10-K 1 ocr10-k2014.htm 10-K OCR 10-K 2014

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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 No. 1-8269

OMNICARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
31-1001351
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

OMNICARE, INC.
900 OMNICARE CENTER
201 E. FOURTH STREET
CINCINNATI, OHIO 45202
(Address of Principal Executive Offices)
513-719-2600
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 
Title of Each Class
 
 
Name of Each Exchange on which Registered
 
 
 
Common Stock ($1.00 Par Value)
 
New York Stock Exchange
4.00% Trust Preferred Income Equity Redeemable
 
New York Stock Exchange
Securities issued by Omnicare Capital Trust I and
 
 
       guaranteed by Omnicare, Inc.
 
 
Series B 4.00% Trust Preferred Income Equity
 
New York Stock Exchange
Redeemable Securities issued by Omnicare Capital
 
 
Trust II and guaranteed by Omnicare, Inc.
 
 
 
 
 
 
 
 


 




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Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
 No ý

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 requirements for the past 90 days.
Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
                
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No ý

Aggregate market value of the registrant’s voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange Composite Transaction Listing on the last business day of the registrant’s most recently completed second fiscal quarter (i.e., June 30, 2014) ($66.57 per share): $6,481,011,021

As of January 31, 2015, the registrant had 97,115,225 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Omnicare, Inc.’s (“Omnicare”, the “Company” or the “Registrant”) definitive Proxy Statement for its 2015 Annual Meeting of Stockholders, to be held May 21, 2015, are incorporated by reference into Part III of this report. Such definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the Company’s fiscal year.



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OMNICARE, INC.

2014 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I
 
 
PAGE
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.




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As used in this document, unless otherwise specified or the context otherwise requires, the terms “Omnicare,” “Company,” “we,” “our” and “us” refer to Omnicare, Inc. and its consolidated subsidiaries.

PART I

ITEM 1. – BUSINESS

Background

Omnicare, Inc. (“Omnicare” or the “Company”), a corporation formed in 1981, is a leading healthcare services company that specializes in the management of complex pharmaceutical care. We operate two primary businesses through two operating segments, 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, we are the nation’s largest provider of pharmaceuticals and related pharmacy services to long-term care facilities as well as chronic care facilities and other settings. Through SCG, we provide specialty pharmacy and commercialization services for the biopharmaceutical industry. We leverage our specialized clinical capabilities and innovative technology solutions across both businesses as key components of the value management believes we provide to our customers across the United States. Information regarding our reportable segments is presented at “Note 19 - Segment Information” of the Notes to our 2014 Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K (“Annual Report”).

Long-Term Care Group

Through LTC, Omnicare operates the largest institutional pharmacy business in the United States, based on both revenues and the number of customers served. Due to the size and scope of LTC, we believe we have unique cost advantages, especially pertaining to the sourcing of pharmaceuticals. The scale of our operations has also provided us the opportunity to make investments in proprietary automation technology to reduce our dispensing costs while improving the accuracy and consistency of our service delivery. LTC’s customers consist of skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), independent living communities, hospitals, correctional facilities, and other healthcare service providers. In light of a customer mix that is heavily concentrated in the senior market, we have a high level of insight into geriatric pharmaceutical care. At December 31, 2014, LTC provided pharmacy services in the United States in 47 states and the District of Columbia. For the year ended December 31, 2014, LTC comprised approximately 74% of our total net sales and dispensed approximately 111 million prescriptions.
 
In addition to pharmaceutical distribution, we believe we provide value to our customers through our extensive clinical services, our customer-facing technology offerings and the speed at which we transition residents of our customers’ facilities to lower-cost generic pharmaceuticals. With respect to our clinical services, we provide pharmacy consulting, including monthly patient drug therapy evaluations, assist in compliance with state and federal regulations and provide proprietary clinical and health management programs (utilizing outcomes-based algorithm technology). LTC also provides a suite of technology solutions based largely on our Omniview® web-based platform that is intended to improve the efficiency of our customers’ operations through such tools as the electronic ordering of prescription refills, proof-of-delivery tracking, and real-time validation of Medicare Part D coverage, among others. LTC also provides a number of other products and services, including intravenous medications and nutrition products (infusion therapy products and services), respiratory therapy services, and clinical care planning. We also provide pharmaceutical case management services for retirees, employees and dependents who have drug benefits under corporate-sponsored healthcare programs.  

Operating Model. We purchase, repackage and dispense prescription and non-prescription medication in accordance with physician orders and deliver such prescriptions to long-term care facilities for administration to individual residents (by the facilities’ nursing staff for SNFs). We service long-term care facilities typically within a radius of approximately 150 miles of our pharmacy locations and maintain a 24-hour, seven-days per week, on-call pharmacist service for emergency dispensing, delivery, and consultation with the facility’s staff or attending physician. Our “hub-and-spoke” pharmacy infrastructure is composed of 114 spoke pharmacies that primarily handle new prescription orders and 32 hub pharmacies that use proprietary automation to support spoke pharmacies with refill prescriptions, as well as fill new prescription orders in their respective local markets. The use of automation within our pharmacies leverages our size and, we believe, distinguishes us from our competitors by reducing our dispensing costs while improving our dispensing accuracy.

Upon receipt of a prescription order, the relevant resident information is entered into our computerized dispensing and billing systems. At that time, the dispensing system checks the prescription for any potentially adverse drug interactions, duplicative therapy or resident sensitivity. We dispense branded drugs when required or specifically requested by the physician or patient, and we substitute generic drugs in accordance with applicable state and federal laws as requested by the physician or patient. Subject to physician approval and oversight, and in accordance with our pharmaceutical care guidelines, we also provide for patient-

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specific therapeutic interchange of more efficacious and/or safer drugs than those presently being prescribed. See “The Omnicare Geriatric Pharmaceutical Care Guidelines®” below for further discussion.

We utilize a unit-of-use drug distribution system in which our prescriptions are packaged for dispensing in individual doses. This differs from prescriptions filled by retail pharmacies, which typically are dispensed in vials or other bulk packaging that requires measurement of each dose by or for the patient. Our delivery system is intended to improve control over pharmaceutical distribution and patient compliance with drug therapy by increasing the accuracy and timeliness of drug administration.

In conjunction with our drug distribution system, our computerized record keeping/documentation system is designed to result in greater efficiency in nursing time, improved control and reduced waste in client facilities, and lower error rates in both dispensing and administration. We believe we distinguish ourselves from many of our competitors by also providing proprietary clinical programs. For example, we have developed a ranking of drugs based on their relative clinical effectiveness for the elderly and by cost to the payor. We use these rankings, which we call the Omnicare Geriatric Pharmaceutical Care Guidelines®, or Omnicare Guidelines, to more effectively manage patient care and costs. In addition, we provide health and outcomes management programs for the large base of elderly residents of the long-term facilities we serve.

The Omnicare Geriatric Pharmaceutical Care Guidelines®. Supplementing the various clinical services Omnicare provides, we offer client facilities and their attending physicians a guide to pharmaceutical treatment of the elderly called the Omnicare Geriatric Pharmaceutical Care Guidelines® (“Omnicare Guidelines”). We believe the Omnicare Guidelines is the first drug formulary ranking drugs by disease state according to their clinical effectiveness independent of their cost, specifically designed for the elderly. The Omnicare Guidelines ranks drugs used for specific diseases as preferred, acceptable or unacceptable based solely on their disease-specific clinical effectiveness. The Omnicare Guidelines takes into account such factors as pharmacology, safety and toxicity, efficacy, drug administration, quality of life and other considerations specific to the frail elderly population. The clinical evaluations and rankings are developed exclusively for us by the University of the Sciences in Philadelphia, an academic institution recognized for its expertise in geriatric long-term care. The Omnicare Guidelines is extensively reviewed and updated at least annually by the University of Sciences in Philadelphia, taking into account, among other factors, the latest advances as documented in the medical literature. In addition, the Omnicare Guidelines provides relative cost information comparing the prices of the drugs to patients, their insurers or other payors of the pharmacy bill.

As the Omnicare Guidelines focuses on health benefits, as well as cost, we believe that use of the Omnicare Guidelines assists physicians in making the best clinical choices of drug therapy for the patient in a manner that is cost efficient for the payor of the pharmacy bill. Accordingly, we believe that the development of and compliance with the Omnicare Guidelines is important in lowering costs for Omnicare’s payors. The Omnicare Guidelines is also integrated into our primary customer-facing technology platform, Omniview®.

Omniview®. As the primary component of our customer-facing technology suite, Omniview® provides our long-term care facility customers with an innovative technological platform to improve efficiencies within their operations. Our broad range of advanced technologies allows web-based access to electronic medical records, automated pharmacy billing, online medication refills and returns processing, census tracking, pre-admission medication assessment and access to the Omnicare Guidelines. Our MyOmniview web-portal is designed to address patients’ and family member needs by allowing access to the patients’ health records, billing information and pharmaceutical information. We also offer OmniviewDr as the physician-facing part of Omniview’s technology portal, providing prescribers the ability to view patient health records, approve prescription refill requests, and reference a comprehensive document library, among other time-saving and patient care-enhancing features.

Specialty Care Group

SCG operates across a broad spectrum of the healthcare continuum, serving the needs of biopharmaceutical manufacturers, physicians, nurses, caregivers and patients. Our SCG services are primarily focused on the specialty pharmaceutical market and incorporate four platforms: brand support services, supply chain solutions, patient support services and specialty pharmacy. By integrating these services across SCG’s platforms, we are able to provide our manufacturer clients a customized end-to-end solution for all of their needs. Our brand support services, supply chain solutions and patient support services are integrated, fee-for-service platforms that focus on helping the drug manufacturer to market, distribute and obtain reimbursement for their products. In our specialty pharmacy platform, we dispense specialized pharmaceuticals that are high cost, have complex reimbursement and supply chain challenges, have limited patient populations and are not available through normal retail channels. These specialized drugs deal primarily with specific categories of drugs and disease states, such as rheumatoid arthritis, multiple sclerosis, oncology and growth hormones. SCG accounted for approximately 26% of our total net sales during the year ended December 31, 2014.


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Product and Market Development

Our LTC and SCG businesses engage in an ongoing program for the development and marketing of new services. While new services and marketing are important factors for the growth of these businesses, we do not expect that any new service or marketing efforts, including those in the developmental stage, will require the investment of a significant portion of our assets.

Materials/Supply

We believe our purchasing scale creates a cost advantage over others within the industry. Historically, we purchased most of the generic pharmaceuticals we dispensed directly from manufacturers and some generic and branded pharmaceuticals through a wholesale distributor with whom we have a prime vendor agreement at discounted prices based upon contracts negotiated by us directly with pharmaceutical manufacturers; and in some cases, based upon prices accessed through group purchasing organization contracts. Effective January 1, 2015, we expanded our relationship with our primary vendor of branded pharmaceuticals to include the sourcing and distribution of both branded and generic pharmaceuticals. We have not experienced any significant difficulty in obtaining pharmaceuticals or other products and supplies used in the conduct of our business.

Patents, Trademarks, and Licenses

Our business operations are not dependent upon any material patents, trademarks or licenses (see further discussion of licenses under “Government Regulation” below).

Seasonality

Excluding the periodic impacts of the flu season and variations in the number of billing days from quarter to quarter, our business operations are generally not impacted significantly by seasonality.

Inventories

We seek to maintain adequate on-site inventories of pharmaceuticals and supplies to ensure prompt delivery of service to our customers. Our primary wholesale distributor also maintains local warehousing in most major geographic markets in which we operate.

Customers

At December 31, 2014, LTC primarily serves long-term care institutions and other chronic care settings in 47 states in the U.S. and the District of Columbia.

SCG operates throughout the U.S. and serves a broad range of clients, including many large multi-national biopharmaceutical companies.

No single customer comprised more than 10% of our consolidated revenues in 2014, 2013 or 2012.

Financial information with respect to our segments and geographic locations is presented at “Note 19 - Segment Information” of the Notes to Consolidated Financial Statements.

Backlog

Backlog is not relevant to our business as products and services are sold promptly on an as-ordered basis.

Government Regulation

Our pharmacies and the long-term care institutions we serve are subject to extensive federal, state and local regulation. These regulations cover required qualifications, day-to-day operations, reimbursement and the documentation of activities. We regularly monitor and assess the impact on our operations of new or proposed regulations and changes in the interpretation or application of existing regulations.

Pharmacy Licensure, Certification and Regulation. Operation of a pharmacy within a state generally requires licensure by the state board of pharmacy. At December 31, 2014, we had pharmacy licenses, or pending applications, for each pharmacy we operate. In addition, many states regulate out-of-state pharmacies as a condition of the delivery of prescription products to in-state

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patients. Where applicable, our pharmacies hold the requisite licenses to deliver to out-of-state patients. Our pharmacies are also registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances.

Federal and State Laws Affecting the Repackaging, Labeling and Interstate Shipping of Drugs. Federal and state laws impose certain registration, repackaging and labeling requirements on entities that repackage drugs for distribution, other than pharmacies that repackage in the regular practice of dispensing or selling drugs directly to patients. A drug repackager must register with the U.S. Food & Drug Administration (“FDA”) as a repackager, and with the relevant states as a drug wholesaler or repackager. A drug repackager is subject to FDA inspection for compliance with applicable Current Good Manufacturing Practices (“cGMPs”). We hold all required registrations and licenses, and we believe our ongoing repackaging operations are in substantial compliance with applicable federal cGMP requirements and state wholesaler requirements. In addition, we believe we comply with applicable laws regarding the transfer and shipment of pharmaceuticals. In November 2013, Congress passed and the President signed into law the Drug Quality and Security Act (“DQSA”), which established new requirements for drug wholesale distributors and third party logistics providers, including licensing requirements in states that had not previously licensed such entities. The DQSA became effective on January 1, 2015, and the FDA has two years to finalize the relevant regulations pursuant to the law. Certain of our distribution operations are currently licensed under state third party logistics laws, and we anticipate that we will be required to and will obtain a third party logistics license under DQSA for these operations after the regulations are finalized. Supply chain laws and regulations such as the DQSA could increase the overall regulatory burden and costs associated with our distribution business.

Drug Pedigree Regulations. Federal and state laws generally require wholesale drug distributors to maintain, and provide to pharmacies, a history of the transactions in the chain of distribution of a given drug lot from the manufacturer to the pharmacy (a “drug pedigree”). The DQSA establishes federal drug pedigree tracking standards that require drugs to be labeled and tracked at the lot level, preempt state drug pedigree requirements, and require supply-chain stakeholders to participate in an electronic, interoperable prescription drug track and trace system. Supply chain laws and regulations such as these could increase the overall regulatory burden and costs associated with our distribution business. Although we believe we are in compliance with applicable federal and state regulations currently in effect, these regulations may be interpreted or applied in the future in a manner inconsistent with our business practices, which could adversely affect our results of operations, cash flows and financial condition.

Medicare and Medicaid. Our business has long operated under regulatory and cost containment pressures from federal and state laws primarily affecting Medicare and Medicaid. We have historically received reimbursement from Medicare (primarily under the Part A and Part D programs and to a lesser extent the Part B program) and Medicaid programs, directly from individual residents or their responsible parties (private pay), long-term care facilities and from other payors such as third-party insurers.

Our payor mix (as a percentage of annual sales) for each of the years ended December 31, 2014, 2013 and 2012 is presented at “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

For those patients who are not covered by government-sponsored programs or private insurance, we generally bill the patient or the patient’s responsible party directly on a monthly basis. Depending upon local market practices, we may alternatively bill private patients through the long-term care facility. Pricing for private pay patients is based on prevailing regional market rates or “usual and customary” charges.

