XNYS:OCR Omnicare Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:OCR (Omnicare Inc): Fair Value Estimate
Premium
XNYS:OCR (Omnicare Inc): Consider Buying
Premium
XNYS:OCR (Omnicare Inc): Consider Selling
Premium
XNYS:OCR (Omnicare Inc): Fair Value Uncertainty
Premium
XNYS:OCR (Omnicare Inc): Economic Moat
Premium
XNYS:OCR (Omnicare Inc): Stewardship
Premium
 


 
 
 
 
 

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

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

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
401 E. FOURTH STREET
CINCINNATI, OH  45202
(Address of Principal Executive Offices)
513-719-2600
(Registrant’s Telephone Number)
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 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.
Large accelerated filer   ý      Accelerated filer  ¨       Non-Accelerated filer  ¨       Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes  No ý
Common Stock Outstanding
 
Number of Shares
Date
Common Stock, $1 par value
112,975,512
March 31, 2012


 
 
 
 
 
 




OMNICARE, INC. AND

SUBSIDIARY COMPANIES

FORM 10-Q QUARTERLY REPORT MARCH 31, 2012

TABLE OF CONTENTS










ITEM 1. - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(in thousands, except per share data)

 
 
Three months ended,
March 31,
 
 
2012
 
2011
Net sales
 
$
1,593,068

 
$
1,525,571

Cost of sales
 
1,224,968

 
1,190,612

Gross profit
 
368,100

 
334,959

Selling, general and administrative expenses
 
200,124

 
190,166

Provision for doubtful accounts
 
24,431

 
24,530

Other charges
 
18,715

 
7,902

Operating income
 
124,830

 
112,361

Investment income
 
28

 
296

Interest expense
 
(30,862
)
 
(34,678
)
Income from continuing operations before income taxes
 
93,996

 
77,979

Income tax expense
 
38,257

 
28,824

Income from continuing operations
 
55,739

 
49,155

Loss from discontinued operations
 

 
(19,851
)
Net income
 
$
55,739

 
$
29,304

 
 
 
 
 
Earnings (loss) per common share - Basic:
 
 
 
 

Continuing operations
 
$
0.50

 
$
0.43

Discontinued operations
 

 
(0.17
)
Net income
 
$
0.50

 
$
0.26

 
 
 
 
 
Earnings (loss) per common share - Diluted:
 
 

 
 

Continuing operations
 
$
0.48

 
$
0.43

Discontinued operations
 

 
(0.17
)
Net income
 
$
0.48

 
$
0.26

 
 
 
 
 
Dividends per common share
 
$
0.07

 
$
0.0325

 
 
 
 
 
Weighted average number of common shares outstanding:
 
 

 
 

Basic
 
111,487

 
114,129

Diluted
 
116,500

 
115,064

 
 
 
 
 
Comprehensive income
 
$
56,161

 
$
25,925


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


3




CONSOLIDATED BALANCE SHEETS
OMNICARE,  INC.  AND  SUBSIDIARY  COMPANIES
UNAUDITED
(in thousands, except share data)
 
March 31,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
622,177

 
$
580,262

Restricted cash
1,824

 
2,336

Accounts receivable, less allowances of $334,712 (2011-$358,713)
992,792

 
931,314

Inventories
354,270

 
419,378

Deferred income tax benefits
152,132

 
153,444

Other current assets
177,825

 
210,637

Total current assets
2,301,020

 
2,297,371

Properties and equipment, at cost less accumulated depreciation
     of $310,683 (2011-$299,900)
239,927

 
225,257

Goodwill
4,241,610

 
4,247,286

Identifiable intangible assets, less accumulated amortization of
     $256,727 (2011-$246,200)
228,012

 
238,563

Other noncurrent assets
177,919

 
184,633

Total noncurrent assets
4,887,468

 
4,895,739

Total assets
$
7,188,488

 
$
7,193,110

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
222,863

 
$
273,768

Accrued employee compensation
38,334

 
61,019

Current debt
26,890

 
26,447

Other current liabilities
210,777

 
178,833

Total current liabilities
498,864

 
540,067

Long-term debt, notes and convertible debentures
1,965,586

 
1,968,274

Deferred income tax liabilities
849,538

 
838,857

Other noncurrent liabilities
46,459

 
50,476

Total noncurrent liabilities
2,861,583

 
2,857,607

Total liabilities
3,360,447

 
3,397,674

Commitments and contingencies (Note 8)
 

 
 

