Description of Business

Omnicare, Inc. (“Omnicare” or the “Company”) is a leading healthcare services company that specializes in the management of complex pharmaceutical care. The Company operates two primary businesses, Long-Term Care Group (“LTC”) and Specialty Care Group (“SCG”), each serving different customer populations but sharing a common objective: advancing health outcomes at the lowest possible cost. Through LTC, Omnicare is the nation’s largest provider of pharmaceuticals and related pharmacy and ancillary services to long-term care facilities as well as chronic care facilities and other settings. Through SCG, Omnicare provides specialty pharmacy and commercialization services for the biopharmaceutical industry. Omnicare leverages its specialized clinical capabilities and innovative technology solutions across both businesses as key components of the value Omnicare believes it provides to its customers. Additional information about the Company’s reportable segments is presented at “Note 19 - Segment Information”.

In 2013, the Company’s end-of-life hospice pharmacy business (“Hospice”) as well as certain retail operations (“Retail”) qualified for discontinued operations treatment. Each of these businesses was disposed of in 2014. The results of operations for all periods presented reflect the results of these businesses, including related expenses, as discontinued operations. See “Note 3 - Discontinued Operations”.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Omnicare consolidates entities in which the Company is the primary beneficiary in accordance with guidance regarding the consolidation of variable interest entities. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of the Company’s consolidated financial statements in accordance with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and stockholders’ equity at the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and amounts reported in the accompanying notes to consolidated financial statements. Significant estimates underlying the accompanying consolidated financial statements include the allowance for doubtful accounts and contractual allowance reserve; the net carrying value of inventories; acquisition-related accounting, including goodwill and other indefinite-lived intangible assets, and the related impairment assessments; accruals pursuant to the Company’s restructuring initiatives; stock-based compensation; various other operating allowances and accruals (including employee health, workers’ compensation, property and casualty insurance accruals and related assumptions); fair value determinations; accruals related to pending litigation; and current and deferred tax assets, liabilities and provisions. Actual results could differ from those estimates depending upon the resolution of certain risks and uncertainties.

Potential risks and uncertainties, many of which are beyond the control of Omnicare, include, but are not necessarily limited to, such factors as overall economic, financial and business conditions; delays and reductions in reimbursement by the government and other payors to Omnicare or its customers; the overall financial condition of Omnicare’s customers; the effect of new government regulations, executive orders and 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 outcome of pending and future legal and contractual disputes and litigation; the outcome of audit, compliance, administrative or investigatory reviews, including governmental and regulatory inquiries; other contingent liabilities; the ability to identify, finance and consummate acquisitions on favorable terms and the successful integration of acquired companies; the ability to successfully complete planned divestitures; changes in international economic and political conditions; changes in interest rates; changes in the valuation of the Company’s financial instruments, including its interest rate swap agreements and other derivative instruments; changes in tax laws and regulations; access to capital and financing; the demand for Omnicare’s products and services; pricing and other competitive factors in the industry; changes in insurance claims experience and related assumptions; the outcome of the Company’s annual goodwill and other identifiable intangible assets impairment assessments; variations in costs or expenses; and changes in accounting rules and standards.

Reclassifications

Certain reclassifications of prior-year amounts have been made to conform with the current-year presentation, none of which were considered material to the Company’s financial statements taken as a whole.

Translation of Foreign Financial Statements

For the year ended December 31, 2012, assets and liabilities of the Company’s foreign operations were translated at the year-end rate of exchange, and the results of operations for the Company’s foreign operations were translated at average rates of exchange. Gains or losses from translating foreign currency financial statements were accumulated in a separate component of stockholders’ equity. Following the disposition of the Company’s Canadian pharmacy in the third quarter of 2012, the Company had no foreign operations and, as a result, no foreign currency translation was necessary as of and for the years ended December 31, 2014 and 2013.

Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less. Carrying values of cash and cash equivalents approximate fair value due to the short-term nature of these instruments.

Omnicare maintains amounts on deposit with various financial institutions, which may, at times, exceed federally insured limits. Management periodically evaluates the credit-worthiness of these institutions, and the Company has not experienced any losses on such deposits.

The Company also has restricted cash, which primarily represents cash transferred to separate irrevocable trusts for settlement of employee health and severance costs, and cash collected on behalf of third parties. Restricted cash is immaterial to the Company’s financial position overall and is recorded in “Other current assets” on the Consolidated Balance Sheets.

Fair Value of Financial Instruments

The Company applies the authoritative guidance for fair value measurements, which defines a hierarchy of inputs used in fair value measurements. “Level 1” measurements use quoted prices in active markets for identical assets or liabilities. “Level 2” measurements use significant observable inputs. “Level 3” measurements use significant unobservable inputs that require a company to develop its own assumptions. In recording the fair value of assets and liabilities, companies must use the most reliable measurement available. See “Note 8 - Fair Value”.