The Medicaid program is a cooperative federal-state program designed to enable states to provide medical assistance to aged, blind or disabled individuals or members of families with dependent children whose income and resources are insufficient to meet the costs of necessary medical services. Our pharmacies participate in state Medicaid programs.

Federal law and regulations contain a variety of requirements relating to the furnishing of prescription drugs under Medicaid. First, states are given authority, subject to certain standards, to limit or specify conditions for the coverage of particular drugs. Second, federal Medicaid law establishes standards affecting pharmacy practice, including general requirements relating to patient counseling and drug utilization review and more specific standards for SNFs and other nursing facilities relating to drug regimen reviews for Medicaid patients in such facilities. Third, federal regulations impose certain requirements relating to reimbursement for prescription drugs furnished to Medicaid patients, including “upper limits” on payment levels, the calculation of which have been subject to revision by Congress in recent years (see below). In addition to requirements imposed by federal law, each state has substantial discretion to determine administrative, coverage, eligibility and payment policies under its Medicaid program that may affect our operations.

The Medicare program is a federally funded and administered health insurance program for individuals age 65 and over, or who are disabled. While pharmacies are not subject to Medicare certification requirements, providers such as SNFs are subject to

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specified standards. Failure to comply with these requirements and standards may adversely affect an entity’s ability to participate in the Medicare program and receive reimbursement for services provided to Medicare beneficiaries.
 
Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs. From time to time, these audits and inquiries, as well as our own internal compliance program, identify overpayments and other billing errors that result in repayment or self-reporting to the applicable agency. Although we believe that our billing practices materially comply with applicable state and federal requirements, these requirements may be interpreted or applied in the future in a manner inconsistent with our business practices.

The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments (including freezes and funding reductions), administrative rulings and executive orders, all of which may adversely affect our business. Future payments for pharmaceutical supplies and services under the Medicare and Medicaid programs may be based on different methodologies or otherwise differ from present levels. In this regard, we may be subject to payment reductions as a result of federal budgetary or other legislation related to the Medicare and Medicaid programs. In addition, numerous state governments have experienced and may continue to experience budgetary pressures that could result in Medicaid payment reductions or delays in payment to us or our customer nursing facilities.

In addition, if we or our client facilities fail to comply with applicable reimbursement regulations, even if inadvertently, our business could be adversely impacted. Additionally, changes in reimbursement programs or applicable regulations, such as reductions in the allowable reimbursement levels, modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicaid and Medicare expenditures, could adversely affect our business.

Referral Restrictions. We are subject to federal and state laws governing financial and other arrangements between healthcare providers. These laws include the federal anti-kickback statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration directly or indirectly in return for, or to induce, the referral of an individual to a person for the furnishing of any item or service for which payment may be made in whole or in part under federal healthcare programs. We are also subject to the federal physician self-referral statute, which prohibits physicians from referring Medicare and Medicaid patients for certain “designated health services,” including outpatient prescription drugs, durable medical equipment, and enteral supplies and equipment, to an entity if the referring physician (or a member of the physician’s immediate family) has a “financial relationship,” through ownership or compensation, with the entity. Many states have enacted similar statutes which are not necessarily limited to items and services for which payment is made by federal healthcare programs. Violations of these laws may result in fines, imprisonment, denial of payment for services, and exclusion from the federal programs and/or other state-funded programs.

Under the qui tam or “whistleblower” provisions of the federal and various state false claims acts, private citizens may bring lawsuits alleging that a violation of the federal anti-kickback statute or similar laws has resulted in the submission of “false” claims to federal and/or state healthcare programs, including Medicare and Medicaid. Since the private plaintiff in this type of proceeding is generally entitled to share in any damages a court orders the defendant to pay to federal and state governments under these laws, financial incentives exist for individuals to allege that particular practices or activities constitute a violation of these statutes. A determination that we have violated these laws, or the initiation of a lawsuit alleging a violation of these laws, could adversely affect our business and financial condition.

Other provisions in the Social Security Act and in other federal and state laws authorize the imposition of penalties, including criminal and civil fines and exclusions from participation in Medicare, Medicaid and other federal healthcare programs for false claims, improper billing and other offenses.

We believe our contract arrangements with other healthcare providers and our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws. These laws may, however, be interpreted and applied in the future in a manner inconsistent with our business practices.

Healthcare Reform and Federal Budget Legislation. As part of ongoing operations, Omnicare and our customers are subject to legislative and regulatory changes impacting operations and the level of reimbursement received from the Medicare and Medicaid programs. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”), changed the requirements for Centers for Medicare & Medicaid Services’ (“CMS”) calculation of maximum prescription drug reimbursement amounts under state Medicaid programs, as discussed below.


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In March 2013, President Obama issued a sequestration order that mandates spending reductions impacting most federal programs, as required under the terms of the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. The sequestration order requires a 2% cut to Medicare payments to providers and health plans. Sequestration generally applies to Medicare fee-for-service claims with dates-of-service or dates-of-discharge on or after April 1, 2013, and payments made to Medicare Advantage organizations and Medicare Part D sponsors on or after April 1, 2013. Under current law, as amended by subsequent legislation, Medicare sequestration is scheduled to last through fiscal year 2024, although legislation could be enacted at any time to end or modify the terms of sequestration. We believe that this reduction in CMS payments to Medicare Part D plan sponsors generally does not directly affect the amounts that we are paid under our existing agreements with Medicare Part D plan sponsors. However, it is possible that the sequestration reductions could lead Medicare Part D plan sponsors to seek lower rates through renegotiation. There can be no assurance that sequestration or other future policies impacting federal spending on Medicare will not adversely affect our business.

Effective for federal fiscal year 2015, which began October 1, 2014, CMS has increased reimbursement rates paid to skilled nursing facilities for services provided under Medicare Part A by 2% compared to fiscal year 2014 levels. There can be no assurance, however, that Medicare reimbursement rates in future years will not be reduced.

Pursuant to the ACA, certain federal upper limit (“FUL”) prices for certain generic and multisource branded drugs under Medicaid which had generally been calculated using wholesale acquisition cost will instead be calculated using average manufacturer price (“AMP”), which is a price reported by manufacturers to CMS. The ACA also changed certain definitions relating to AMP and other requirements for calculation of AMP and FULs. CMS has released, for review and comment only, draft FULs and related data, as well as its draft methodology for calculating such FULs. We submitted comments to CMS on various aspects of these draft FULs and methodology, including our assessment that the draft weighted AMPs do not reflect the market prices at which these drugs can be acquired in the marketplace. The FUL methodology has not been finalized to date. CMS has also released proposed regulations relating to the calculation of AMP and FUL pursuant to the ACA changes, and in the same release has proposed that Medicaid reimbursement of covered outpatient drugs to which FUL do not apply be based upon an “actual acquisition cost” measure, with new requirements for Medicaid dispensing fees. We submitted comments on these proposals. Although CMS had announced its intention to finalize the FULs for multiple source drugs in July 2014, on June 2, 2014, CMS announced that it would not be finalizing the draft FULs at that time. CMS stated that further detailed guidance would be provided for states to implement the ACA FULs, that it expects to provide a new finalization date for the FULs when it releases such guidance, and that it will continue to analyze the draft monthly FUL data, including the relationship of those FULs to the National Average Drug Acquisition Cost pricing. CMS subsequently indicated in a November 20, 2014 informational bulletin that it would finalize ACA FULs at or about the same time that it publishes its final rule pertaining to Medicaid reimbursement for covered outpatient drugs under the ACA. There can be no assurance that new FULs or other changes in reimbursement for drugs we provide under Medicaid will not adversely affect our business.

Health Information Privacy, Security and Transaction Practices. The information set forth under “Federal and state laws that protect patient health and other personal information may increase our costs and limit our ability to collect and use that information” in Item 1A of this Annual Report is incorporated by reference herein.

Compliance Program. The Department of Health and Human Services Office of Inspector General (“OIG”) has issued guidance to the healthcare industry to help providers design effective voluntary compliance programs to prevent fraud, waste and abuse in healthcare programs, including Medicare and Medicaid. In addition, we are subject in the ordinary course of business to audits, inspections and investigatory reviews by federal and state authorities covering various aspects of our business. In 2009, we entered into an amended and restated corporate integrity agreement with the OIG, which succeeds our prior corporate integrity agreement with the OIG entered into in 2006 and requires, among other things, that we maintain and augment our compliance program in accordance with the terms of the agreement.

Although we believe that we are in compliance in all material respects with federal, state and local laws, failure to comply, even if inadvertently, could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

See “Risk Factors”, “Legal Proceedings” and “Note 18 - Commitments and Contingencies” to our Consolidated Financial Statements at Items 1A, 3 and 8, respectively, of this Annual Report for further discussion of the impact of government regulation on our business.

Competition

Long-term care pharmaceutical services are highly regional or local in nature and, within a given geographic area of operations, highly competitive. We are the nation’s largest provider of pharmaceuticals and related pharmacy services to long-term care institutions. Our largest competitor nationally is PharMerica Corporation. We also compete with numerous local and regional

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institutional pharmacies, pharmacies owned by long-term care facilities and local retail pharmacies. We compete on the basis of quality, price, terms and overall cost-effectiveness, along with the clinical expertise, breadth of services, technology and professional support we offer. Some states have enacted “freedom of choice” or “any willing provider” requirements as part of their state Medicaid programs or in separate legislation, which may increase the competition that we face in providing services to long-term care facility residents in these states.

Through SCG, we offer a comprehensive portfolio of brand support services, supply chain solutions, patient support services and specialty pharmacy services tailored to the biotechnology and biopharmaceutical industries. SCG competes throughout the U.S. with specialty pharmacies, drug wholesalers and pharmaceutical benefit management companies. Our SCG integrated solution addresses management and dispensing of specialty medications, pharmaceutical reimbursement, pharmacy support services and third party logistics under a single management team which, we believe, differentiates us from our competitors. We compete on the basis of quality and overall cost effectiveness, along with the breadth of services and professional support we offer.

Environmental Matters

In operating our pharmacies, we have not historically incurred significant expense in complying with applicable pollution control laws, and we do not expect to make material capital expenditures for environmental control in the future. While we cannot predict the effect that any future environmental legislation or regulations or the interpretation or application of such legislation and regulations may have on our operations, we do not anticipate any changes regarding pollution control laws that would have a material adverse impact to Omnicare.

Employees

At December 31, 2014, we employed approximately 12,451 persons, (including approximately 725 part-time employees), all of which are located within the U.S.

Executive Officers of the Company

Our executive officers on the date of this Annual Report are as follows:
 
 
 
 
 
 
First Elected to
Name
 
Age
 
Office (1)
 
Present Office
Nitin Sahney
 
51
 
President and Chief Executive Officer (2)
 
June 30, 2014
Robert O. Kraft
 
44
 
Senior Vice President and Chief Financial Officer (3)
 
September 11, 2012
Alexander M. Kayne
 
42
 
Senior Vice President, General Counsel and Secretary (4)
 
April 4, 2011
Kirsten Marriner
 
42
 
Senior Vice President and Chief Human Resources Officer (5)
 
March 27, 2013
David Hileman
 
51
 
Senior Vice President, Commercial Operations (6)
 
September 7, 2014
Amit Jain
 
42
 
Senior Vice President, Operations and Sales (7)
 
September 7, 2014

(1)
Executive officers are elected for one-year terms at the annual organizational meeting of the Board of Directors, which follows the annual meeting of stockholders.
(2)
Mr. Sahney was appointed as our Chief Executive Officer on June 30, 2014, after serving as our President since September 2012. Mr. Sahney served as our Chief Operating Officer from June 2012 to June 2014 and as Executive Vice President and President - Specialty Care Group from November 2010 to June 2012. Prior to joining Omnicare, Mr. Sahney managed a healthcare investment fund since October 2007. Before that, Mr. Sahney served as President and Chief Executive Officer of RxCrossroads, a specialty pharmaceutical services company acquired by Omnicare in 2005, from 2001 until August 2007. Prior to his involvement with RxCrossroads, Mr. Sahney held a number of management positions with Cardinal Health, Inc., beginning in September 1993.
(3)
Mr. Kraft was appointed as our Senior Vice President and Chief Financial Officer on September 11, 2012. Mr. Kraft served as our Senior Vice President - Finance from November 2010 to September 2012. Prior to joining Omnicare, Mr. Kraft spent 18 years with the public accounting firm PricewaterhouseCoopers LLP, where he was a partner.
(4)
Mr. Kayne was appointed as our Senior Vice President, General Counsel and Secretary on April 11, 2011. From November 2010 to April 2011, Mr. Kayne served as Interim General Counsel and Secretary of Omnicare. Prior to joining Omnicare, Mr. Kayne was a partner with Dewey & LeBoeuf LLP in its litigation department. In May 2012, Dewey & LeBoeuf LLP filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.

10


(5)
Ms. Marriner was appointed as our Senior Vice President and Chief Human Resources Officer on March 27, 2013. Prior to joining Omnicare, Ms. Marriner spent nearly ten years with Fifth Third Bank where she served in various leadership capacities, including Senior Vice President, Director of Talent Management and Development. Before that, she spent five years with KeyCorp in a human resources management position.
(6)
Mr. Hileman was appointed as our Senior Vice President, Commercial Operations on September 7, 2014. Before taking on his current role, Mr. Hileman served as Senior Vice President, Long Term Care Operations from March 2013 to September 2014, and Senior Vice President, Specialty Operations from January 2011 to March 2013.  Mr. Hileman joined Omnicare in 2005 with the acquisition of RxCrossroads as a Vice President.
(7)
Mr. Jain was appointed as our Senior Vice President, Operations and Sales on September 7, 2014. Before taking on his current role, Mr. Jain served as Senior Vice President, Sales & Specialty Operations from September 2013 to September 2014, Senior Vice President, Specialty and Long Term Care Sales from August 2012 to September 2013, and Vice President of Business Development from June 2011 to August 2012. Prior to joining Omnicare, Mr. Jain held various leadership roles at Headstrong, a global consultancy organization that provides technology and outsourcing solutions in healthcare and financial markets.

Available Information

We make available, free of charge, on or through our corporate website, at www.omnicare.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Additionally, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C., 20549. Information regarding operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. Information that we file with the SEC is also available at the SEC’s website at www.sec.gov.

We also post on our corporate website the following corporate governance documents and committee charters:

Corporate Governance Guidelines
Code of Business Conduct and Ethics
Code of Ethics for the Chief Executive Officer and Senior Financial Officers
Audit Committee Charter
Compliance Committee Charter
Compensation Committee Charter
Nominating and Governance Committee Charter
Executive Committee Charter

Copies of these documents are also available in print to any stockholder who requests them by writing our Corporate Secretary at:
Omnicare, Inc.
900 Omnicare Center
201 East Fourth Street
Cincinnati, OH 45202

11



ITEM 1A. – RISK FACTORS

Risks Relating to Our Business

Our or our client facilities’ failure to comply with Medicaid and Medicare regulations could jeopardize our eligibility to participate in these programs, subject us to other penalties, or otherwise reduce our revenue from these programs.

Our business is dependent upon revenues from the Medicare and Medicaid programs, which are highly regulated. Our or our client facilities’ failure to comply with applicable regulations, even if inadvertent, could adversely affect our reimbursement under these programs and our ability to continue to participate in these programs, which could have a material adverse effect on our results of operations. In addition, our failure to comply with applicable Medicare and Medicaid regulations could subject us to other penalties.