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, 131,928,200
    shares issued (2011-131,756,500 shares issued)
131,928

 
131,757

Paid-in capital
2,500,427

 
2,488,941

Retained earnings
1,699,645

 
1,651,829

Treasury stock, at cost-18,952,700 shares (2011-18,132,600 shares)
(511,413
)
 
(484,123
)
Accumulated other comprehensive income
7,454

 
7,032

Total stockholders' equity
3,828,041

 
3,795,436

Total liabilities and stockholders' equity
$
7,188,488

 
$
7,193,110


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

4



CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(in thousands)
 
Three months ended
 
March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
55,739

 
$
29,304

Loss from discontinued operations

 
19,851

Adjustments to reconcile net income to net cash flows from operating activities:
 

 
 

Depreciation
12,055

 
11,958

Amortization
20,406

 
19,852

Goodwill impairment charge
5,903

 

Write-off of debt issuance costs
103

 
198

Debt redemption tender offer premium

 
(1,277
)
Changes in assets and liabilities, net of effects from acquisition and divestiture of businesses:
 

 
 

Accounts receivable, net of provision for doubtful accounts
(58,591
)
 
(11,811
)
Inventories
65,161

 
44,278

Current and noncurrent assets
24,734

 
72,101

Accounts payable
(47,754
)
 
3,539

Accrued employee compensation
(22,685
)
 
(27,250
)
Current and noncurrent liabilities
45,346

 
(16,814
)
Net cash flows from operating activities of continuing operations
100,417

 
143,929

Net cash flows from operating activities of discontinued operations

 
446

Net cash flows from operating activities
100,417

 
144,375

Cash flows from investing activities:
 
 
 

Acquisition of businesses, net of cash received
(563
)
 
(9,496
)
Capital expenditures
(20,239
)
 
(8,565
)
Other
512

 
(1,169
)
Net cash flows used in investing activities of continuing operations
(20,290
)
 
(19,230
)
Net cash flows used in investing activities of discontinued operations

 
(373
)
Net cash flows used in investing activities
(20,290
)
 
(19,603
)
Cash flows from financing activities:
 

 
 

Payments on term loans
(6,587
)
 

Payments on long-term borrowings and obligations

 
(125,050
)
Decrease in cash overdraft balance
(3,151
)
 
(9,716
)
Payments for Omnicare common stock repurchases
(22,328
)
 
(28,748
)
Proceeds for stock awards and exercise of stock options, net of stock tendered in payment
2,519

 
983

Dividends paid
(7,825
)
 
(3,730
)
Other
(840
)
 
(2,007
)
Net cash flows used in financing activities
(38,212
)
 
(168,268
)
Net increase (decrease) in cash and cash equivalents
41,915

 
(43,496
)
Less increase in cash and cash equivalents of discontinued operations

 
73

Increase (decrease) in cash and cash equivalents of continuing operations
41,915

 
(43,569
)
Cash and cash equivalents at beginning of period
580,262

 
494,484

Cash and cash equivalents at end of period
$
622,177

 
$
450,915


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



5





Note 1 – Basis of Presentation

Omnicare, Inc. and its consolidated subsidiaries (“Omnicare” or the “Company”) have prepared the accompanying unaudited Consolidated Financial Statements in accordance with the accounting policies described in its consolidated financial statements and the notes thereto included in the Company's 2011 Annual Report on Form 10-K ("2011 Annual Report"), and the interim reporting requirements of Form 10-Q.  Accordingly, certain information and disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  The Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes included in the 2011 Annual Report and any related updates included in the Company’s Securities and Exchange Commission (“SEC”) filings.  Certain reclassifications of prior year amounts have been made to conform to the current year presentation.  

Note 2 – Significant Accounting Policies

Interim Financial Data

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

Subsequent Event

Omnicare entered into separate, privately negotiated exchange agreements under which, effective April 3, 2012, the Company retired $256.9 million in aggregate principal amount of outstanding 3.75% Convertible Senior Subordinated Notes due 2025 (the "Existing Notes") in exchange for its issuance of $390 million in aggregate principal amount of new 3.75% Convertible Senior Subordinated Notes due 2042 (the "New Notes"). The New Notes are guaranteed by substantially all of the Company's subsidiaries, subject to certain exceptions.

The New Notes mature in 2042 and will pay interest semiannually at a rate of 3.75% per year. Commencing with the interest period beginning April 1, 2020, the New Notes will also pay contingent interest under certain circumstances based on their then current trading price. The New Notes will be convertible, upon certain circumstances, into cash and, if applicable, shares of Omnicare common stock. The New Notes have an initial conversion rate of 24.09639 shares of common stock per $1,000 original principal amount of notes (subject to adjustment in certain events). This is equivalent to an initial conversion price of approximately $41.50 per share.