Revenue Recognition

In general, Omnicare recognizes revenue when products are delivered or services are rendered or provided to the customer, prices are fixed and determinable and collection is reasonably assured.

A significant portion of the Company’s revenues from sales of pharmaceutical and medical products have been reimbursed by the federal Medicare Part D program and, to a lesser extent, state Medicaid programs. Payments for services rendered to patients covered by these programs are generally less than billed charges. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and records an estimated contractual allowance for certain sales and receivable balances at the revenue recognition date, to properly account for anticipated differences between billed and reimbursed amounts. Accordingly, the total net sales and receivables reported in the Company’s financial statements are recorded at the amount expected to be ultimately received from these payors. Since billing functions for a portion of the Company’s revenue systems are largely computerized, enabling on-line adjudication (i.e., submitting charges to Medicare, Medicaid or other third-party payors electronically, with simultaneous feedback of the amount to be paid) at the time of sale to record net revenues, our exposure in connection with estimating contractual allowance adjustments is limited primarily to unbilled and initially rejected Medicare, Medicaid and third-party claims (typically approved for reimbursement once additional information is provided to the payor). For the remaining portion of the Company’s revenue systems, the contractual allowance is estimated for all billed, unbilled and initially rejected Medicare, Medicaid and third-party claims. The Company evaluates several criteria in developing the estimated contractual allowances on a monthly basis, including historical trends based on actual claims paid, current contract and reimbursement terms, and changes in customer base and payor/product mix. Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled, and the aggregate impact of these resulting adjustments was not significant to the Company’s results of operations for any of the periods presented.

Patient co-payments associated with certain state Medicaid programs, Medicare Part B, Medicare Part D and certain third-party payors are typically not collected at the time products are delivered or services are rendered, but are billed to the individual as part of the Company’s normal billing procedures and subject to the Company’s normal accounts receivable collections procedures.

Under certain circumstances, the Company accepts returns of medications and issues a credit memo to the applicable payor. The Company estimates and accrues for sales returns based on historical return experience, giving consideration to the Company’s return policies. Product returns are processed in the period received, and are not significant compared to our total sales and gross profit.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk consist primarily of interest-bearing cash and cash equivalents, and accounts receivable.

At any given point in time, the Company has cash on deposit with financial institutions, and cash invested in high quality, short-term money market funds or U.S. government-backed repurchase agreements, generally having original maturities of three months or less, in order to minimize its credit risk. The Company is exposed to credit risk in the event of a default by the financial institutions holding such deposits or that issued such cash equivalents to the extent of the cash and cash equivalents recorded in the Consolidated Balance Sheets.

The Company generally does not require collateral from its customers in connection with the extension of credit in the form of accounts receivable balances. The Company establishes allowances for doubtful accounts based on various factors, including historical credit losses and specifically identified credit risks. Management regularly reviews the allowances for doubtful accounts for appropriateness. For the years ended December 31, 2014, 2013 and 2012, no single customer accounted for 10% or more of the Company’s revenues.

In 2014, approximately 65% of Omnicare’s pharmacy services billings were directly reimbursed by government-sponsored programs, including federal Medicare Part D, Medicare Part B and, to a lesser extent, state Medicaid programs. The remainder of Omnicare’s billings were paid or reimbursed by individual residents or their responsible parties (private pay), facilities and other third-party payors, including private insurers. A portion of these revenues also are indirectly dependent on government programs. The table below represents the Company’s approximate payor mix (as a % of annual sales) for each of the years ended:



	December 31,
	2014		2013		2012
Private pay, third-party and facilities ^(a)	34	%	36	%	36	%
Federal Medicare program (Part D & Part B)	58	%	55	%	52	%
State Medicaid programs	7	%	7	%	8	%
Other sources	1	%	2	%	4	%
Totals	100	%	100	%	100	%

(a) Includes payments from skilled nursing facilities on behalf of their federal Medicare program-eligible residents (Medicare Part A) and for other services and supplies, as well as payments from third-party insurers and private pay.

Accounts Receivable

The following table is an aging of the Company’s December 31, 2014 and 2013 gross accounts receivable (net of allowances for contractual adjustments, and prior to allowances for doubtful accounts), aged based on payment terms and categorized based on the three primary types of payors (in thousands):



December 31, 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	$	184,492	$	28,818	$	213,310
Facility payors	297,308		99,036		396,344
Private pay payors	69,693		101,289		170,982
Total gross accounts receivable	$	551,493	$	229,143	$	780,636
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

Notes Receivable

The Company periodically enters into notes receivable with its customers. These notes receivable and the related allowance for losses are recorded in “Other current assets” and “Other noncurrent assets” on the Consolidated Balance Sheets. The Company assesses and monitors credit risk associated with notes receivable through periodic reviews of the customer’s net worth, payment history, long-term debt ratings and other information available from recognized credit rating services. The receivables are periodically assessed for significant changes in credit ratings or other information indicating an increase in exposure to credit risk. Losses on notes receivable have historically not been material to the consolidated financial position of the Company.