The significant portion of our revenue that we derive from agreements with payors, including Medicare Part D Plans, and long-term care facility clients could be reduced if such agreements are terminated or changed.

In 2014, approximately 58% of our revenue was derived from beneficiaries covered under the Medicare Part D program. Our reimbursement under Medicare Part D, as well as our reimbursement from certain private third-party payors, is determined pursuant to agreements that we negotiate with those payors or their pharmacy benefit manager representatives. Likewise, our reimbursement from SNFs for drugs is determined pursuant to our agreements with them. Certain of these agreements are terminable upon prior notice by the other party. A SNF’s financial difficulty could lead to payment disputes and ultimately to the termination of our agreement with them. We cannot provide assurance that we will be able to replace terminated or expired agreements on terms as favorable as our existing agreements or at all. The termination or modification of these agreements could adversely affect our reimbursement from these sources, which would have a material adverse effect on our results of operations. Further, termination of our agreement with a long-term care facility or similar facility customer generally terminates our provision of services to any of the residents of that facility, resulting in the loss of revenue from any source for those residents. Additionally, the proportion of our Medicare Part D business serviced under specific agreements may change over time based upon beneficiary choice, reassignment of beneficiaries to different Medicare Part D Plans, Medicare Part D Plan consolidation or other factors, which could also adversely affect our revenue. Our payor mix (as a percentage of annual sales) for each of the years ended December 31, 2014, 2013, and 2012 is presented at “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

Continuing efforts to contain healthcare costs may reduce our future revenue.

Our sales and profitability are affected by the efforts of healthcare payors to contain or reduce the cost of healthcare by lowering reimbursement rates, limiting the scope of covered services, and negotiating reduced or capitated pricing arrangements. Many states are facing budget pressures that could result in increased healthcare cost containment efforts. Any changes that lower reimbursement levels under Medicare, Medicaid or other programs could reduce our future revenue. These changes may include modifications in the timing or processing of payments, and other changes intended to limit or decrease the growth of Medicare, Medicaid or third party expenditures. In addition, our profitability may be adversely affected by any efforts of our suppliers to shift healthcare costs by increasing the net prices on the products we obtain from them.

Federal and state healthcare legislation has significantly impacted our business, and future legislation and regulations are likely to affect us.

We derive a significant portion of our revenues directly or indirectly from government-sponsored programs, principally the federal Medicare program and to a lesser extent state Medicaid programs. As part of ongoing operations, Omnicare and our customers are subject to legislative and regulatory changes impacting operations and the level of reimbursement received from the Medicare and Medicaid programs. See “Government Regulation” above in Item 1 of this Annual Report, which is incorporated by reference herein.

In order to limit the growth of healthcare costs, we anticipate that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for healthcare providers, including long-term care facilities and pharmacies. We cannot predict with any degree of certainty the financial impact on our business of the ACA, or future healthcare initiatives, if any, regarding the cost of healthcare, managed care, universal healthcare coverage, and other healthcare issues. We receive discounts, rebates and other price concessions from pharmaceutical manufacturers pursuant to contracts for the purchase of their products. There can be no assurance that any changes in legislation or regulations, or the interpretation or application of current law, that would eliminate or significantly reduce the discounts, rebates and other price

12


concessions that we receive from manufacturers or that would otherwise impact payment available for drugs under federal or state healthcare programs will not have a material adverse impact on our results of operations, financial position or cash flows.

Over the long term, funding for federal and state healthcare programs may be impacted by the aging of the population; the growth in enrollees as eligibility is potentially expanded; the escalation in drug costs owing to higher drug utilization among seniors; the impact of the Medicare Part D benefit for seniors; the introduction of new, more efficacious but also more expensive medications; and the long-term financing of the entire Medicare program. Given competing national priorities, we are unable to predict the outcome and impact on our business of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs. Further, Medicare, Medicaid and/or private payor rates for pharmaceutical supplies and services may not continue to be based on current methodologies or remain comparable to present levels. Any future healthcare legislation or regulation impacting these rates may materially adversely affect our business.
 
Changes in industry pricing benchmarks could materially impact our financial performance.
 
Contracts and fee schedules in the prescription drug industry, including our contracts with various payors and fee schedules under state Medicaid programs, generally use certain published benchmarks, including average wholesale price (“AWP”) and wholesale acquisition cost (“WAC”), to establish pricing for prescription drugs. Most of our contracts and fee schedules utilize the AWP or WAC standard. However, there can be no assurance that payors will continue to utilize AWP, as previously calculated, or that other pricing benchmarks will not be adopted to establish prices within the industry. For example, see “Healthcare Reform and Federal Budget Legislation” under Item 1 of this Annual Report, which is incorporated here by reference, for a description of pricing changes pursuant to the ACA. In addition, CMS has been conducting a national survey of pharmacies to create a national average drug acquisition cost benchmark (“NADAC”), which states may use to set pharmacy payment rates. Effective November 27, 2013, CMS began publishing NADAC prices that are updated on a weekly and monthly basis. CMS also has released for comment draft National Average Retail Price (“NARP”) data, which reflects prices paid to retail community pharmacies for drugs for individuals with Medicaid, cash paying customers, and those with certain third party insurance. Effective July 1, 2013, CMS suspended its NARP survey, pending funding decisions.

Due to these and other uncertainties, we can give no assurance that the short- or long-term impact of changes to industry pricing benchmarks will not have a material adverse effect on our business and financial results. Our financial projections, including our earnings guidance for 2015, contemplate what we have estimated to be the most probable impact of changes to industry pricing benchmarks. Actual results may be materially less favorable than those estimated in formulating such projections.

If we fail to comply with licensure requirements, fraud and abuse laws, false claims provisions or other applicable laws, we may need to curtail operations, and could be subject to significant penalties.

Our pharmacy business is subject to extensive and often changing federal, state and local regulations, and our pharmacies are required to be licensed in the states in which they are located or do business. While we regularly monitor and assess the impact on our operations of regulatory activity and we currently have pharmacy licenses for each pharmacy we operate, the failure to obtain or renew any required regulatory approvals or licenses could adversely affect the continued operation of our business. In addition, we are subject to federal and state laws that impose registration, repackaging and labeling requirements on entities that repackage drugs for distribution; state and federal laws regarding the transfer and shipment of pharmaceuticals; and “drug pedigree” regulations that require prescription drug wholesale distributors to document a history of the transactions in a drug lot’s chain of distribution. These supply chain laws and regulations, which include the DQSA, could increase the overall regulatory burden and costs associated with our distribution business. We are also subject to federal and state laws, commonly known as the fraud and abuse laws, that prohibit payments intended to induce or encourage the referral of patients to, or the recommendation of, a particular provider of items or services. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion from the Medicaid, Medicare and other federal healthcare programs.

Further, under the qui tam or “whistleblower” provisions of the federal and various state false claims acts, private citizens may bring lawsuits alleging that a violation of the federal anti-kickback statute or similar laws has resulted in the submission of “false” claims to federal and/or state healthcare programs, including Medicare and Medicaid. Since the private plaintiff in this type of proceeding is generally entitled to share in any damages a court orders the defendant to pay to federal and state governments under these laws, financial incentives exist for individuals to allege that particular practices or activities constitute a violation of these statutes. A determination that we have violated these laws, or the initiation of a lawsuit alleging a violation of these laws, could adversely affect our business and financial condition.

As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as governmental/regulatory authorities responsible for enforcing the laws and regulations to which we are subject. Federal and state government agencies have increased their focus on and coordination of civil and criminal efforts in the

13


healthcare area, and the ACA and other recent legislation has expanded federal healthcare fraud enforcement authority. The OIG and U.S. Department of Justice have, from time to time, established national enforcement initiatives, targeting all providers of a particular type, that focus on specific billing practices or other suspected areas of abuse. Further, under the federal False Claims Act and certain state statutes, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. There can be no assurance that the ultimate resolution of any such claims, inquiries or investigations, individually or in the aggregate, will not have a material adverse effect on our consolidated results of operations, financial position or cash flows. Moreover, we cannot predict our future costs associated with compliance with such laws.

Our pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances. The Drug Enforcement Administration (“DEA”) increased scrutiny and enforcement of long-term care pharmacy practices under the federal Controlled Substances Act. We believe that this increased scrutiny and, in some cases, stringent interpretation of existing regulations, effectively changed long-standing practices for dispensing controlled substances in the long-term care facility setting. We have been required to modify the controlled substances dispensing procedures at certain of our pharmacies to comply with the regulations as currently interpreted by the DEA. Heightened enforcement of controlled substances regulations could increase the overall regulatory burden and costs associated with our pharmacy services, and there can be no assurance that this heightened level of enforcement and DEA or other investigations, or any fines or other penalties resulting therefrom, will not materially adversely affect our results of operations, financial condition or cash flows.

Federal and state laws that protect patient health and other personal information may increase our costs and limit our ability to collect and use that information.

Omnicare and the healthcare industry generally are required to comply with the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which mandates, among other things, the adoption of standards to enhance the efficiency and simplify the administration of the healthcare system, as well as to protect the confidentiality of protected health information and electronic protected health information. Many states have similar laws applicable to the Company. In many of our operations, we are a “covered entity” under HIPAA and, therefore, our operations are required to comply with these standards for which we are subject to significant civil and criminal penalties if we fail to do so. We also provide services to customers that are covered entities, and we are required to provide satisfactory written assurances to those customers through our contractual agreements that we will provide our services in accordance with the requirements of HIPAA. Our failure to comply with these contractual agreements could lead to a loss of customers, contractual liability to our customers or direct action by the federal government, including penalties.

On January 25, 2013, the Office for Civil Rights of the Department of Health and Human Services published a final rule modifying the HIPAA Privacy, Security, Breach Notification and Enforcement Rules, including revisions made by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), which, among other things, expanded the privacy and security requirements for business associates that create, receive, maintain or transmit protected health information for or on behalf of covered entities; increased penalties for noncompliance; and strengthened requirements for reporting breaches of unsecured protected health information. The rule also makes business associates and their subcontractors directly liable for civil monetary penalties for impermissible uses and disclosures of protected health information. The rule required covered entities and business associates to comply, subject to limited exceptions, with the applicable requirements of this final rule by September 23, 2013.

In addition to HIPAA, we must adhere to state privacy laws and other state privacy or health information requirements not preempted by HIPAA, including those that provide greater privacy protection for individuals than HIPAA. We believe we fully comply with current HIPAA rules, including the associated changes to HIPAA pursuant to HITECH, and similar state requirements; however, there can be no assurance that the cost of compliance with HIPAA and similar state standards will not increase significantly in the future, which could result in an adverse effect on our operations or profitability, or that of our customers.

There are costs and administrative burdens associated with ongoing compliance with information privacy and security laws. Failure to comply carries with it the risk of significant penalties and sanctions. We cannot predict at this time the costs associated with compliance, or the impact of such laws and regulations on our results of operations, cash flows or financial condition.

We have substantial outstanding debt, including convertible debt, and could incur additional debt in the future. Any failure to meet our debt obligations, including settlement of conversions of our convertible debt securities, would adversely affect our business and financial condition.

At December 31, 2014, our total consolidated long-term debt plus the portion of current debt representing notes and convertible debentures accounted for approximately 43.1% of our total capitalization. Although certain of the instruments governing our current indebtedness contain restrictions on our incurrence of additional debt, these restrictions are subject to qualifications and

14


exceptions and, under certain circumstances, we could incur substantial additional indebtedness, including in connection with potential acquisition transactions. Additionally, these restrictions do not prevent us from incurring obligations that do not constitute debt under the governing documents.

The degree to which we are leveraged could have adverse consequences, including:
a substantial portion of our cash flow from operations will be required to service interest and principal payments on our debt and may not be available for operations, working capital, capital expenditures, expansion, acquisitions, dividends or general corporate or other purposes;
our ability to obtain additional financing in the future may be impaired;
we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage;
our flexibility in planning for, or reacting to, changes in our business and industry may be limited; and
we may be more vulnerable in the event of a downturn in our business, our industry or the economy in general.

Several series of our outstanding notes and debentures (collectively, the “Convertible Notes”) are convertible into cash and/or shares of our common stock under specified circumstances, including if the closing price of our common stock is more than 130% of the conversion price for such series of Convertible Notes during the applicable measurement period. In general, upon conversion, we will pay cash for the principal amount of the Convertible Notes and shares of common stock for the remainder, if any, based on a daily conversion value during the applicable cash settlement averaging period, provided that we will pay cash in lieu of any fractional shares. Payment occurs at the end of the applicable settlement period, which is generally 30 days after we receive a holder’s notice of conversion. For additional details on the conversion features of the Convertible Notes, see “Note 11 - Debt” of the Notes to Consolidated Financial Statements.

The aggregate principal amount of Convertible Notes convertible at any given time is subject to change depending on factors such as the price of our common stock during the applicable measurement period. As of December 31, 2014, approximately $387 million in aggregate principal amount of Convertible Notes was convertible, including our 3.75% Convertible Senior Subordinated Notes due 2025 (the “2025 Notes”) and our 4.00% Junior Subordinated Convertible Debentures due 2033 (the “2033 Debentures”). Additionally, holders of approximately $186 million aggregate principal amount of our 3.25% Convertible Senior Debentures due 2035 (the “Initial 2035 Debentures”) have the right to require us to repurchase their Initial 2035 Debentures on December 15, 2015 and, therefore, the Initial 2035 Debentures are classified as current debt as of December 31, 2014. We cannot predict the aggregate principal amount of Convertible Notes that will be convertible at any given time or how many, if any, holders of such Convertible Notes will present their Convertible Notes for conversion or how many, if any, holders of the Initial 2035 Debentures will require us to repurchase their Initial 2035 Debentures or the impact of any such conversions or repurchases on our results of operations, financial condition, liquidity or cash flows.

Our ability to make payments on, repurchase or refinance our debt and to satisfy conversions of our Convertible Notes will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, business, financial, competitive, legislative, regulatory, and other factors that are beyond our control. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under our credit facility in an amount sufficient to enable us to pay our debt, satisfy conversions of our Convertible Notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. There can be no assurance that we will be able to refinance any of our debt, including our credit facility, on commercially reasonable terms or at all.

We are subject to risks relating to acquisitions we may consummate.

From time to time, we may pursue and consummate acquisitions as a component of our strategy. Acquisitions involve inherent uncertainties, including our ability to consummate proposed acquisitions on favorable terms or at all, the effect on acquired businesses of integration into a larger organization, and the availability of management resources to oversee the operations of these businesses. Even though an acquired business may have experienced positive financial performance as an independent company prior to an acquisition, we cannot be sure that the business will continue to perform positively after an acquisition.
 
We also may acquire businesses with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, and tax contingencies. We have policies and procedures to conduct reviews of potential acquisitions for compliance with healthcare laws and to adapt the acquired businesses to our standards and applicable laws. We also generally seek indemnification from sellers covering these matters. We may, however, incur material liabilities for past activities of acquired businesses.
 

15


We cannot be sure of the successful completion or integration of any acquisition, or that an acquisition will not have an adverse impact on our results of operations, cash flows or financial condition. We also may not realize any or all of the anticipated benefits of any acquisition.

Compliance with our Corporate Integrity Agreement imposes significant costs on our business, and our failure to comply would result in penalties or other adverse consequences.

