demand for Omnicare's products and services; variations in costs or expenses; and changes in accounting rules and standards. 36 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omnicare's primary market risk exposure relates to interest rate risk exposure through its borrowings. The Company's debt obligations at September 30, 2003 include $160.0 million outstanding under the term loan portion of its June 2003 four-year, variable-rate Credit Facility at an interest rate of LIBOR plus 1.375%, or 2.5% at September 30, 2003 (a one-hundred basis point change in the interest rate would impact pretax interest expense by approximately $1.6 million per year); $375.0 million outstanding under its 8.125% fixed-rate senior subordinated notes (the "8.125% Senior Notes"), due 2011; $250.0 million outstanding under its 6.125% fixed-rate senior subordinated notes (the "6.125% Senior Notes"), due 2013; and $345.0 million outstanding under its 4.0% fixed-rate convertible debentures (the "4.0% Convertible Debentures"), due 2033. During the second quarter of 2003, the Company entered into an interest rate swap agreement ("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 will receive a fixed rate of 6.125% and pay a floating rate based on LIBOR with a maturity of six months plus a spread of 2.27%. The floating rate is determined semi-annually two London Banking Days prior to the first of each December and June, commencing December 1, 2003. The estimated LIBOR-based floating rate was 3.45% at September 30, 2003 (a one-hundred basis point change in the interest rate would impact 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 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 liability and reduced the carrying value of the related 6.125% Senior Notes by $17.2 million as of September 30, 2003. At September 30, 2003, the fair value of Omnicare's Credit Facility approximates its carrying value, and the fair value of the 8.125% Senior Notes, 6.125% Senior Notes and 4.0% Convertible Debentures is approximately $405.9 million, $245.0 million and $388.1 million, respectively. Embedded in the trust PIERS are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision. The embedded derivatives are periodically valued by a third party advisor, and at September 30, 2003 the values of both derivatives were not material. However, the values are subject to change, based on market conditions, which could affect the Company's future results of operations. The Company has operations and revenue that occur outside of the United States ("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 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. 37 ITEM 4. CONTROLS AND PROCEDURES (a) Based on a recent evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in periodic reports filed under the Securities Exchange Act of 1934. (b) There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 38 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Index of Exhibits. (b) Reports on Form 8-K On July 31, 2003, the Company reported that it had issued a press release announcing its financial results for the second quarter of 2003. 39 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: November 14, 2003 By: /s/ David W. Froesel, Jr. -------------------- ------------------------------ David W. Froesel, Jr. Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 40 INDEX OF EXHIBITS
Document Incorporated by Reference Number and Description of Exhibit from a Previous Filing, Filed Herewith (Numbers Coincide with Item 601 of Regulation S-K) or Furnished Herewith, as Indicated Below -------------------------------------------------- --------------------------------------- (3.3) Second Amended and Restated By-laws Filed Herewith of Omnicare, Inc. (11) Computation of Earnings Per Common Share Filed Herewith (12) Computation of Ratio of Earnings to Fixed Filed Herewith Charges (31.1) Rule 13a-14(a) Certification of Chief Executive Filed Herewith Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (31.2) Rule 13a-14(a) Certification of Chief Financial Filed Herewith Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (32.1) Section 1350 Certification of Chief Executive Officer Furnished Herewith of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002* (32.2) Section 1350 Certification of Chief Financial Officer Furnished Herewith of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002*
* A signed original of this written statement required by Section 906 has been provided to Omnicare, Inc. and will be retained by Omnicare, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. E-1