Under certain circumstances, the Company has the right to redeem the New Notes on or before April 1, 2016 by paying a coupon make-whole amount plus accrued but unpaid interest. After April 1, 2016 the Company may, as its option, redeem the New Notes by paying par plus accrued but unpaid interest.

In connection with the issuance of the New Notes, the Company also entered into capped call transactions with a counterparty. The capped calls are subject to adjustment or termination upon the occurrence of specified events affecting the Company and are subject to additional disruption events that may give rise to termination. The capped call transactions are intended to reduce potential dilution upon conversion of the New Notes.

The Company will recognize an estimated non-cash loss on the debt exchange of approximately $40 million in its Q2 2012 financial statements.

Stock-Based Compensation

Stock-based compensation expense recognized in the Consolidated Statements of Income for stock options and stock awards totaled approximately $3.1 million and $5.0 million for the three months ended March 31, 2012 and 2011, respectively.


6



Accounts Receivable
The following table is an aging of the Company’s gross accounts receivable (net of allowances for contractual adjustments), aged based on payment terms and categorized based on the three primary overall types of accounts receivable characteristics (in thousands):
March 31, 2012
 
Current and 0-180 Days Past Due
 
181 Days and Over Past Due
 
Total
Medicare (Part D and Part B), Medicaid and Third-Party payors
 
$
291,526

 
$
193,612

 
$
485,138

Facility payors
 
424,049

 
193,690

 
617,739

Private Pay payors
 
78,070

 
146,557

 
224,627

Total gross accounts receivable
 
$
793,645

 
$
533,859

 
$
1,327,504

December 31, 2011
 
 
 
 
 
 
Medicare (Part D and Part B), Medicaid and Third-Party payors
 
$
257,782

 
$
199,303

 
$
457,085

Facility payors
 
387,509

 
204,419

 
591,928

Private Pay payors
 
85,934

 
155,080

 
241,014

Total gross accounts receivable
 
$
731,225

 
$
558,802

 
$
1,290,027


Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) balances by component and in the aggregate, follow (in thousands):
 
 
March 31,
2012
 
December 31, 2011
Cumulative foreign currency translation adjustments
 
$
9,482

 
$
8,338

Unrealized loss on fair value of investments
 
(281
)
 
(277
)
Pension and postemployment benefits
 
(1,747
)
 
(1,029
)
Total accumulated other comprehensive income, net
 
$
7,454

 
$
7,032


The amounts are net of applicable tax benefits which were not material at March 31, 2012 and December 31, 2011.

Fair Value

The Company’s financial assets and liabilities, measured at fair value on a recurring basis, were as follows (in thousands):
 
 
 
 
Based on
 
 
Fair Value
 
Quoted Prices in Active Markets
 (Level 1)
 
Other Observable Inputs
(Level 2)
 
Unobservable Inputs
(Level 3)
March 31, 2012
 
 
 
 
 
 
 
 
7.75% interest rate swap agreements - fair value hedge
 
$
31,138

 
$

 
$
31,138

 
$

Derivatives
 

 

 

 

Total
 
$
31,138

 
$

 
$
31,138

 
$

December 31, 2011
 
 
 
 
 
 
 
 
7.75% interest rate swap agreement - fair value hedge
 
$
35,473

 
$

 
$
35,473

 
$

Derivatives
 

 

 

 

Total
 
$
35,473

 
$

 
$
35,473

 
$

 

7



The fair value of the Company’s fixed-rate debt facilities, excluding the previously disclosed swap values, is based on quoted market prices in an active market (Level II) and is summarized as follows (in thousands):

Fair Value of Financial Instruments
 
 
March 31, 2012
 
December 31, 2011
Financial Instrument
 
Book Value
 
Market Value
 
Book Value
 
Market Value
7.75% senior subordinated notes, due 2020
 
$
550,000

 
$
610,500

 
$
550,000

 
$
591,300

3.75% convertible senior subordinated notes, due 2025
 
 

 
 

 
 

 
 

Carrying value
 
363,407

 

 
361,345

 

Unamortized debt discount
 
211,593

 

 
213,655

 

Principal amount
 
575,000

 
836,600

 
575,000

 
816,500

4.00% junior subordinated convertible debentures, due 2033
 
 