In 2009, we entered into an amended and restated Corporate Integrity Agreement (“CIA”) with the OIG, which requires, among other things, that we maintain and augment our compliance program in accordance with the terms of the CIA. The CIA also requires that we, among other things, (i) create procedures designed to ensure that each existing, new or renewed arrangement with any actual or potential source of healthcare business or referrals to Omnicare or any actual or potential recipient of healthcare business or referrals from Omnicare does not violate the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), or related regulations, directives and guidance, including creating and maintaining a database of such arrangements; (ii) retain an independent review organization to review our compliance with the terms of the CIA and report to the OIG regarding that compliance; and (iii) provide training for certain employees as to our obligations under the CIA. The CIA continues the requirements of our prior corporate integrity agreement to create and maintain procedures designed to ensure that all therapeutic interchange programs are developed and implemented by Omnicare consistent with the CIA and federal and state laws for obtaining prior authorization from the prescriber before making a therapeutic interchange of a drug, and to maintain procedures for the accurate preparation and submission of claims for federal healthcare program beneficiaries, including beneficiaries in hospice programs. The requirements of the CIA have resulted in increased costs to maintain our compliance program and greater scrutiny by federal regulatory authorities. Violations of the CIA could subject the Company to significant monetary penalties or other adverse consequences. Consistent with the CIA, we review our customer contracts for compliance with applicable laws and regulations.

We operate in highly competitive businesses.

The long-term care pharmacy business is highly regionalized and, within a given geographic region of operations, highly competitive. Our largest competitor is PharMerica Corporation. In the geographic regions we serve, we also compete with numerous local and regional institutional pharmacies, pharmacies owned by long-term care facilities and local retail pharmacies. While we compete on the basis of quality, price, terms and overall cost-effectiveness, along with the clinical expertise, breadth of services, pharmaceutical technology and professional support we offer, competitive pressures may adversely affect our profitability and results of operations.

Our SCG business competes throughout the United States with drug wholesalers and pharmaceutical benefit management companies. While we compete on the basis of quality and overall cost effectiveness, along with the breadth of services and professional support we offer, competitive pressures may adversely affect our profitability and results of operations.

Factors outside of our control could require us to record an asset impairment of goodwill.

We are required to analyze goodwill and other intangible assets for impairment. Factors out of our control, including, but not limited to, the economic environment, our market capitalization, and anticipated cash flows could require us to record an impairment charge for goodwill. The accounting guidance establishes a method of testing goodwill for impairment on an annual basis, or on an interim basis if an event occurs that would reduce the fair value of a reporting unit or an indefinite-lived intangible asset below its carrying value. As of December 31, 2014, we had approximately $4 billion of goodwill, which represented 66.5% of our total assets. If we determine that an impairment exists, we will be required to record a non-cash asset impairment charge, which could be significant. For additional information regarding our goodwill, see “Note 7 - Goodwill and Other Intangible Assets” of the Notes to Consolidated Financial Statements and “Critical Accounting Policies - Goodwill” at Part II, Item 7 of this Annual Report.

Cybersecurity attacks or other data security incidents could disrupt our operations and expose us to regulatory fines or penalties, liability or reputational damage.
In the ordinary course of our business, we process, store and transmit data, which may include sensitive personal information as well as proprietary or confidential information relating to our business or third parties. Although we have information technology security systems, a successful cybersecurity attack or other data security incident could result in the misappropriation of confidential or personal information, create system interruptions, or deploy malicious software that attacks our systems. Such an attack or incident could result in business interruptions from the disruption of our information technology systems or negative publicity resulting in reputational damage with our customers, shareholders and other stakeholders. In addition, the unauthorized dissemination of sensitive personal information or proprietary or confidential information could expose us or other third-parties to regulatory fines or penalties, litigation and potential liability, or otherwise harm our business.

16



Future projects related to our information technology systems may result in unexpected costs or business interruptions.
In the fourth quarter of 2014, management completed an assessment of our ongoing project to replace our 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, we recorded an asset impairment charge of $60 million in the fourth quarter of 2014 related to 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.
As we pursue other projects in the future, including the expansion of our existing systems or the design and implementation of new systems, the projects may result in additional costs, business interruptions or the diversion of management’s time and attention away from our operations and strategy. If we do not pursue future projects, we may be hindered in our ability to improve existing operations, support future growth and take advantage of new applications and technologies.

ITEM 1B. – UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. – PROPERTIES

Our properties include offices, distribution centers, warehouses and other key operating facilities (such as institutional pharmacies) in various locations within the U.S. At December 31, 2014, we operated a total of 176 facilities. LTC has 167 facilities, 7 of which are owned, in 44 states within the U.S. (excluding Alaska, Hawaii, North Dakota, Wyoming, Vermont and Delaware), representing an aggregate of approximately 2.5 million square feet. SCG operates 5 leased facilities in Florida, Kentucky, and Ohio, representing an aggregate of approximately 0.4 million square feet. Our Corporate/Other segment has 4 leased facilities, which includes our headquarters in Cincinnati, Ohio and office locations in Ohio, Pennsylvania and the District of Columbia, representing an aggregate of approximately 0.2 million square feet. We consider all of our facilities to be in good operating condition and generally to be adequate for present and anticipated business needs.

ITEM 3. – LEGAL PROCEEDINGS
 
Information relating to certain legal proceedings in which Omnicare is involved is included in “Note 18 - Commitments and Contingencies” of the Notes to our Consolidated Financial Statements in Item 8 of this Annual Report and is incorporated by reference herein.

ITEM 4. – MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock; Holders of Record

Our common stock, par value $1.00 per share (the “Common Stock”), is listed on the New York Stock Exchange (the “NYSE”) under the ticker symbol “OCR”, and the following table sets forth the ranges of high and low sales prices of our Common Stock, as reported by the NYSE, during each quarter of 2014 and 2013.
 
 
2014
 
2013
 
High
 
Low
 
High
 
Low
First Quarter
$64.87
 
$56.41
 
$40.90
 
$36.12
Second Quarter
$67.01
 
$57.00
 
$48.70
 
$40.46
Third Quarter
$67.49
 
$61.22
 
$56.39
 
$47.49
Fourth Quarter
$74.42
 
$59.85
 
$60.93
 
$52.26

17



The number of holders of record of our Common Stock on January 31, 2015 was 1,714, which excludes stockholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms and banks.

Stock Performance Graph
 
The following graph compares the cumulative total return from December 31, 2009 through December 31, 2014 on a $100 investment (assuming dividend reinvestment) in our Common Stock, the Standard & Poor’s 500 Stock Index and the S&P 500 Health Care Index.

 
December 31,
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Omnicare, Inc.
$
100.00

 
$
105.46

 
$
143.80

 
$
152.51

 
$
258.22

 
$
315.98

S&P 500
100.00

 
115.06

 
117.49

 
136.30

 
180.44

 
205.14

S&P 500 Health Care Index
100.00

 
102.90

 
116.00

 
136.75

 
193.46

 
242.47


Dividends

On February 12, 2015, our Board of Directors approved a quarterly cash dividend of $0.22, for an indicated annual rate of $0.88 per share for 2015, which is greater than the aggregate dividend amount paid per share in each of 2014 and 2013 (the quarterly dividends are presented in “Note 20 - Summary of Quarterly Results (Unaudited)” of the Notes to Consolidated Financial Statements). We expect to continue to pay cash dividends on our Common Stock on a quarterly basis; however, there can be no assurances as future dividends are dependent on our future earnings and financial condition and other factors not currently determinable. In addition, our senior credit facility and agreements governing certain of our other indebtedness impose restrictions on our ability to pay dividends.

Stock Repurchases

A summary of our repurchases of our Common Stock during the quarter ended December 31, 2014 is as follows (in thousands, except per share data):


18


Period
 
Total Number of Shares Purchased (a)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that Are Eligible To Be Purchased Under the Plans or Programs (b)
October 1 - 31, 2014
 

 
$

 

 
$
339,613

November 1 - 30, 2014
 
52

 
69.74

 

 
339,613

December 1 - 31, 2014 (c)
 
851

 
70.59

 
850

 
264,613

Total
 
903

 
$
70.54

 
850

 
$
264,613


(a) During the fourth quarter of 2014, we purchased approximately 53,000 shares of our Common Stock in connection with our employee benefit plans, including purchases associated with the payment of the holders’ income tax upon the vesting of restricted stock awards. These purchases were not made pursuant to a repurchase plan or program.

(b) The following chart summarizes our stock repurchase programs, as approved by our Board of Directors, in effect for the periods ended December 31, 2012 through December 31, 2014 (in thousands):
Date Approved
 
Amount Approved
 
Term Date
 
Remaining Repurchase Authority
May 3, 2010
 
$
200,000

 
May 3, 2012
 

May 26, 2011
 
$
100,000

 
December 31, 2012
 

February 21, 2012
 
$
200,000

 
February 28, 2014
 

September 12, 2012
 
$
350,000

 
December 31, 2014
 

December 4, 2013
 
$
500,000

 
December 31, 2015
 
$
264,613


(c) As part of our share repurchase program, in December 2014, we entered into two accelerated share repurchase (“ASR”) agreements. Under the first ASR, we paid $75 million and received approximately 0.8 million shares of our Common Stock valued at $60 million in December 2014. The $15 million balance was recorded as an equity forward contract, included in paid-in capital at December 31, 2014, and settled in January 2015 with approximately 0.2 million additional shares of our Common Stock. Under the second ASR, we paid $100 million and received approximately 1.1 million shares valued at $80 million in January 2015. The $20 million balance is expected to settle during the first quarter of 2015.

In 2014, we repurchased approximately 3.5 million shares of our Common Stock at an aggregate cost of approximately $235 million. Through December 31, 2014, we have repurchased approximately 27.5 million shares of our Common Stock under our share repurchase programs at an aggregate cost of approximately $1 billion, and had authority to repurchase approximately $265 million of additional shares of Common Stock through December 31, 2015, after giving effect to the $15 million equity forward contract described above, but prior to the purchases under the second 2014 ASR. 


ITEM 6. - SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data and should be read in conjunction with our Consolidated Financial Statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included at Items 8 and 7, respectively, of this Annual Report. All amounts disclosed herein relate to our continuing operations unless otherwise stated.


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Five-Year Summary of Selected Financial Data
Omnicare, Inc. and Subsidiary Companies
(in thousands, except per share data)
 
For the years ended or at December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
INCOME STATEMENT DATA:
 
 
 
 
 
 
 
 
 
Net sales
$
6,417,615

 
$
6,013,398

 
$
5,878,464

 
$
5,896,606

 
$
5,747,124

Income from continuing operations
184,212

 
84,892

 
171,943

 
142,779

 
5,984

Diluted earnings per common share - continuing operations
1.74

 
0.78

 
1.52

 
1.25

 
0.05

Dividends per common share
0.82

 
0.62

 
0.42

 
0.15

 
0.11

Diluted weighted average number of common shares outstanding
106,228

 
109,449

 
112,988

 
114,781

 
116,927

 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA (at end of period):
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
153,799

 
$
356,001

 
$
444,620

 
$
577,528

 
$
492,299

Total assets
6,107,790

 
6,691,846

 
6,989,264

 
7,193,110

 
7,311,520

Long-term debt (excluding current portion), net of swap
1,517,559

 
1,418,819

 
2,030,030

 
1,968,274

 
2,106,758

Stockholders’ equity
2,588,721

 
2,740,803

 
3,505,712

 
3,795,436

 
3,818,761

 
 
 
 
 
 
 
 
 
 
OTHER FINANCIAL DATA:
 

 
 

 
 

 
 
 
 
Net cash flows from operating activities of continuing operations
$
491,727

 
$
479,514

 
$
534,629

 
$
546,148

 
$
383,993

Capital expenditures
(82,531
)
 
(95,015
)
 
(96,924
)
 
(60,717
)
 
(21,022
)

ITEM 7. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

The following discussion should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K (the “Annual Report”). In addition, see “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information” below, as well as “Risk Factors” in Item 1A of this Annual Report. All amounts disclosed herein relate to our continuing operations unless otherwise stated.

Executive Overview

Omnicare, Inc. (“Omnicare” or the “Company”) is a leading healthcare services company that specializes in the management of complex pharmaceutical care. We operate two primary businesses through two operating segments, 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, we are 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, we provide specialty pharmacy and commercialization services for the biopharmaceutical industry. We leverage our specialized clinical capabilities and innovative technology solutions across both businesses as key components of the value management believes we provide to our customers across the United States.
 
Through LTC, we operate the largest institutional pharmacy business in the U.S., based on both revenues and the number of customers served. Due to the size and scope of LTC, we believe that we have unique cost advantages, especially pertaining to the sourcing of pharmaceuticals. The scale of our operations has also provided us the opportunity to make investments in proprietary automation technology to reduce dispensing costs while improving the accuracy and consistency of our service delivery. LTC’s customers consist of skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), independent living communities, hospitals, correctional facilities, and other healthcare service providers. In light of a customer mix that is heavily concentrated in the senior market, we have a high level of insight into geriatric pharmaceutical care. At December 31, 2014, LTC provided pharmacy services in the U.S. in 47 states and the District of Columbia. For the year ended December 31, 2014, LTC comprised approximately 74% of our total net sales and dispensed approximately 111 million prescriptions.

SCG operates across a broad spectrum of the healthcare continuum, serving the needs of biopharmaceutical manufacturers, physicians, nurses, caregivers and patients. SCG’s services are primarily focused on the specialty pharmaceutical market and incorporate four platforms: brand support services, supply chain solutions, patient support services and specialty pharmacy. By

20


integrating these services across SCG’s platforms, we are able to provide our manufacturer clients a customized end-to-end solution for all of their needs. Our brand support services, supply chain solutions and patient support services are integrated, fee-for-service platforms that focus on helping the drug manufacturer to market, distribute and obtain reimbursement for their products. In our specialty pharmacy platform, we dispense specialized pharmaceuticals that are high cost, have complex reimbursement and supply chain challenges, have limited patient populations and are not available through normal retail channels. These specialized drugs deal primarily with specific categories of drugs and disease states, such as rheumatoid arthritis, multiple sclerosis, oncology and growth hormones. SCG accounted for approximately 26% of our total net sales during the year ended December 31, 2014.

We believe we have an attractive business model, with a leading position in the long-term care market and our relative position in the growing specialty care market supported by strong cash flows. Moreover, we believe that our business model is appropriately aligned with the interests of our customers, payors and patients as many of the factors that benefit us, such as new low-cost generic introductions and more accurate and efficient automation technologies, also have a favorable effect on our key constituencies. As such, we believe we can play a role in lowering the country’s healthcare costs while striving for positive patient outcomes.

In 2014, SCG continued its strong financial performance primarily as a result of strong organic growth across our platforms and drug price inflation within our specialty pharmacy platform. The LTC business experienced increased financial performance year-over-year due to increased drug price inflation and increased operating efficiencies.

In the second quarter of 2014, through privately negotiated transactions, we repurchased approximately $52 million in aggregate principal amount of our 3.75% Convertible Senior Subordinated Notes due 2025 (the “2025 Notes”) for approximately $134 million in cash. We recognized a loss on the repurchase of approximately $8 million and wrote off debt issuance costs of $1 million, which are reflected in “Other charges” and “Interest expense” on the Consolidated Statements of Comprehensive Income (Loss), respectively.

On June 30, 2014, John L. Workman, our former CEO and a director, retired from all positions with the Company. Effective upon his retirement, Nitin Sahney, our President and Chief Operating Officer, became our President and Chief Executive Officer and a member of our Board of Directors.

In the second quarter of 2014, we finalized the sale of certain retail operations (“Retail”) for net proceeds of approximately $6 million. Additionally, in the third quarter of 2014, we finalized the sale of our end-of-life hospice pharmacy business (“Hospice”) for proceeds of approximately $65 million. We recorded an after-tax loss of $8 million on the disposal. Additionally, in the second quarter of 2014, we recorded an impairment loss of $40 million to reduce the carrying value of Hospice to fair value.

