Interim Financial Data

The interim financial data is unaudited; however, in the opinion of Omnicare management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Omnicare consolidated results of operations, financial position and cash flows for the interim periods presented have been made. All significant intercompany accounts and transactions have been eliminated.

Stock-Based Compensation

Stock-based compensation expense recognized in the Consolidated Statement of Comprehensive Income (Loss) for stock options, restricted stock units, performance share units and stock awards totaled approximately $5 million and $15 million, respectively, for the three and nine months ended September 30, 2014 and $5 million and $14 million for the three and nine months ended September 30, 2013, respectively.

Accounts Receivable

The following table is an aging of the Company’s gross accounts receivable (net of allowances for contractual adjustments), aged based on payment terms and categorized based on the three primary types of payors (in thousands):



September 30, 2014	Current and 0-180 Days Past Due		181 Days and Over Past Due		Total
Medicare (Part D and Part B), Medicaid and Third-Party payors	$	201,382	$	47,497	$	248,879
Facility payors	306,681		122,378		429,059
Private Pay payors	76,953		91,013		167,966
Total gross accounts receivable	$	585,016	$	260,888	$	845,904
December 31, 2013
Medicare (Part D and Part B), Medicaid and Third-Party payors	$	195,544	$	67,791	$	263,335
Facility payors	328,444		146,751		475,195
Private Pay payors	75,655		84,101		159,756
Total gross accounts receivable	$	599,643	$	298,643	$	898,286

Accumulated Other Comprehensive Income (Loss)

The following table is a summary of the Company’s accumulated other comprehensive income (loss) (“AOCI”) (in thousands):



	September 30, 2014			December 31, 2013
Unrealized loss on fair value of investments	$	(571	)	$	(702	)
Pension and post-employment benefits	(1,364		)	(1,839		)
Total accumulated other comprehensive loss, net	$	(1,935	)	$	(2,541	)

The amounts are net of applicable tax benefits, which were not material at September 30, 2014 and December 31, 2013. The reclassifications out of AOCI did not materially affect any individual line item on the Consolidated Statement of Comprehensive Income (Loss).

Fair Value

The Company’s financial instruments, measured at fair value on a recurring basis, were as follows (in thousands):



			Based on
	Fair Value		Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
September 30, 2014
Bond portfolio	$	25,216	$	—	$	25,216	$	—
7.75% interest rate swap agreements - fair value hedge	18,041		—		18,041		—
Derivatives	—		—		—		—
Total	$	43,257	$	—	$	43,257	$	—
December 31, 2013
Bond portfolio	$	25,140	$	—	$	25,140	$	—
7.75% interest rate swap agreements - fair value hedge	18,671		—		18,671		—
Derivatives	—		—		—		—
Total	$	43,811	$	—	$	43,811	$	—

The fair value of the Company’s fixed-rate debt securities are shown in “Note 5 - Debt”.

Offsetting Assets and Liabilities

The Company has interest rate swap agreements (the “Interest Rate Swap Agreements”) with multiple counterparties with respect to all $400 million aggregate principle amount outstanding of its 7.75% Senior Subordinated Notes due 2020 (the “2020 Notes”). The following table presents the effect of netting arrangements on the Company’s recognized assets and liabilities in connection with the Interest Rate Swap Agreements as of September 30, 2014 and December 31, 2013 (in thousands):



							Gross Amounts not offset in the statement of financial position
Interest Rate Swaps as of:	Gross amount of recognized assets (liabilities)		Gross amount offset in the statement of financial position		Net amount of assets (liabilities) presented in the statement of financial position		Financial instruments		Cash collateral received		Net amount
September 30, 2014
Swap A	$	9,130	$	—	$	9,130	$	—	$	—	$	9,130
Swap B	8,911		—		8,911		—		—		8,911
	$	18,041	$	—	$	18,041	$	—	$	—	$	18,041

December 31, 2013
Swap A	$	9,408	$	—	$	9,408	$	—	$	—	$	9,408
Swap B	9,263		—		9,263		—		—		9,263
	$	18,671	$	—	$	18,671	$	—	$	—	$	18,671

Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 2014 and September 30, 2013 is different than the applicable federal statutory rate primarily as a result of the impact of state and local income taxes and additional tax benefits recognized in 2014 for prior year settlement payments, and the non-deductible portion of the settlement payments made related to the Gale and Silver complaints (each as described in “Note 7 - Commitments and Contingencies”).