 
 

 
 

 
 

Carrying value
 
204,304

 

 
203,675

 

Unamortized debt discount
 
140,696

 

 
141,325

 

Principal amount
 
345,000

 
330,800

 
345,000

 
318,800

3.25% convertible senior debentures, due 2035
 
 

 
 

 
 

 
 

Carrying value
 
388,458

 

 
384,799

 

Unamortized debt discount
 
64,042

 

 
67,701

 

Principal amount
 
452,500

 
437,200

 
452,500

 
404,600


Income Taxes

The quarterly effective tax rates are different than the federal statutory rate largely as a result of the impact of state and local income taxes and certain non-deductible charges.  The year over year change in the effective tax rate is primarily due to certain non-deductible charges relating to the goodwill impairment recorded in the first quarter of 2012.

Other Charges

Other Charges consist of the following (in thousands):
 
 
Three months ended March 31,
 
 
2012
 
2011
Settlement, litigation and other related charges
 
$
7,203

 
$
6,013

Acquisition and other related costs
 
3,109

 
1,889

Goodwill impairment
 
5,903

 

Separation costs
 
2,500

 

Total - other charges
 
$
18,715

 
$
7,902

 
Common Stock Repurchase Program

In the three months ended March 31, 2012, the Company repurchased approximately 0.7 million shares through authorized share repurchase programs at an aggregate cost of approximately $22 million, for a cumulative amount of approximately 9.8 million shares repurchased at an aggregate cost of approximately $263 million through March 31, 2012.  In February 2012, the Company's Board of Directors increased the Company's share repurchase authorization by $200 million until February 28, 2014. The Company had approximately $237 million of combined share repurchase authority remaining as of March 31, 2012.

Recently Issued Accounting Standards

There are no recently issued accounting standards that are expected to have a material impact on the Company's consolidated results of operations, financial position and cash flows.


8



Note 3 – Discontinued Operations

In 2011, the Company completed the divestiture of certain home healthcare and related ancillary businesses (“the Disposal Group”) that were non-strategic in nature and its Tidewater Group Purchasing Organization (“Tidewater”) as the Company determined they were no longer a good strategic fit within the Company’s portfolio of assets.  The Company did not consider the operations of the Disposal Group and Tidewater (collectively, the “Non-Core Disposal Group”) as significant, individually or in the aggregate, to the operations of Omnicare. Also in 2011, the Company completed the divestiture of its Contract Research Services organization (“CRO Services”). For the three months ended March 31, 2011, CRO Services recorded a pretax impairment loss of approximately $41 million to reduce the carrying value of the CRO Services operations to fair value.  


Selected financial information related to the discontinued operations follows (in thousands):
 
 
Three months ended March 31, 2011
Net sales from discontinued operations
 
$
34,532

Loss from operations - pretax
 
(2,774
)
 
 
 
Loss from operations - aftertax
 
(1,729
)
Impairment loss on discontinued operations - aftertax
 
(18,122
)
Loss from discontinued operations
 
$
(19,851
)

Note 4 – Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the three months ended March 31, 2012 are as follows (in thousands):
 
 
 
 
 
 
 
 
 
Long-Term Care Group
 
Specialty Care Group
 
Total
Goodwill balance as of December 31, 2011
 
$
3,568,658

 
$
678,628

 
$
4,247,286

 
 
 
 
 
 
 
Impairment losses
 
(5,903
)
 

 
(5,903
)
Other
 
$
227

 
$

 
$
227

 
 
 
 
 
 
 
Goodwill
 
3,568,885

 
678,628

 
4,247,513

Accumulated impairment losses
 
(5,903
)
 

 
(5,903
)
Goodwill, net of impairment as of March 31, 2012
 
$
3,562,982

 
$
678,628

 
$
4,241,610


On April 2, 2012, Omnicare signed a letter of intent (“LOI”) with a third party to sell the Company's Canadian Pharmacy. In the three months ended March 31, 2012, the Company recorded an impairment loss of approximately $6 million to reduce the carrying value of the Canadian Pharmacy to fair value based on the terms of the LOI.

The “Other” caption above includes the settlement of acquisition matters relating to prior-year acquisitions.

The Company’s intangible amortization expense for the three months ended March 31, 2012 and 2011 was approximately $11 million and $10 million, respectively.