During the third quarter of 2014, settlement payments of $116 million and $8.24 million were made related to the Gale and Silver complaints, respectively (each as described in “Note 18 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements), and $4.24 million was received related to the our motion for sanctions filed against relator Gale and his attorneys. We recorded a settlement charge of $120 million in 2013 in connection with the settlement of these claims.

In the fourth quarter of 2014, we entered into a Pharmaceutical Prime Vendor Agreement with McKesson Corporation (“McKesson”), effective as of January 1, 2015, which expanded our relationship with McKesson to include the sourcing and distribution of both branded and generic pharmaceuticals. This expanded agreement replaced our existing Prime Vendor Agreement for Pharmaceuticals with McKesson, dated as of July 27, 2010, as amended, pursuant to which we have purchased branded pharmaceuticals.

In 2014, we settled the outstanding tranches of the capped call transactions entered into in 2012, receiving approximately 2.1 million shares with a value of approximately $140 million. See “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for additional details.

In the fourth quarter of 2014, we completed various refinancing activities, including the amendment and extension of our existing senior unsecured credit agreement, the refinancing of our 7.75% Senior Subordinated Notes due 2020 (the “2020 Notes”) and our 3.75% Convertible Senior Subordinated Notes due 2042 (the “2042 Notes”) with newly issued 4.75% Senior Notes due 2022 and 5.00% Senior Notes due 2024, and the exchange of a portion of our 3.25% Convertible Senior Debentures due 2035 (the “2035 Debentures”) for substantially similar debentures with the date on which the holders can require us to repurchase their debentures extended from December 2015 to January 2021. See “Note 11 - Debt” of the Notes to Consolidated Financial Statements.
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, we 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

21


(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.
During the fourth quarter of 2014, the Company’s Board of Directors approved an increase to the quarterly cash dividend on the Company’s common stock to $0.22 per share, a 10% increase over the previous quarterly dividend rate of $0.20 per share.

For a further discussion of our business activities, see “Business” in Part I, Item 1 of this Annual Report.

Outlook
While our growth was historically driven largely by acquisitions, we have continued our focus on optimizing a number of structural and organizational changes that were designed to provide a foundation for organic growth. These efforts led to improvements in service levels, enhanced customer relationships, and a realigned account management structure, which was a driving factor in our 7% revenue increase in 2014.

We accelerated the structural repositioning of our LTC operations in June 2012 when we began implementing a multi-phased operating plan. The primary goals of the multi-phased plan were: improving operations at certain under-performing hub pharmacies; designing and implementing a sales transformation model; and realigning the organization structurally to provide for greater consistency and improved visibility. By mid-2013, we had completed the majority of our operating plan with favorable results. The value-based solution we bring to the market enhances our selling effectiveness and is intended to improve the overall customer experience, which has driven a year-over-year reduction in service related losses and maintained our high customer retention rates. In 2014, we launched a centralization strategy for key operating and support functions, as well as a restructuring of our account management to drive growth and discipline within our operations. Additionally, we finalized our sourcing strategy late in the year with an expanded agreement with McKesson that provides for the sourcing of all generic pharmaceuticals, as well as previously serviced branded pharmaceuticals. We expect the expansion of our agreement with McKesson will create greater efficiencies in our procurement process and create value for our business and our shareholders.

Just as we have invested in the underlying operations within LTC, we have similarly repositioned our SCG business to better capitalize on the attractive growth characteristics within the specialty pharmaceutical market. Until late 2010, the businesses that now encompass SCG operated nearly independently, providing little opportunity to realize synergies across these businesses. Since the formation of SCG, these businesses have reported into a single management team that is focused on better leveraging the assets of these specialty care businesses. We continue to invest in our SCG organization to further advance capabilities while improving sales results, especially in the fee-for-service operating platforms (brand support services, supply chain solutions, and patient support services). Through these efforts, we built a manufacturer-focused sales organization, and we are encouraged by the positive developments in the quality of our sales pipeline. Through the organizational restructuring of these businesses and subsequent investments in sales and marketing, we believe SCG has differentiated itself in the market as a fully integrated provider of commercialization solutions for biopharma. We believe our continued investments in SCG will position us well to maximize our opportunities to capitalize on growth within the specialty care market, which is anticipated to continue outpacing the broader pharmaceutical market over the next several years.

We believe our structural repositioning has increased visibility across our two business segments, enabling us to develop unique growth strategies for our six operating platforms: skilled nursing pharmacy (LTC); assisted living pharmacy (LTC); brand support services (SCG); supply chain solutions (SCG); patient support services (SCG); and specialty pharmacy (SCG). As a byproduct of our executive level changes in the past few years, we have also centralized core functions, such as sales, account management and clinical operations, giving us the ability to more broadly capitalize on certain customer opportunities across our operating platforms, while more fully realizing operational synergies.

By better positioning ourselves for consistent organic growth, we believe we have developed more flexibility regarding the redeployment of cash flows. During the past few years, we have accelerated our efforts to return capital to stockholders, returning an average of 61.7% of our operating cash flows to stockholders through share repurchases and dividends for the years ended December 31, 2014 and 2013. Additionally, with the structural improvements instituted across our operations, we believe we are better positioned to take advantage of acquisition opportunities that fit within our strategic and financial criteria.

In addition to our internally driven growth objectives and capital allocation initiatives, certain pharmaceutical market dynamics and demographic developments may continue to alter the landscape of the industries in which we compete. Specifically, both generic drugs and specialty pharmaceuticals have steadily increased their respective shares of the overall market, and we believe we are positioned well to capitalize on continued growth in both areas. With respect to generic drugs, our new expanded agreement with McKesson leverages the strengths of both companies to provide a purchasing advantage and enables the rapid conversion of residents to newly available generic alternatives. As we benefit from these lower cost generic alternatives, so do our customers, payors and the residents we serve. Certain branded drugs we dispense in high volumes are expected to lose patent exclusivity over

22


the next few years, creating an attractive growth opportunity for us while also enabling our customers to better manage industry cost pressures.

With respect to specialty pharmaceuticals, new treatment alternatives have become available for such complicated therapeutic categories as multiple sclerosis and rheumatoid arthritis, as well as rare disease states that are dependent upon innovative orphan drug therapies. We believe that, through SCG, we are well-positioned to benefit from the continued introduction of new large-molecule compounds and other specialty pharmaceutical medications. As more of these products enter the market, and as pharmaceutical companies continue to outsource more activities, we believe the demand for commercialization services, such as reimbursement support and third party logistics, will continue to increase.
 
Demographic trends indicate that demand for long-term care may increase into the middle of this century as the elderly population grows significantly. Moreover, those over 65 years old consume a disproportionately high level of healthcare services, including prescription drugs, when compared with the under-65 population. Appropriate pharmaceutical care is generally considered a cost-effective form of treatment for many of the chronic ailments afflicting the elderly, which can also improve their quality of life. We expect these factors to result in growing demand for the geriatric pharmaceutical industry as a potential means to permit our country to maintain the level of services provided under its government-sponsored healthcare programs while containing healthcare costs.

In order to fund this growing demand for healthcare services, we believe the government and the private sector will continue to review, assess and possibly alter healthcare delivery systems and payment methodologies. While we cannot at this time predict the ultimate impact on government reimbursement and our business of any of these initiatives, we believe that our expertise in geriatric pharmaceutical care and pharmaceutical cost management position us to help meet the challenges of today’s healthcare environment. In addition, we possess significant scale in our core markets, which we believe better positions us to absorb potential policy and reimbursement changes. However, there can be no assurance that changes in government reimbursement regulations and the other risks discussed under “Risk Factors” in Item 1A of this Annual Report will not significantly adversely impact our operating results.

Consolidated Results of Operations

The following summary table presents our consolidated financial information and results of operations as well as Adjusted operating income and Adjusted income from continuing operations (in thousands).
 
For the years ended December 31,
 
2014
 
2013
 
2012
Net sales
$
6,417,615

 
$
6,013,398

 
$
5,878,464

Operating income
427,313

 
297,854

 
410,335

Adjusted operating income (a)
609,384

 
565,121

 
525,423

Income from continuing operations
184,212

 
84,892

 
171,943

Adjusted income from continuing operations (a)
315,211

 
289,515

 
263,654


(a)
Adjusted operating income and Adjusted income from continuing operations exclude certain items not considered part of our core operating results and certain non-cash charges. We believe that presenting these non-GAAP financial measures enhances investors’ understanding of how management assesses the performance of our businesses. We use non-GAAP measures for budgeting purposes, measuring actual results, allocating resources and in determining employee incentive compensation. Our method of calculating non-GAAP financial measures may differ from those used by other companies and, therefore, comparability may be limited. See “Special Items” below for a description of the excluded items and a reconciliation of Adjusted operating income and Adjusted income from continuing operations to the most comparable GAAP financial measures.

2014 vs. 2013

Net sales for 2014 were favorably impacted by the positive impact of drug price inflation in both LTC and SCG. Partially offsetting this favorable impact were reductions in reimbursement coupled with competitive pricing issues. See discussion of sales and operating income results in more detail under “Long-Term Care Group Segment” and “Specialty Care Group Segment” below.

Gross profit as a percentage of total net sales was 22.1% for the year ended December 31, 2014, as compared with 23.6% in 2013. Gross profit was unfavorably affected primarily by the reductions in reimbursement coupled with competitive pricing issues. Additionally, gross margin was unfavorably impacted by growth in the SCG segment, which has a mix of business with lower

23


margins. Favorably impacting gross profit was the effect of drug price inflation, cost reductions and productivity improvement initiatives, as well as lower payroll and employee benefit costs.
 
Leveraging of fixed and variable overhead costs primarily relates to generating higher sales volumes from pharmacy facilities with no or limited increases in fixed costs (e.g., rent, depreciation, etc.) and negligible to moderate increases in variable costs (e.g., utilities, delivery, labor, etc.), as well as the elimination of pharmacies through our productivity and consolidation initiatives discussed below. We believe we will be able to continue to leverage fixed and variable overhead costs through both internal and acquired growth.

Government and other reimbursement formulas generally adjust to take into account drug price inflation or deflation. In order to enhance our gross profit margins, we strategically allocate our resources to those activities that will increase internal sales growth and favorably impact sales mix, or will lower costs. In addition, through the ongoing development of our pharmaceutical purchasing programs, we are able to obtain discounts, rebates and other price concessions (“Discounts”) and thereby manage our pharmaceutical costs.

Increased leverage in purchasing favorably impacts gross profit and is primarily derived through timing of brand to generic conversions and Discounts relating to purchases from our suppliers and vendors. When recognizing the related receivables associated with these Discounts, we account for these Discounts as a reduction of cost of goods sold and inventories. We record our estimates of Discounts earned during the 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 to actual amounts as the applicable arrangements are settled and cash is received. The aggregate amount of these adjustments has not been significant to our results of operations.

Our consolidated selling, general and administrative (“operating”) expenses as a percentage of net sales were 11.3% in 2014, compared to 12.6% in 2013. Operating expenses for the year ended December 31, 2014 were favorably impacted by our continued progress in lowering operating expenses through our non-drug purchasing program, lower payroll and employee benefit costs and reduced operating expenses due to the disposition of certain assets, primarily in our medical supply services business in the second quarter of 2013. Partially offsetting these factors was increased depreciation expense for assets related to our initiatives to improve our infrastructure and customer service.
  
Interest expense, net of investment income, was higher in 2014 than 2013 primarily due to our refinancing activities completed in 2014. See “Note 11 - Debt” of the Notes to Consolidated Financial Statements.

Our effective tax rates are different than the applicable federal statutory rates during 2014 primarily as a result of the impact of state and local income taxes and additional tax benefits recognized which were related to prior year settlement payments. In 2013, the difference in rates was attributable to the non-deductible portion of the settlement charge for the Gale and Silver complaints (each as described in “Note 18 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements). See “Note 15 - Income Taxes” of the Notes to Consolidated Financial Statements.

2013 vs. 2012

Net sales for 2013 were positively impacted by drug price inflation and growth in SCG. Offsetting these factors was the unfavorable sales impact of the increased availability and utilization of generic drugs as well as reductions in reimbursement coupled with competitive pricing issues. See discussion of sales and operating income results in more detail under “Long-Term Care Group Segment” and “Specialty Care Group Segment” below.

Gross profit as a percentage of total net sales was 23.6% for the year ended December 31, 2013, as compared with 23.7% in 2012. Gross profit was unfavorably affected by certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement coupled with competitive pricing issues. Favorably impacting gross profit was the increased availability and utilization of higher margin generic drugs (which had a more favorable effect due to the timing of generic conversions in 2012), cost reductions and productivity improvement initiatives and lower payroll and employee benefit costs.

Our operating expenses as a percentage of net sales were 12.6% in 2013, compared to 13.1% in 2012. Operating expenses for the year ended December 31, 2013 were favorably impacted by the continued progress in lowering operating expenses through our non-drug purchasing program, lower payroll and employee benefit costs and reduced operating expenses due to the disposition of certain assets, primarily in our medical supply services business. Partially offsetting these factors was increased depreciation expense for assets related to our initiatives to improve our infrastructure and customer service and a reduction in net sales due to the impact of the increased availability and utilization of generic drugs.

24



Interest expense, net of investment income, was lower in 2013 than 2012 primarily due to our refinancing activities completed in 2013 and 2012. See “Note 11 - Debt” of the Notes to Consolidated Financial Statements.

Our effective tax rates are different than the applicable federal statutory rates primarily as a result of the impact of state and local income taxes and certain non-deductible litigation costs. The year-over-year change in our effective tax rate is primarily due to certain non-deductible charges related to the disposition of businesses and the litigation settlement charge recognized in 2013. See “Note 15 - Income Taxes” of the Notes to Consolidated Financial Statements.

Long-Term Care Group Segment

 
For the years ended December 31,
 
2014
 
2013
 
2012
Net sales
$
4,750,121

 
$
4,627,871

 
$
4,789,551

Operating income
$
516,086

 
$
420,646

 
$
562,379

Scripts dispensed
111,315

 
112,460

 
113,556


2014 vs. 2013

LTC net sales were favorably impacted by increased drug price inflation. This increase was partially offset by reductions in reimbursement coupled with competitive pricing issues related to our facilities contracts, as well as a reduction in sales due to the disposition of certain assets, primarily in our medical supply services business in the second quarter of 2013. While we are focused on reducing our costs to mitigate the impact of drug pricing and reimbursement issues, there can be no assurance that such issues or other pricing and reimbursement pressures will not adversely impact LTC’s net sales.

Operating income in 2014 was unfavorably affected by certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement and pricing as well as the year-over-year impact of certain other “special items” described under “Special Items” below. Operating income for 2013 was unfavorably impacted by a settlement charge of $120 million plus attorneys’ fees related to the Gale and Silver matters as described in “Note 18 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements. Operating income was favorably impacted primarily by drug price inflation, cost reductions and productivity improvement initiatives, as well as lower payroll and employee benefit costs.

2013 vs. 2012
 
LTC net sales were unfavorably impacted by reductions in reimbursement coupled with competitive pricing issues related to our facilities contracts as well as a reduction in sales due to the disposition of certain assets, primarily in our medical supply services business, partially offset by drug price inflation. Also unfavorably impacting net sales was the increased availability and utilization of generic drugs, which had a more adverse effect on 2013 due to the timing of generic conversions in 2012. When a drug converts from brand to generic, our cost goes down, and a portion of that savings is passed on to our customers, which reduces sales, but increases gross profit.