As of December 31, 2014 and 2013, gross notes receivable were approximately $81 million and $79 million, respectively, of which approximately $52 million were included in “Other current assets” on the Consolidated Balance Sheets. As of December 31, 2014 and 2013, the allowance for credit losses on the notes receivable was approximately $13 million, which was included in “Other current assets” on the Consolidated Balance Sheets.

Interest income on the notes receivable is recognized on an accrual basis when earned. Interest income was $3 million, $4 million and $5 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Inventories

Inventories consist primarily of purchased pharmaceuticals and medical supplies held for sale to customers and are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Physical inventories are typically performed on a monthly basis at pharmacy sites and, in all cases, no less than once a quarter. Cost of goods sold is recorded based on the actual results of the physical inventory.

The Company receives discounts, rebates and other price concessions (“Discounts”) relating to purchases from its suppliers and vendors. The Company recognizes the related receivables associated with the Discounts by reducing cost of goods sold and inventories. The Company records its estimates of Discounts earned during a period on the accrual basis of accounting, giving proper consideration to whether those Discounts have been earned based on the terms of applicable arrangements and to the levels of inventories remaining on-hand. Receivables related to Discounts are regularly adjusted based on the best available information, and are adjusted to actual amounts as cash is received and the applicable arrangements are settled. Estimates of Discounts have not historically differed materially from actual results.

Properties and Equipment

Properties and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance, repairs, renewals and betterments that do not materially prolong the useful lives of the assets are charged to expense as incurred. Depreciation of properties and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years for computer equipment and software, machinery and equipment, and furniture and fixtures. Buildings and building improvements are depreciated over 40 years, and leasehold improvements are amortized over the lesser of the initial lease term or their useful lives. The Company capitalizes certain costs that are directly associated with the development of internally developed software, representing the historical cost of these assets. Once the software is completed and placed into service, such costs are amortized over the estimated useful lives, ranging from three to ten years.

Leases

Rental payments under operating leases are expensed. Leases that substantially transfer all of the benefits and risks of ownership of property to Omnicare or otherwise meet the criteria for capitalization are accounted for as capital leases. An asset is recorded at the time a capital lease is entered into together with its related long-term obligation to reflect its purchase and financing. Property and equipment recorded under capital leases are depreciated on the same basis described above.

Valuation of Long-Lived Assets

Long-lived assets such as property and equipment, software (acquired and internally developed) and investments are reviewed for impairment when events or changes in circumstances indicate that the book carrying amount of the assets may not be recoverable. An impairment charge is recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its book carrying amount. In addition, an impairment is realized if an asset is abandoned. See “Impairment Charges” below.

Goodwill, Intangibles and Other Assets

Intangible assets are comprised primarily of goodwill, customer relationship assets, noncompete agreements, technology assets, and trademarks and trade names, all originating from business combinations accounted for as purchase transactions. The Company has adopted guidance regarding the testing for goodwill impairment that permits the Company to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then the Company would perform the two-step goodwill impairment test. The first step, used to identify potential impairment, is a comparison of the reporting unit’s estimated fair value to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, applicable goodwill is considered to be not impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment, if any. The second step requires the Company to calculate an implied fair value of goodwill at the reporting unit level. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.

Intangible assets are amortized over their useful lives. See “Note 7 - Goodwill and Other Intangible Assets”.

Debt issuance costs are included in “Other noncurrent assets” on the Consolidated Balance Sheets and are amortized over the life of the related debt, or to the put and initial redemption date of December 15, 2015 in the case of the 3.25% Convertible Senior Debentures due 2035 (the “Initial 2035 Debentures”) and to the put date of January 15, 2021 in the case of the 3.25% Convertible Senior Exchange Debentures due 2035 (the “Exchange 2035 Debentures”).

Insurance Accruals

The Company is self-insured for certain employee health, property and casualty, worker’s compensation, medical professional liability and automobile liability insurance claims. Claims are paid as they are submitted to the respective plan administrators. The Company records monthly expense for the self-insurance plans in its financial statements for incurred claims, using historical claims experience and input from third-party insurance professionals to determine the appropriate accrual level. The accrual reflects claims that have been incurred but not yet paid or reported to the plan administrator. The Company establishes the accruals based on historical claim lag periods, current payment trends for similar insurance claims and input from third-party insurance and valuation professionals. The discount rate utilized in the computation of the property and casualty accrual balance at December 31, 2014 and 2013, was 1.61% and 1.79%, respectively.