9



Note 5 – Debt

A summary of debt follows (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Revolving credit facility
 
$

 
$

Senior term loan, due 2016
 
438,750

 
444,375

7.75% senior subordinated notes, due 2020
 
550,000

 
550,000

3.75% convertible senior subordinated notes, due 2025
 
575,000

 
575,000

4.00% junior subordinated convertible debentures, due 2033
 
345,000

 
345,000

3.25% convertible senior debentures, due 2035
 
452,500

 
452,500

Capitalized lease and other debt obligations
 
16,419

 
15,054

Subtotal
 
2,377,669

 
2,381,929

Add interest rate swap agreements
 
31,138

 
35,473

(Subtract) unamortized debt discount
 
(416,331
)
 
(422,681
)
(Subtract) current portion of debt
 
(26,890
)
 
(26,447
)
Total long-term debt, net
 
$
1,965,586

 
$
1,968,274


At March 31, 2012, there was no outstanding balance under the Company’s revolving credit facility and $438.8 million in loans outstanding under the term loan.  The interest rate on the term loan was approximately 2.50% at March 31, 2012. As of March 31, 2012, the Company had approximately $11 million outstanding relating to standby letters of credit, substantially all of which were subject to automatic annual renewals.

The weighted average floating interest rate on the interest rate swap agreements was 5.00% versus the 7.75% stated rate on the corresponding senior subordinated notes due 2020 with remaining principal balance of $550 million at March 31, 2012 .

The Company amortized to expense approximately $1.5 million and $1.4 million of deferred debt issuance costs during the three months ended March 31, 2012 and 2011, respectively. Also, the 2011 period included approximately $1.1 million in debt redemption costs associated with the Company's redemption of approximately $125 million aggregate principal amount of its 6.125% Senior Subordinated Notes, due 2013.

Omnicare entered into separate, privately negotiated exchange agreements under which, effective April 3, 2012, the Company retired $256.9 million in aggregate principal amount of outstanding 3.75% Convertible Senior Subordinated Notes due 2025 (the "Existing Notes") in exchange for its issuance of $390 million in aggregate principal amount of new 3.75% Convertible Senior Subordinated Notes due 2042 (the "New Notes"). In connection with the issuance of the New Notes, the Company also entered into capped call transactions with a counterparty, which are intended to reduce potential dilution upon conversion of the New Notes. See additional information at the "Subsequent Events" caption of the "Significant Accounting Policies" note.

At March 31, 2012, The Company had three convertible securities, its 3.75% Convertible Senior Subordinated Notes, due 2025 (the “3.75% Convertible Notes”), the Series B 4.00% junior subordinated convertible debentures, due 2033 (the “4.00% Convertible Debentures”), and its 3.25% convertible senior debentures, due 2035 (with optional repurchase right of holders, at par, on December 15, 2015) (the “3.25% Convertible Debentures”).  Issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are required to separately account for the liability and equity components in a manner that reflects the entity’s calculated nonconvertible debt borrowing rate when the debt was issued.  The carrying amounts of the Company’s convertible debt and related equity balances, are as follows (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Carrying value of equity component
 
$
619,223

 
$
619,223

Principal amount of convertible debt
 
$
1,372,500

 
$
1,372,500

Unamortized debt discount
 
(416,331
)
 
(422,681
)
Net carrying value of convertible debt
 
$
956,169

 
$
949,819


10




As of March 31, 2012, the remaining amortization period for the debt discount was approximately 13.75, 21.25 and 3.75 years for the 3.75% Convertible Notes, 4.00% Convertible Debentures and 3.25% Convertible Debentures, respectively.

The effective interest rates for the liability components of the 3.75% Convertible Notes, 4.00% Convertible Debentures and 3.25% Convertible Debentures were 8.25%, 8.01% and 7.625%, respectively, for the period ended March 31, 2012.

Note 6 – Earnings (Loss) Per Share Data

The following is a reconciliation of the basic and diluted earnings (loss) per share (“EPS”) computations for both the numerator and denominator (in thousands, except per share data):
 
 
Three months ended March 31,
2012:
 
Income (Numerator)
 
Common Shares(Denominator)
 
Per Common
Share Amounts
Basic EPS
 
 
 
 
 
 
Income from continuing operations
 
$
55,739

 
 
 
$
0.50

Loss from discontinued operations
 

 
 
 

Net income
 
55,739

 
111,487

 
$
0.50

Effect of Dilutive Securities
 
 

 
 

 
 

Convertible securities
 
71

 
4,320

 
 

Stock options, warrants and awards
 

 
693

 
 

Diluted EPS
 
 

 
 

 
 

Income from continuing operations plus assumed conversions
 
55,810

 
 