Operating income in 2013 was unfavorably affected by certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement and pricing, as well as the year-over-year impact of various “special items” described under “Special Items” below. Operating income was favorably impacted primarily by the increased availability and utilization of higher margin generic drugs (which had a more favorable effect on 2013 due to the timing of generic conversions in 2012), cost reductions and productivity improvement initiatives, lower payroll and employee benefit costs, as well as drug price inflation.


25


Specialty Care Group Segment

 
For the years ended December 31,
 
2014
 
2013
 
2012
Net sales
$
1,667,152

 
$
1,384,003

 
$
1,078,627

Operating income
$
136,373

 
$
113,243

 
$
92,671


2014 vs. 2013

SCG net sales were positively impacted primarily by organic growth and drug price inflation in our specialty pharmacy business. Favorable drug utilization was driven primarily by continued growth in our multiple sclerosis and oncology therapies. We also experienced year-over-year growth in our fee-for-service platforms.

Operating income was favorably affected primarily by the same factors that impacted net sales. Partially offsetting these positive factors was the unfavorable impact of mix within the SCG segment toward business with lower margins, reimbursement pressures, and investments in facilities and personnel in order to position the segment for future growth.

2013 vs. 2012

SCG net sales were positively impacted primarily by increased volume in programs with drug manufacturers coupled with higher prescription volumes and drug price inflation in our specialty pharmacy business. Favorable drug utilization was driven primarily by growth in our multiple sclerosis and oncology therapies.

Operating income was favorably affected primarily by the same factors that impacted net sales. Partially offsetting these positive factors was the unfavorable impact of mix within the SCG segment toward business with lower margins, competitive pricing pressures, and investments in facilities and personnel in order to position the segment for future growth.
 
Restructuring and Other Related Charges

See “Note 17 - Restructuring and Other Related Charges” of the Notes to Consolidated Financial Statements.

Special Items

We believe that presenting certain non-GAAP financial measures, which exclude items not considered part of our core operating results and certain non-cash charges (“Special Items”), enhances stockholders’ understanding of how we assess the performance of our businesses. We use non-GAAP measures for budgeting purposes, measuring actual operating results, allocating resources and in determining employee incentive compensation. Our method of calculating non-GAAP financial measures may differ from those used by other companies and, therefore, comparability may be limited. Our results of continuing operations for the years ended December 31, 2014, 2013, and 2012 include the Special Items presented in the table below, which also contains a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measures (in thousands, except per share amounts):

26


 
For the years ended December 31,
 
2014
 
2013
 
2012
Settlement, litigation and other related charges (i)
$
42,818

 
$
167,465

 
$
49,375

Other charges (ii)
139,253

 
99,802

 
65,713

Subtotal - operating expense Special Items
182,071

 
267,267

 
115,088

Amortization of discount on convertible notes (iii)
23,551

 
24,567

 
24,073

Debt redemption costs - interest expense (iii)
12,742

 
4,784

 
12,363

Total Special Items
$
218,364

 
$
296,618

 
$
151,524

Total Special Items - after tax (iv)
$
130,999

 
$
204,623

 
$
91,711

 
 
 
 
 
 
Operating income
$
427,313

 
$
297,854

 
$
410,335

Operating expense Special Items
182,071

 
267,267

 
115,088

Adjusted operating income
$
609,384

 
$
565,121

 
$
525,423

 
 
 
 
 
 
Income from continuing operations
$
184,212

 
$
84,892

 
$
171,943

Total Special Items - after tax
130,999

 
204,623

 
91,711

Adjusted income from continuing operations
$
315,211

 
$
289,515

 
$
263,654


(i)
See “Note 18 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements.
(ii)
See “Other charges” under “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.
(iii)
See “Note 11 - Debt” of the Notes to Consolidated Financial Statements.
(iv)
The tax effect was calculated by multiplying the tax-deductible pretax amounts by the appropriate effective tax rate.

Discontinued Operations

Net income for the years ended December 31, 2014, 2013 and 2012 was impacted by the results of discontinued operations, primarily due to impairment charges in the years ended December 31, 2014 and 2013. In the fourth quarter of 2013, our Hospice business and Retail operations qualified for discontinued operation treatment. We recorded impairment losses of $40 million and $145 million in the years ended December 31, 2014 and December 31, 2013, respectively, to reduce the carrying value of the Hospice and Retail businesses to fair value.

See further discussion at “Note 3 - Discontinued Operations” of the Notes to Consolidated Financial Statements.

Impact of Inflation

We estimate that the impact of drug price inflation on our cost of sales for our highest dollar products during the three years ended December 31, 2014 ranged from approximately 5% to 8%. However, the impact of inflation on our net income is significantly lower, because government and other reimbursement formulas, which impact sales, generally adjust to take into account drug price inflation or deflation.

Financial Condition, Liquidity and Capital Resources

Cash and cash equivalents (including restricted cash) at December 31, 2014 were $154 million compared with $356 million at December 31, 2013.

We generated net cash flows from operating activities of continuing operations of $492 million during the year ended December 31, 2014, compared with $480 million and $535 million during the years ended December 31, 2013 and 2012, respectively. Operating cash flows in 2014 were used primarily for debt payments, capital expenditures, stock repurchases and dividend payments. During the third quarter of 2014, settlement payments of $116 million and $8.24 million were made related to the Gale and Silver complaints, respectively, and $4.24 million was received related to our motion for sanctions filed against relator Gale and his attorneys as described in “Note 18 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements. Operating cash flows for 2013 and 2012 included litigation settlement payments of $20 million and $50 million, respectively.

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Net cash flows from operating activities during the year ended December 31, 2014 were favorably impacted primarily by the year-over-year change in accounts receivable and accounts payable as a result of continued efforts to improve our working capital management. Compared to 2013, operating cash flow was favorably impacted primarily by the year-over-year change in timing of inventory purchases and timing of accounts payable payments. Inventory increased in the fourth quarter of 2013 as we took advantage of certain strategic purchasing initiatives. Net cash flows from operating activities were also impacted by a deposit made with our drug wholesaler in the fourth quarter of 2012 of $45 million. We made additional deposits of $20 million and $6 million in the first and fourth quarters of 2013, respectively, and received a net refund of approximately $1 million in 2014. As a result of our new agreement with McKesson becoming effective January 1, 2015, we received the remaining outstanding deposit of approximately $72 million in the first quarter of 2015.

Favorably impacting operating cash flow was the excess of tax deductible interest expense over book interest expense related to our 4.00% Junior Subordinated Convertible Debentures due 2033 (the “2033 Debentures”), our 2035 Debentures, our 2025 Notes, our 2042 Notes (which were retired during the year ended December 31, 2014) and our 3.50% Senior Subordinated Convertible Notes due 2044 (the “2044 Notes”). This difference resulted in an increase in our deferred tax liabilities during the years ended December 31, 2014 and 2013 of $33 million and $29 million, respectively ($199 million cumulative as of December 31, 2014). The recorded deferred tax liability could, under certain circumstances, be realized in the future upon conversion or redemption of the debt, which would serve to reduce operating cash flows.

Net cash from investing activities of continuing operations was $12 million for the year ended December 31, 2014 as compared to net cash used of $87 million and $136 million during the years ended December 31, 2013 and 2012, respectively. In 2014, we received approximately $71 million for the divestiture of our Retail and Hospice businesses as described in “Note 3 - Discontinued Operations” of the Notes to Consolidated Financial Statements. In 2013, we received $12 million related to the disposition of certain assets, primarily our medical supply services business. In 2012, we received $19 million for the divestiture of our Canadian pharmacy and our pharmacy operational software business.

Additionally, net cash from investing activities of continuing operations for the year ended December 31, 2014 required outlays of $2 million for amounts payable relating to acquisitions. Acquisitions of businesses required cash payments during 2013 and 2012 of $4 million and $35 million, respectively. The 2014, 2013 and 2012 acquisition-related payments were funded primarily by operating cash flows. Our capital requirements, in addition to the payment of debt and dividends, are primarily comprised of our acquisition program and capital expenditures. Our capital expenditures were $83 million, $95 million and $97 million for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease in capital expenditures in 2014 relates primarily to reduced expenditures related to our information technology systems.

Net cash used in financing activities of continuing operations was $706 million, $482 million and $531 million during the years ended December 31, 2014, 2013 and 2012, respectively. In the fourth quarter of 2014, we completed certain refinancing activities (see “Note 11 - Debt” of the Notes to Consolidated Financial Statements), including the amendment and extension of our existing senior unsecured credit agreement (as amended, the “Amended Credit Facility”). We issued $400 million aggregate principal amount of 4.75% Senior Notes due 2022 and $300 million aggregate principal amount of 5.00% Senior Notes due 2024. We redeemed the entire $400 million outstanding principal balance of the 2020 Notes for an aggregate cash redemption price of $429 million. We recognized a net loss on the redemption of approximately $29 million in the fourth quarter of 2014 which was included in “Other charges” on the Consolidated Statements of Comprehensive Income (Loss). In connection with the redemption of the 2020 Notes, we terminated the related interest rate swap agreements. Upon termination, we recognized an $18 million gain, which was included in “Other charges” on the Consolidated Statements of Comprehensive Income (Loss) in the fourth quarter of 2014. We also repurchased in private transactions approximately $103 million principal amount of our 2042 Notes for an aggregate purchase price of approximately $177 million and, following our issuance of a notice of redemption for all of the outstanding 2042 Notes, holders of approximately $287 million principal amount of 2042 Notes remaining outstanding converted their 2042 Notes into an aggregate of approximately $304 million in cash and 2.9 million shares of our common stock. We recognized a net loss on the repurchase and conversion transactions of approximately $37 million in the fourth quarter of 2014, which was included in “Other charges” on the Consolidated Statements of Comprehensive Income (Loss).

In addition to the fourth quarter 2014 refinancing activities, in June 2014, we entered into separate, privately negotiated agreements to repurchase approximately $52 million in aggregate principal amount of our outstanding 2025 Notes for $134 million in cash. We recognized a loss on the repurchase of approximately $8 million and wrote off debt issuance costs of $1 million, which are reflected in “Other charges” and “Interest expense” on the Consolidated Statements of Comprehensive Income (Loss), respectively. In the fourth quarter of 2013, holders presented approximately $37 million of the Series B 4.00% Trust Preferred Income Equity Redeemable Securities (the “Series B PIERS”) and $1 million of the Series A 4.00% Trust Preferred Income Equity Redeemable Securities (the “Series A PIERS”), representing a corresponding amount of our 2033 Debentures, for conversion. The conversions

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settled in the first quarter of 2014, which increased our payments on long-term borrowings and obligations for the year ended December 31, 2014.

Net cash used in financing activities for the year ended December 31, 2013 includes the effect of our 2013 refinancing activities. In August 2013, we entered into separate, privately negotiated exchange agreements under which we retired approximately $180 million in aggregate principal amount of outstanding 2025 Notes in exchange for the issuance of $424 million in aggregate principal amount of new 2044 Notes. Also in 2013, we entered into separate, privately negotiated purchase agreements to repurchase approximately $5 million in aggregate principal amount of our outstanding 2025 Notes and $150 million in aggregate principal amount of our outstanding 2020 Notes.

Net cash used in financing activities for 2012 includes the effect of our 2012 refinancing activities, including (i) the amendment and restatement of our senior unsecured credit agreement consisting of a $300 million five-year unsecured revolving credit facility and a $425 million five-year unsecured term loan facility, (ii) the retirement of approximately $257 million of our outstanding 2025 Notes in exchange for the issuance of $390 million of new 2042 Notes and (iii) our redemption of $25 million of our outstanding 2035 Debentures.

In 2014, 2013 and 2012, we repurchased approximately 3.5 million shares of our common stock for $235 million, approximately 4.8 million shares of our common stock for $221 million, and approximately 10 million shares of our common stock for $389 million, respectively, including shares repurchased through accelerated share repurchase agreements. Through December 31, 2014, we have repurchased approximately 27.5 million shares under our share repurchase programs at an aggregate cost of approximately $1 billion and had authority to repurchase approximately $265 million of additional shares of common stock. See “Note 2 - Common Stock Repurchase Program” of the Notes to Consolidated Financial Statements.
On December 3, 2014, our Board of Directors declared a quarterly cash dividend of $0.22 per share for an indicated annual rate of $0.88 per share for 2015, which is greater than the aggregate dividends paid per share in each of 2014 and 2013. Aggregate dividends of $80 million paid during 2014 were higher than the $63 million paid in 2013 and the $45 million paid in 2012, due primarily to an increase in dividends paid per share to $0.82 in 2014 as compared to $0.62 and $0.42 per share paid in 2013 and 2012, respectively.

At December 31, 2014, we had no outstanding borrowings under our five- year unsecured revolving credit facility and $395 million of borrowings outstanding under our five-year senior unsecured term loan. As of December 31, 2014, we had approximately $14 million of standby letters of credit, substantially all of which are subject to automatic annual renewals.

Several series of our outstanding notes and debentures (collectively, the “Convertible Notes”) are convertible into cash and/or shares of our common stock under specified circumstances, including if the closing price of our common stock is more than 130% of the conversion price for such series of Convertible Notes during the applicable measurement period. In general, upon conversion, we will pay cash for the principal amount of the Convertible Notes and shares of common stock for the remainder, if any, based on a daily conversion value during the applicable cash settlement averaging period, provided that we will pay cash in lieu of any fractional shares. Payment occurs at the end of the applicable settlement period, which is generally 30 days after we receive a holder’s notice of conversion. For additional details on the conversion features of the Convertible Notes, see “Note 11 - Debt” of the Notes to Consolidated Financial Statements.

The aggregate principal amount of Convertible Notes convertible at any given time is subject to change depending on factors such as the price of our common stock during the applicable measurement period. As of December 31, 2014, approximately $387 million in aggregate principal amount of Convertible Notes was convertible, including our 2025 Notes and our 2033 Debentures. Additionally, holders of approximately $186 million aggregate principal amount of our 2035 Debentures (the “Initial 2035 Debentures”) have the right to require us to repurchase their Initial 2035 Debentures on December 15, 2015, and therefore the Initial 2035 Debentures are classified as current debt as of December 31, 2014. We cannot predict the aggregate principal amount of Convertible Notes that will be convertible at any given time or how many, if any, holders of such Convertible Notes will present their Convertible Notes for conversion or how many, if any, holders of the Initial 2035 Debentures will require us to repurchase their Initial 2035 Debentures or the impact of any such conversions or repurchases on our results of operations, financial condition, liquidity or cash flows.

We may, from time to time, refinance our outstanding debt securities, including the Convertible Notes, and may fund such a refinancing with cash on hand, borrowings under our revolving credit facility or the issuance of new senior or subordinated debt securities. Any such refinancing is subject to prevailing market conditions and there can be no assurance as to whether or on what terms any such refinancing will occur.


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There were no known material commitments and contingencies outstanding at December 31, 2014, other than the contractual obligations summarized under “Disclosures about Aggregate Contractual Obligations and Off-Balance Sheet Arrangements” below, certain acquisition-related payments potentially due in the future, including deferred payments, indemnification payments and payments originating from earnout and other provisions that may become payable, as well as the matters discussed in “Note 18 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

We believe that net cash flows from operating activities, existing cash balances, availability under our revolving credit facility and external sources of financing that we believe are available, will be sufficient to satisfy our future working capital needs, debt servicing, conversions of the Convertible Notes, repurchases of the Initial 2035 Debentures, capital expenditures and other financing requirements for at least the next year, although no such assurances can be given in that regard. We may be unable to refinance maturing debt on terms that are as favorable as those from which we previously benefited or on terms that are acceptable to us. In addition, no assurances can be given regarding our ability to obtain additional financing in the future.