Other Charges

Other charges (on a pre-tax basis) consist of the following (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Debt related costs	$	72	$	50,868	$	7,832	$	50,868
Disposition of businesses	285		10,116		805		38,902
Separation and other costs	3,642		648		16,922		4,836
Acquisition and other related costs	—		—		—		2,300
Total - other charges	$	3,999	$	61,632	$	25,559	$	96,906

See “Note 5 - Debt” for additional details on the debt related costs.

Disposition of Businesses

In 2013, the Company completed the disposition of certain assets, primarily in its medical supply services business, which were not considered, individually or in the aggregate, significant to the operations of Omnicare. The Company recorded a charge on the disposition of these businesses of $10 million and $39 million ($9 million and $27 million after-tax), respectively, in the three and nine months ended September 30, 2013. These charges are reflected in the “Other charges” caption of the Consolidated Statement of Comprehensive Income (Loss).

Separation and Other Costs

In the three and nine months ended September 30, 2014, the Company recorded separation related costs and accelerated stock based compensation expense for certain employees of approximately $4 million and $17 million, respectively, including charges related to retirement of the Chief Executive Officer in the second quarter of 2014. In the three and nine months ended September 30, 2013, the Company recorded separation related costs for certain employees of approximately $1 million and $5 million, respectively. These charges are reflected in the “Other charges” caption of the Consolidated Statement of Comprehensive Income (Loss).

Restructuring and Other Related Charges

The Company continues to make payments in connection with its Company-wide Reorganization Program (the “CWR Program”), primarily related to certain severance amounts and the relocation of its corporate office. As of September 30, 2014, the Company has made cumulative payments of approximately $3 million for severance and other employee-related costs in connection with the CWR Program. The Company had liabilities related to the CWR Program of approximately $5 million at December 31, 2013, with utilization of approximately $2 million in the nine months ended September 30, 2014. The remaining liabilities pursuant to the CWR Program of $3 million at September 30, 2014, represent amounts not yet paid relating to actions taken in connection with the CWR Program (primarily lease termination costs) and will be settled as these matters are finalized.

Common Stock Repurchase Program

In the nine months ended September 30, 2014, the Company repurchased approximately 2.7 million shares of its common stock at an aggregate cost of approximately $160 million under share repurchase programs authorized by its Board of Directors. Through September 30, 2014, the Company has repurchased an aggregate of approximately 27 million shares of its common stock at an aggregate cost of approximately $1 billion under the share repurchase programs. During the nine months ended September 30, 2013, the Company repurchased approximately 2.5 million shares of its common stock at an aggregate cash outlay of approximately $91 million through authorized share repurchase programs. The cash expenditure in the nine months ended September 30, 2013 includes the impact of the equity forward contract components of the Company’s two previously disclosed accelerated share repurchase agreements. As of September 30, 2014, the Company had authority to repurchase approximately $340 million of additional shares under the share repurchase programs through December 31, 2015.

Capped Call

On April 2, 2012, the Company entered into capped call transactions with a counterparty, paying $48 million for the purchase of the capped calls, which was recorded as additional paid-in capital. The capped call transactions are intended to reduce potential economic dilution upon conversion of the Company’s 3.75% Convertible Senior Subordinated Notes due 2042. The capped calls settle in tranches through March 2016, one of which settled in the first quarter of 2014. The adjusted strike price for the capped calls ranged from $40.96 to $41.05 and the adjusted cap price for the tranche settled in 2014 ranged from $56.75 to $56.88; the strike and cap prices adjust for the Company’s dividend payments. The Company received approximately 0.6 million net shares upon settlement with a value of approximately $38 million.

Recently Issued Accounting Standards

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-15, "Presentation of Financial Statements - Going Concern", which requires management to evaluate whether conditions or events raise substantial doubt about the entity’s ability to continue as a going concern and, if so, to provide related footnote disclosures. The guidance is effective for annual or interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on the Company’s Consolidated Financial Statements.

In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period," ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The guidance is effective for annual or interim reporting periods beginning on or after December 15, 2015. The Company does not anticipate that the adoption of this standard will have a material impact on its Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which provides guidance for revenue recognition. The standard’s core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosures. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. The Company is currently in the process of evaluating the impact of adoption of this ASU on its Consolidated Financial Statements.

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results and is disposed of or classified as held for sale. The standard also introduces several new disclosures. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. ASU 2014-08 is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on its Consolidated Financial Statements.