Stock-Based Compensation

The Company records compensation costs relating to share-based payment transactions in its financial statements under a fair value recognition model. Under this guidance, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award (usually the vesting period).

Delivery Expenses

Omnicare incurred expenses totaling approximately $168 million, $164 million and $160 million for the years ended December 31, 2014, 2013 and 2012, respectively, to deliver products sold to its customers. Delivery expenses are included in “Selling, general and administrative expenses” on the Consolidated Statements of Comprehensive Income (Loss).

Income Taxes

The Company accounts for income taxes using the asset and liability method under which deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates to differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements.

Future tax benefits are recognized to the extent that realization of those benefits are considered to be more likely than not, and a valuation allowance is established for deferred tax assets that do not meet this threshold.

In accordance with guidance regarding the accounting for uncertainty in income taxes, the Company recognizes a tax position if, based solely on its technical merits, it is more likely than not to be sustained upon examination by the relevant taxing authority. If a tax position does not meet the more likely than not recognition threshold, the Company does not recognize the benefit of that position in its financial statements. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following (in thousands):



	December 31,
	2014			2013
Unrealized gain (loss) on fair value of investments	(300		)	(702		)
Pension and postemployment benefits	(2,525		)	(1,839		)
Total accumulated other comprehensive loss, net	$	(2,825	)	$	(2,541	)

The amounts are net of applicable tax benefits, which were inconsequential for the years ended December 31, 2014 and 2013.

Other Charges (Credits)

Other Charges (Credits) consist of the following (in thousands):



	December 31,
	2014		2013		2012
Acquisition and other related costs⁽¹⁾	$	—	$	2,300	$	1,380
Restructuring and other related charges ⁽²⁾	566		—		8,956
Disposition of businesses ⁽³⁾	805		39,245		(1,777		)
Separation costs ⁽⁴⁾	20,975		6,760		21,000
Loss on sale of plane and termination of plane lease ⁽⁵⁾	—		—		1,062
Debt redemption loss and costs⁽⁶⁾	56,696		51,497		35,092
Impairment charges⁽⁷⁾	60,211		—		—
Total - other charges, net	$	139,253	$	99,802	$	65,713


(1)	See “Note 4 - Acquisitions”.


(2)	See “Note 17 - Restructuring and Other Related Charges”.


(3)	See “Disposition of Businesses” below.


(4)	See “Note 13 - Separation Costs”.


(5)	The Company sold its corporate aircraft in 2012 for a $1 million loss. The year ended December 31, 2012 includes charges relating to the sale of the Company’s aircraft.


(6)	See “Note 11 - Debt”.


(7)	See “Impairment Charges” below.

Disposition of Businesses

In 2013, the Company completed the disposition of certain assets, primarily in its medical supply services business, which were not considered significant, individually or in the aggregate, to the operations of Omnicare. The Company recorded a charge on the disposition of these businesses of $39 million ($28 million after-tax) for the year ended December 31, 2013. These charges are reflected in “Other charges” on the Consolidated Statements of Comprehensive Income (Loss).

In 2012, the Company completed the disposition of its Canadian pharmacy and its pharmacy operational software business, which were not considered, individually or in the aggregate, significant to the operations of Omnicare. The Company recorded a gain on the disposition of these businesses of $2 million, which is reflected in “Other charges” on the Consolidated Statements of Comprehensive Income (Loss).

Impairment Charges

In the fourth quarter of 2014, management completed an assessment of its ongoing project to replace its pharmacy dispensing systems. As a result of the assessment, management decided to abandon the project due to significant costs required to complete the implementation. In connection with this decision, the Company recorded an asset impairment charge of approximately $60 million in the fourth quarter of 2014, which was included in “Other charges” on the Consolidated Statements of Comprehensive Income (Loss). The impairment charge consists of purchased software that will not be used in the future and consulting costs associated with the design and implementation which were previously recorded as property plant and equipment.

Capped Call

In April 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 calls were intended to reduce potential economic dilution upon conversion of the Company’s 3.75% Convertible Senior Subordinated Notes due 2042 (the “2042 Notes”). The capped calls were scheduled to settle in four annual 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 the first quarter of 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. Additionally, in the fourth quarter of 2014, in connection with the conversion of all of the 2042 Notes then outstanding, the Company agreed with the capped call counterparty to early settlement of the remaining two tranches, receiving approximately 1.5 million net shares upon settlement with a value of approximately $102 million. The total number of shares received by the Company in 2014 in connection with the settlement of the capped calls was 2.1 million shares with a value of approximately $140 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”) which 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 does not expect the adoption of this ASU to have a material impact on the Company’s Consolidated Financial Statements.