Disclosures about Aggregate Contractual Obligations and Off-Balance Sheet Arrangements

Aggregate Contractual Obligations:

The following summarizes our aggregate contractual obligations as of December 31, 2014, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
 
 
Total
 
Less Than 1 Year
 
1-3 Years
 
4-5 Years
 
More than 5 Years
Debt obligations(a)
$
2,333,405

 
$
592,688

 
$
40,000

 
$
335,000

 
$
1,365,717

Capital lease obligations
13,083

 
5,735

 
7,150

 
198

 

Operating lease obligations
109,331

 
22,961

 
39,468

 
25,191

 
21,711

Purchase obligations
29,485

 
21,866

 
4,802

 
2,817

 

Other current obligations
238,886

 
238,886

 

 

 

Other long-term obligations
38,763

 

 
33,193

 
2,967

 
2,603

Subtotal
2,762,953

 
882,136

 
124,613

 
366,173

 
1,390,031

Future interest relating to debt and capital lease obligations(b)
1,316,771

 
86,038

 
170,683

 
167,955

 
892,095

Total contractual cash obligations
$
4,079,724

 
$
968,174

 
$
295,296

 
$
534,128

 
$
2,282,126


(a)
As of December 31, 2014, approximately $387 million in aggregate principal amount of Convertible Notes was convertible, including the 2025 Notes and the 2033 Debentures. Additionally, holders of approximately $186 million aggregate principal amount of the Initial 2035 Debentures have the right to require us to repurchase their Initial 2035 Debentures on December 15, 2015. As a result, the 2025 Notes, 2033 Debentures, and the Initial 2035 Debentures are classified as current debt as of December 31, 2014. See “Note 11 - Debt” of the Notes to Consolidated Financial Statements.
(b)
Represents estimated future interest costs based on the stated fixed interest rate of the debt, or the variable interest rate in effect at period end for variable interest rate debt. To the extent that any debt is repaid or refinanced prior to the stated maturity date, the estimated future interest costs would change accordingly. The estimated future interest costs presented in this table do not include any amounts potentially payable associated with the contingent interest and interest reset provisions of our Convertible Notes, as applicable, or the impact of potential changes in our credit rating, changes in variable interest rates, or any tax effects associated with our interest costs.


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Off-Balance Sheet Arrangements:
As of December 31, 2014, we had two unconsolidated entities, Omnicare Capital Trust I (“Trust I”) and Omnicare Capital Trust II (“Trust II”), which were established for the purpose of facilitating the offerings of the Series A PIERS and the Series B PIERS, respectively. Trust I and Trust II are wholly-owned finance subsidiaries. We have fully and unconditionally guaranteed the securities of Trust I and Trust II. The 2033 Debentures issued by us to Trust I (the “Series A 2033 Debentures”) and Trust II (the “Series B 2033 Debentures”) in connection with the issuance of the Series A PIERS and the Series B PIERS, respectively, are presented as a single line item in our consolidated balance sheets and debt footnote disclosures. Additional information concerning the Series A PIERS and the Series B PIERS, the guarantees, and the Series A 2033 Debentures and Series B 2033 Debentures is included in “Note 11 - Debt” of the Notes to Consolidated Financial Statements. We record interest payable to Trust I and Trust II as interest expense in our Consolidated Statements of Comprehensive Income (Loss).

As of December 31, 2014, we had no other unconsolidated entities, or any financial partnerships, such as entities often referred to as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.

Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk exposure relates to variable interest rate risk through our variable interest rate debt instruments. Accordingly, we define market risk loss as the potential loss in our earnings due to higher interest rates for certain debt. The modeling technique we use to evaluate interest rate risk exposure involves performing a sensitivity analysis on our variable-rate debt, assuming a change in interest rates of 100 basis points. Among our debt obligations is $395 million outstanding under our variable-rate senior term loan, due 2019, at an interest rate of 1.96% at December 31, 2014 (a 100 basis point change in the interest rate would increase or decrease interest expense by approximately $4 million per year).
The fair values of our fixed-rate debt instruments, excluding the impact of our interest rate swap agreements, is based on quoted market prices in active markets (Level 2) and are summarized as follows (in thousands):


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Fair Value of Financial Instruments
 
 
December 31, 2014
 
December 31, 2013
Financial Instrument:
 
Book Value
 
Market Value
 
Book Value
 
Market Value
7.75% senior subordinated notes, due 2020
 
$

 
$

 
$
400,000

 
$
435,800

4.75% senior notes, due 2022
 
400,000

 
408,000

 

 

5.00% senior notes, due 2024
 
300,000

 
316,700

 

 

3.75% convertible senior subordinated notes, due 2025
 
 

 
 

 
 

 
 

Carrying value
 
54,148

 

 
87,310

 

Unamortized debt discount
 
25,824

 

 
45,098

 

Principal amount
 
79,972

 
211,900

 
132,408

 
306,500

4.00% junior subordinated convertible debentures, due 2033
 
 

 
 

 
 

 
 

Carrying value
 
188,550

 

 
186,136

 

Unamortized debt discount
 
118,133

 

 
121,017

 

Principal amount
 
306,683

 
550,200

 
307,153

 
455,900

3.25% convertible senior debentures, due 2035
 
 

 
 

 
 

 
 

Carrying value
 
178,284

 

 
393,126

 

Unamortized debt discount
 
7,749

 

 
34,374

 

Principal amount
 
186,033

 
197,000

 
427,500

 
457,400

3.25% convertible senior exchange debentures, due 2035
 
 

 
 

 
 

 
 

Carrying value
 
216,738

 

 

 

Unamortized debt discount
 
24,729

 

 

 

Principal amount
 
241,467

 
279,500

 

 

3.75% convertible senior debentures, due 2042
 
 

 
 

 
 

 
 

Carrying value
 

 

 
225,014

 

Unamortized debt discount
 

 

 
164,986

 

Principal amount
 

 

 
390,000

 
592,800

3.50% convertible senior debentures, due 2044
 
 

 
 

 
 

 
 

Carrying value
 
218,474

 

 
216,643

 

Unamortized debt discount
 
205,776

 

 
207,607

 

Principal amount
 
424,250

 
507,000

 
424,250

 
428,500

See “Note 11 - Debt” and “Note 8 - Fair Value” of the Notes to Consolidated Financial Statements.

We do not have any financial instruments held for trading purposes.

Critical Accounting Policies
 
 
 
 
 

Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our financial statements, we are required to make assumptions, judgments, and estimates that affect the reported amounts of assets, liabilities, stockholders’ equity, revenues and expenses and the related disclosure of commitments and contingencies. On a regular basis, we evaluate our critical estimates giving consideration to a combination of factors, including historical experience, current conditions, feedback from outside advisors where feasible, and other assumptions that we believe to be reasonable at the time and under the current circumstances. Our significant accounting policies are summarized in “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

The accounting treatment of many transactions is specifically dictated by U.S. GAAP and does not require significant management judgment in its application or for which management’s judgment in selecting among available alternatives would not produce a materially different result. An accounting policy is considered to be critical if it is important to the determination of our financial position and operating results, and it requires significant judgment and estimates on the part of our management in its application. If our actual results were to differ materially from the judgments and estimates made, our reported financial position or operating results could be materially affected. We believe the following policies are the critical accounting policies and estimates that involve significant judgment and estimates by our management in preparing our consolidated financial statements.


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Revenue Recognition
In general, we recognize revenue when products are delivered or services are rendered or provided to our customers, prices are fixed and determinable, and collection is reasonably assured.

A significant portion of our revenues from sales of pharmaceutical and medical products are 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. We monitor our revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and record an estimated contractual allowance for 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 our financial statements are recorded at the amount expected to be ultimately received from these payors. Since billing functions for a portion of our 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 our revenue systems, the contractual allowance is estimated for all billed, unbilled and initially rejected Medicare, Medicaid and third-party claims. We evaluate 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 our results of operations for any of the periods presented. Further, we do not expect the impact of changes in estimates related to unsettled contractual allowance amounts from Medicare, Medicaid and third-party payors as of December 31, 2014 to be significant to our future consolidated results of operations, financial position and cash flows.

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

Under certain circumstances, we accept returns of medications and issue a credit memo to the applicable payor. We estimate and accrue for sales returns based on historical return experience, giving consideration to our return policies. Product returns are processed in the period received and are not significant compared to our total sales and gross profit.

Allowance for Doubtful Accounts
Collection of accounts receivable from customers is our primary source of operating cash flow and is critical to our operating performance, cash flows and financial condition. Our primary collection risk relates to facility and private pay customers, as billings to these customers can be complex and may lead to payment disputes or delays. We provide a reserve for accounts receivable considered to be at increased risk of becoming uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. We establish this allowance for doubtful accounts and consider such factors as historical collection experience (i.e., payment history and credit losses) and creditworthiness, specifically identified credit risks, aging of accounts receivable by payor category, current and expected economic conditions and other relevant factors. We regularly review our allowance for doubtful accounts for appropriateness. Judgment is used to assess the collectability of account balances and the economic ability of customers to pay.

Our allowance for doubtful accounts as of December 31, 2014 was $202 million, compared with $203 million at December 31, 2013. Our allowance for doubtful accounts represented 25.9% and 22.6% of gross receivables (net of contractual allowance adjustments) as of December 31, 2014 and December 31, 2013, respectively. Unforeseen future developments could lead to changes in our provision for doubtful accounts levels and future allowance for doubtful accounts percentages, which could materially impact our overall financial results, financial position or cash flows. For example, a one percentage point increase in the allowance for doubtful accounts as a percentage of gross receivables as of December 31, 2014 would result in an increase to the provision for doubtful accounts and related allowance for doubtful accounts of approximately $8 million.
 
Patient charges pending approval from Medicare, Medicaid and third-party payors are primarily billed as private pay and, where applicable, are recorded net of an estimated contractual allowance at period end. Once an approval to bill Medicare, Medicaid or third-party payors has been obtained, we reverse the private pay balance and record a corresponding Medicare, Medicaid or third-party receivable. Our policy is to resolve accounts receivable with pending status as soon as practicable. Pending accounts receivable balances were not a significant component of the overall accounts receivable balance at December 31, 2014.

We have standard policies and procedures for collection of our accounts receivable. Our collection efforts generally include the mailing of statements, followed, when necessary, by delinquency notices, personal and other contacts, the use of our national

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collections department or outside collection agencies, and mediation, arbitration or litigation when accounts are considered unresponsive.

Our collection efforts primarily relate to our facility and private pay customers, as well as efforts to collect or rework Medicare Part D copayments and rejected claims. When we become aware that a specific customer is potentially unable to meet part or all of its financial obligations, for example, as a result of bankruptcy or deterioration in the customer’s operating results or financial position, our collections department includes the exposed balance in our allowance for doubtful accounts. At such time that a balance is definitively deemed to be uncollectible, the balance is written off against the allowance for doubtful accounts. At December 31, 2014, the portion of our overall accounts receivable balance placed in mediation, arbitration or litigation or with outside collection agencies is not significant.

Given our experience, we believe that our aggregate reserves for potential losses are adequate, but if any of our larger customers were to unexpectedly default on their obligations, our overall allowances for doubtful accounts may prove to be inadequate. In particular, if economic conditions worsen, the payor mix shifts significantly or our customers’ reimbursement rates are adversely affected, impacting our customers’ ability to pay their bills, we may adjust our allowance for doubtful accounts accordingly, and our accounts receivable collections, cash flows, financial position and results of operations could be adversely affected.

See “Accounts Receivable” in “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

Goodwill
We have adopted guidance regarding the testing for goodwill impairment that permits us 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, we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then we would perform the two-step goodwill impairment test. The first step, used to identify potential impairment, is a comparison of a 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 us 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.

We performed step one of the quantitative goodwill impairment test as part of our 2014 and 2013 annual assessments. We estimated the fair value of our reporting units based on discounted cash flows, which required significant management judgment, as well as a market approach that compared the reporting units’ earnings and revenue multiples to those of comparable public companies. For our continuing operations, we estimated the fair value of our reporting units to be greater than the carrying value, indicating that goodwill was not impaired.

Taxes
We estimate our current and deferred tax assets and liabilities, including those relating to our acquired subsidiaries, based on current tax laws in the statutory jurisdictions in which we operate and the enacted tax rates expected to apply for the periods in which we expect to settle or realize the deferred tax assets or liabilities. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, as well as the realization of deferred tax assets including those relating to net operating losses. We determine the amount of realizable state net operating loss deferred tax assets by projecting taxable income for the tax years remaining before the net operating losses expire. 

We periodically review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence, including historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on our expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and our tax methods of accounting. If we are unable to generate sufficient future taxable income by jurisdiction, or if there is a material change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then we could be required to increase our valuation allowance against our deferred tax assets, resulting in an increase in our effective tax rate and related tax expense.


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We also review our tax assets and liabilities, including those relating to acquired subsidiaries, giving consideration to the relevant guidance regarding accounting for uncertainty in income taxes. In accordance with this guidance, we recognize 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, we do not recognize the benefit of that position in our financial statements. A tax position that meets the more likely than not recognition threshold is measured by determination of the largest amount of benefit that has at least a 50 percent likelihood of being realized upon ultimate resolution with a taxing authority.

We operate in a significant number of states and tax jurisdictions with varying tax laws. We are subject to both federal and state audits of tax returns in the normal course of business. While we believe we have provided adequately for tax liabilities in our consolidated financial statements, adverse determinations by applicable taxing authorities could have a material adverse effect on our consolidated financial position, results of operations or cash flows. If our provision for current or deferred taxes is not adequate, if we are unable to realize certain deferred tax assets or if the tax laws change unfavorably, we could experience tax losses. Likewise, if our provision for current and deferred taxes is in excess of our actual tax liability, if we are able to realize additional deferred tax assets or if tax laws change favorably, we could experience tax gains. A one percentage point change in our overall 2014, 2013 and 2012 effective tax rates would impact tax expense and income from continuing operations by $3.0 million, $1.7 million and $2.8 million, respectively.

Legal Contingencies
As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as governmental/regulatory authorities responsible for enforcing the laws and regulations to which we are subject, which may include reviews of our individual pharmacies’ reimbursement documentation and administrative practices. Often, these inspections, audits, investigations and inquiries relate to prior periods, including periods predating our ownership of a particular pharmacy. Further, under the federal False Claims Act and certain state statutes, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. In addition, we are involved with various legal actions arising in the normal course of business. At any point in time, we are in varying stages of discussions on these matters. We regularly review, and, where appropriate, consult with our outside legal advisors regarding the status of inspections, audits, inquiries, investigations, legal claims and legal proceedings and assess our potential financial exposure.

We record accruals for contingencies to the extent that we conclude that it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. To the extent the amount of a probable loss is estimable only by reference to a range of equally probable outcomes, and no amount within the range appears to be a better estimate than any other amount, the low end of the range is accrued. Legal matters are inherently unpredictable and we evaluate these matters regularly. The unpredictable nature of legal proceedings may be exacerbated by various factors from time to time, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceedings are in their early stages; (iv) the matters present legal uncertainties; (v) significant facts are in dispute; (vi) a large number of parties are participating in the proceedings (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) the proceedings present a wide range of potential outcomes. With respect to violations of the False Claims Act, treble damages and/or additional potential penalties per claim will apply.

Because of the inherent uncertainties related to these matters, the use of estimates, assumptions and judgments, and external factors beyond our control, accruals are based on the best information available at the time. As additional information becomes available, we reassess our potential liability related to any pending inspections, audits, inquiries, investigation, claims and litigation and may revise our estimated exposure upward or downward accordingly, and update our related disclosure, as appropriate. Such revision of our estimated contingent liabilities could have a material impact on our consolidated financial statements.

Certain ongoing and recently completed legal proceedings are described in “Note 18 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

Recently Issued Accounting Standards
Recently issued accounting standards are described under “Recently Issued Accounting Standards” in “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information

In addition to historical information, this report contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, all statements regarding the intent, belief or current expectations regarding the matters discussed or incorporated by reference

35


in this document (including statements as to “beliefs,” “expectations,” “anticipations,” “intentions” or similar words) and all statements which are not statements of historical fact. Such forward-looking statements, together with other statements that are not historical, are based on management’s current expectations and involve known and unknown risks, uncertainties, contingencies and other factors that could cause results, performance or achievements to differ materially from those stated. The most significant of these risks and uncertainties are described in our Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: overall economic, financial, political and business conditions; trends in the long-term healthcare and pharmaceutical industries; our ability to attract new clients and service contracts and retain existing clients and service contracts; our ability to identify, finance and consummate acquisitions on favorable terms or at all; trends for the continued growth of our businesses; changes in drug pricing; delays and reductions in reimbursement by the government and other payors to Omnicare and our customers; the overall financial condition of our customers and our ability to assess and react to such financial condition; the ability and willingness of our vendors and business partners to continue to provide products and services to Omnicare; the successful integration of acquired companies and realization of contemplated synergies; the continued availability of suitable acquisition candidates; the ability to attract and retain skilled management; competition for qualified staff in the healthcare industry; variations in demand for our products and services; variations in costs or expenses; our ability to implement productivity, consolidation and cost reduction efforts and to realize anticipated benefits; the potential impact of legislation, government regulations, and other government action and/or executive orders, including those relating to Medicare Part D, its implementing regulations and any subregulatory guidance; reimbursement and drug pricing policies and changes in the interpretation and application of such policies, including changes in calculation of average wholesale price; discontinuation of reporting average wholesale price and/or implementation of new pricing benchmarks; legislative and regulatory changes impacting long-term care pharmacies or specialty pharmacies; government budgetary pressures and changes, including federal and state budget shortfalls; efforts by payors to control costs; changes to or termination of our contracts with pharmaceutical benefit managers, Medicare Part D Plan sponsors and/or commercial health insurers or changes in the proportion of our business covered by specific contracts; the outcome of pending and future legal or contractual disputes; potential liability for losses not covered by, or in excess of, insurance; the impact of executive separations; the impact of benefit plan terminations; the impact of differences in actuarial assumptions and estimates as compared to eventual outcomes; events or circumstances that could result in an impairment of assets, including but not limited to, goodwill and identifiable intangible assets; our ability to successfully complete planned divestitures; market conditions; the outcome of audit, compliance, administrative, regulatory, or investigatory reviews; volatility in the market for our stock and in the financial markets generally; timing of conversions of our convertible debt securities; access to adequate capital and financing on acceptable terms; changes in our credit ratings given by rating agencies; changes in tax laws and regulations; changes in accounting rules and standards; the impact of potential cybersecurity risks and/or incidents; costs to comply with our Corporate Integrity Agreement; and unexpected costs or business interruptions from information technology projects. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, our actual results, performance or achievements could differ materially from those expressed in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as otherwise required by law, we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.


ITEM 7A. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under “Quantitative and Qualitative Disclosures about Market Risk” in Item 7 of this Annual Report is incorporated by reference herein.



36


ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Financial Statement Schedule

 
 
PAGE
Financial Statements:
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
Consolidated Statements of Comprehensive Income (Loss)  
 
Consolidated Balance Sheets
 
Consolidated Statements of Cash Flows
 
Consolidated Statements of Stockholders' Equity
 
Notes to Consolidated Financial Statements
 
 
 
Financial Statement Schedule
 

All other financial statement schedules are omitted because they are not applicable or because the required information is shown elsewhere in the Consolidated Financial Statements or Notes thereto.


37


Report of Independent Registered Public Accounting Firm

To the Stockholders and
Board of Directors of Omnicare, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Omnicare, Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Cincinnati, OH
February 25, 2015



38


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
OMNICARE, INC. AND SUBSIDIARY COMPANIES

(in thousands, except per share data)

 
For the years ended December 31,
 
2014
 
2013
 
2012
Net sales
$
6,417,615

 
$
6,013,398

 
$
5,878,464

Cost of sales
4,999,071

 
4,592,536

 
4,483,042

Gross profit
1,418,544

 
1,420,862

 
1,395,422

Selling, general and administrative expenses
724,700

 
756,180

 
772,004

Provision for doubtful accounts
84,460

 
99,561

 
97,995

Settlement, litigation and other related charges
42,818

 
167,465

 
49,375

Other charges
139,253

 
99,802

 
65,713

Operating income
427,313

 
297,854

 
410,335

Interest expense, net of investment income
(129,947
)
 
(123,870
)
 
(135,103
)
Income from continuing operations before income taxes
297,366

 
173,984

 
275,232

Income tax provision
113,154

 
89,092

 
103,289

Income from continuing operations
184,212

 
84,892

 
171,943

Income (loss) from discontinued operations, net of income tax
(39,685
)
 
(128,324
)
 
22,931

Net income (loss)
$
144,527

 
$
(43,432
)
 
$
194,874

Earnings (loss) per common share - Basic:
 

 
 

 
 

Continuing operations
$
1.89

 
$
0.83

 
$
1.57

Discontinued operations
(0.41
)
 
(1.26
)
 
0.21

Net income (loss)
$
1.48

 
$
(0.43
)
 
$
1.78

Earnings (loss) per common share - Diluted:
 

 
 

 
 

Continuing operations
$
1.74

 
$
0.78

 
$
1.52

Discontinued operations
(0.37
)
 
(1.17
)
 
0.20

Net income (loss)
$
1.36

 
$
(0.39
)
 
$
1.73

Weighted average number of common shares outstanding:
 

 
 

 
 

Basic
97,524

 
102,080

 
109,531

Diluted
106,228

 
109,449

 
112,988

Other comprehensive income (loss), net of tax
 
 
 
 
 
   Cumulative translation adjustment
$

 
$

 
$
1,384

   Unrealized appreciation (depreciation) in fair value of investments
402

 
(274
)
 
(151
)
   Amortization of pension benefit gain and actuarial loss
(686
)
 
553

 
(1,363
)
Total other comprehensive income (loss), net of tax
(284
)
 
279

 
(130
)
Comprehensive income (loss)
$
144,243

 
$
(43,153
)
 
$
194,744

 
 
 
 
 
 
The Notes to Consolidated Financial Statements are an integral part of these statements.


39


CONSOLIDATED BALANCE SHEETS
OMNICARE, INC. AND SUBSIDIARY COMPANIES

(in thousands, except share data)
 
December 31,
 
2014
 
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
153,799

 
$
356,001

Accounts receivable, less allowances of $201,875 (2013-$202,602)
578,761

 
695,684

Inventories
519,584

 
512,418

Deferred income tax benefits
59,200

 
135,094

Other current assets
287,560

 
265,536

Current assets of discontinued operations

 
49,995

Total current assets
1,598,904

 
2,014,728

Properties and equipment, at cost less accumulated depreciation
 of $332,684 (2013-$263,603)
267,753

 
305,888

Goodwill
4,061,806

 
4,057,456

Identifiable intangible assets, less accumulated amortization of
 $257,283 (2013-$227,657)
98,942

 
129,974

Other noncurrent assets
80,385

 
96,722

Noncurrent assets of discontinued operations

 
87,078

Total noncurrent assets
4,508,886

 
4,677,118

Total assets
$
6,107,790

 
$
6,691,846

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
219,358

 
$
181,022

Accrued employee compensation
46,830

 
50,240

Current debt
446,717

 
527,204

Other current liabilities
154,726

 
355,845

Current liabilities of discontinued operations

 
18,846

Total current liabilities
867,631

 
1,133,157

Long-term debt, notes and convertible debentures
1,517,559

 
1,418,819

Deferred income tax liabilities
936,247

 
1,012,733

Other noncurrent liabilities
45,926

 
53,835

Noncurrent liabilities of discontinued operations

 
1,398

Total noncurrent liabilities
2,499,732

 
2,486,785

Total liabilities
3,367,363

 
3,619,942

Convertible debt (Note 11)
151,706

 
331,101

Commitments and contingencies (Note 18)
 

 
 

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, 138,425,862
shares issued (2013-134,623,736 shares issued)
138,426

 
134,624

Paid-in capital
2,210,526

 
2,047,195

Retained earnings
1,757,386

 
1,693,799

Treasury stock, at cost- 39,997,930 shares (2013- 34,013,923 shares)
(1,514,792
)
 
(1,132,274
)
Accumulated other comprehensive loss
(2,825
)
 
(2,541
)
Total stockholders’ equity
2,588,721

 
2,740,803

Total liabilities and stockholders’ equity
$
6,107,790

 
$
6,691,846

The Notes to Consolidated Financial Statements are an integral part of these statements.

40


CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
 (in thousands)

For the years ended December 31,
 
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
144,527

 
$
(43,432
)
 
$
194,874

Loss (income) from discontinued operations
39,685

 
128,324

 
(22,931
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 

 
 
 
 

Depreciation
58,036

 
56,013

 
49,048

Amortization
74,258

 
76,947

 
79,489

Asset impairment charges
60,211

 

 

Loss from disposition
805

 
39,245

 

Loss on debt extinguishment
69,381

 
56,280

 
47,558

Deferred tax provision
92,700

 
61,932

 
95,327

Changes in assets and liabilities, net of effects from acquisition and divestiture of businesses:
 

 
 

 
 

Accounts receivable, net of provision for doubtful accounts
58,685

 
77,441

 
74,220

Inventories
(7,001
)
 
(138,028
)
 
38,066

Current and noncurrent assets
(10,117
)
 
65,138

 
44,017

Accounts payable
52,289

 
(11,649
)
 
(70,531
)
Accrued employee compensation
(2,412
)
 
(19,856
)
 
12,895

Gale/Silver settlement payments, net
(120,000
)
 

 

Current and noncurrent liabilities
(19,320
)
 
131,159

 
(7,403
)
Net cash flows from operating activities of continuing operations
491,727

 
479,514

 
534,629

Net cash flows from (used in) operating activities of discontinued operations
863

 
(12,454
)
 
9,855

Net cash flows from operating activities
492,590

 
467,060

 
544,484

Cash flows from investing activities:
 

 
 

 
 

Acquisition of businesses, net of cash received
(1,613
)
 
(3,895
)
 
(34,873
)
Divestiture of businesses, net
71,194

 
11,658

 
19,207

Capital expenditures
(82,531
)
 
(95,015
)
 
(96,924
)
Marketable securities
25,377

 
(365
)
 
(25,018
)
Other

 
1,061

 
1,270

Net cash flows from (used in) investing activities of continuing operations
12,427

 
(86,556
)
 
(136,338
)
Net cash flows used in investing activities of discontinued operations
(863
)
 
(1,007
)
 
(2,996
)
Net cash flows from (used in) investing activities
11,564

 
(87,563
)
 
(139,334
)
Cash flows from financing activities:
 

 
 

 
 

Payments on term loans
(20,938
)
 
(21,250
)
 
(24,688
)
Proceeds from long-term borrowings and obligations
717,500

 

 
425,000

Payments on long-term borrowings and obligations
(1,067,707
)
 
(192,322
)
 
(453,573
)
Capped call transaction

 

 
(48,126
)
Fees paid for financing activities
(8,913
)
 
(5,660
)
 
(7,566
)
(Decrease) increase in cash overdraft balance
(16,360
)
 
473

 
(14,927
)
Payments for Omnicare common stock repurchases, including equity forward contract
(235,438
)
 
(220,971
)
 
(388,968
)
Proceeds (outflows) for stock awards and exercise of stock options, net of stock tendered in payment
(2,251
)
 
15,819

 
24,951

Dividends paid
(80,298
)
 
(62,928
)
 
(45,214
)
Other
8,049

 
5,262

 
1,912

Net cash flows used in financing activities of continuing operations
(706,356
)
 
(481,577
)
 
(531,199
)
Net cash flows from financing activities of discontinued operations

 
3,868

 

Net cash flows used in financing activities
(706,356
)
 
(477,709
)
 
(531,199
)
Net decrease in cash and cash equivalents
(202,202
)
 
(98,212
)
 
(126,049
)
Less (decrease) increase in cash and cash equivalents of discontinued operations

 
(9,593
)
 
6,859

Decrease in cash and cash equivalents of continuing operations
(202,202
)
 
(88,619
)
 
(132,908
)
Cash and cash equivalents at beginning of year
356,001

 
444,620

 
577,528

Cash and cash equivalents at end of year
$
153,799

 
$
356,001

 
$
444,620

The Notes to Consolidated Financial Statements are an integral part of these statements.

41


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(in thousands, except per share data)
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
Balance at January 1, 2012
$
131,757

 
$
2,488,941

 
$
1,651,829

 
$
(484,123
)
 
$
7,032

 
$
3,795,436

Dividends paid ($0.42 per share)

 

 
(45,214
)
 

 

 
(45,214
)
Stock acquired/issued for benefit plans

 

 

 
39

 

 
39

Stock option exercises and amortization/forfeitures
1,295

 
50,093

 

 
(232
)
 

 
51,156

Common stock repurchase

 

 

 
(339,117
)
 

 
(339,117
)
Purchase of capped call

 
(48,126
)
 

 

 

 
(48,126
)
Debt exchange

 
(54,546
)
 

 

 

 
(54,546
)
Equity forward contract

 
(50,000
)
 

 

 

 
(50,000
)
Stock awards/issuance, net of amortization/forfeitures
451

 
33,608

 
(414
)
 
(22,583
)
 

 
11,062

Translation adjustment recorded on divestiture of business

 

 

 

 
(9,722
)
 
(9,722
)
Net income

 

 
194,874

 

 

 
194,874

Other comprehensive (loss), net of tax

 

 

 

 
(130
)
 
(130
)
Balance at December 31, 2012
133,503

 
2,419,970

 
1,801,075

 
(846,016
)
 
(2,820
)
 
3,505,712

Dividends paid ($0.62 per share)

 

 
(62,928
)
 

 

 
(62,928
)
Stock acquired/issued for benefit plans

 

 

 
57

 

 
57

Stock option exercises, amortization/forfeitures and adjustments
744

 
22,088

 

 
(67
)
 

 
22,765

Common stock repurchase

 

 

 
(220,971
)
 

 
(220,971
)
Equity forward contract settlement

 
50,000

 

 
(50,000
)
 

 

Stock awards/issuance, net of amortization/forfeitures
376

 
29,849

 
(916
)
 
(15,277
)
 

 
14,032

Debt exchanged/converted
1

 
(143,611
)
 

 

 

 
(143,610
)
Reclassification of convertible debt to mezzanine (Note 11)

 
(331,101
)
 

 

 

 
(331,101
)
Net (loss)

 

 
(43,432
)
 

 

 
(43,432
)
Other comprehensive income, net of tax

 

 

 

 
279

 
279

Balance at December 31, 2013
134,624

 
2,047,195

 
1,693,799

 
(1,132,274
)
 
(2,541
)
 
2,740,803

Dividends paid ($0.82 per share)

 

 
(80,297
)
 

 

 
(80,297
)
Stock option exercises, amortization/forfeitures and adjustments
312

 
13,883

 

 
278