 
$
0.48

Loss from discontinued operations
 

 
 

 

Net income plus assumed conversions
 
$
55,810

 
116,500

 
$
0.48

2011:
 
 

 
 

 
 

Basic EPS
 
 

 
 

 
 

Income from continuing operations
 
$
49,155

 
 

 
$
0.43

Loss from discontinued operations
 
(19,851
)
 
 

 
(0.17
)
Net income
 
29,304

 
114,129

 
$
0.26

Effect of Dilutive Securities
 
 

 
 

 
 

4.00% junior subordinated convertible debentures
 
72

 
275

 
 

Stock options, warrants and awards
 

 
660

 
 

Diluted EPS
 
 

 
 

 
 

Income from continuing operations plus assumed conversions
 
49,227

 
 

 
$
0.43

Loss from discontinued operations
 
(19,851
)
 
 

 
(0.17
)
Net income plus assumed conversions
 
$
29,376

 
115,064

 
$
0.26


EPS is reported independently for each amount presented.  Accordingly, the sum of the individual amounts may not necessarily equal the separately calculated amounts for the corresponding period.

The Company is required to include additional shares in its diluted shares outstanding calculation based on the treasury stock method when the average Omnicare stock market price for the applicable period exceeds $27.39, $40.82 and $79.38 for the 3.75% Convertible Notes, 4.00% Convertible Debentures, and 3.25% Convertible Debentures, respectively.

During the three months ended March 31, 2012 and 2011, the anti-dilutive effect associated with certain stock options, warrants and awards was excluded from the computation of diluted EPS, since the exercise price was greater than the average market price of the Company’s common stock during these periods.  The aggregate number of stock options, warrants and awards excluded from the computation of diluted EPS for the three months ended March 31, 2012 and 2011 totaled 1.8 million and 3.4 million, respectively.  

11



Note 7 – Restructuring and Other Related Charges

Company-wide Reorganization Program:

During 2010, the Company initiated a “Company-wide Reorganization Program” (the “CWR Program”), including a reshaping of the organization with the objective of deploying resources closer to the customers, allowing Omnicare to become more responsive to customer needs, better leveraging the Omnicare platform and better positioning the Company for potential growth.  The program is anticipated to be completed in the next twelve months and is currently estimated to result in restructuring and other related charges of approximately $13 million, the majority of which is anticipated to be incurred in the LTC and Corporate/Other segments, and is largely related to severance, employment agreement buyout and lease termination costs.

As of March 31, 2012, the Company has made cumulative payments of approximately $2.9 million of severance and other employee-related costs for the CWR Program.  The Company had liabilities of approximately $0.4 million at December 31, 2011, of which approximately $0.2 million was utilized in the three months ended March 31, 2012.  The remaining liabilities of $0.2 million at March 31, 2012 represent amounts not yet paid relating to actions taken in connection with the program (primarily severance and employment agreement buy-outs) and will be settled as these matters are finalized.

In the three months ended March 31, 2012, the Company recorded approximately $2.5 million, reflected in the “Other charges” caption of the Consolidated Statements of Income, for separation costs related to three former executives.

Note 8 – Commitments and Contingencies

Omnicare continuously evaluates contingencies based upon the best available information.  The Company believes that liabilities have been recorded to the extent necessary in cases where the outcome is considered probable and reasonably estimable.  To the extent that resolution of contingencies results in amounts that vary from the Company’s recorded liabilities, future earnings will be charged or credited accordingly.

On October 5, 2011, a qui tam complaint, entitled United States ex rel. Donald Gale v. Omnicare, Inc., No. 1:10-cv-0127, was served on the Company. The case had been filed on January 19, 2010 under seal with the U.S. District Court for the Northern District of Ohio, Eastern Division. The complaint was unsealed by the Court on June 9, 2011 after the U.S. Department of Justice notified the court that it has declined to intervene in this action. The complaint was brought by Donald Gale as a private party qui tam relator on behalf of the federal government. The action alleges civil violations of the False Claims Act based on allegations that the Company provided certain customer facilities with discounts and other forms of remuneration in return for referrals of business in violation of the Anti-Kickback Statute, and offered pricing terms in violation of the "most favored customer" pricing laws of various state Medicaid plans. The Company filed a motion to dismiss on January 27, 2012. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.

On August 4, 2011, a qui tam complaint, entitled United States of America ex rel. Fox Rx, Inc. v. Omnicare, Inc. and Neighborcare, Inc., No. 1:11-cv-0962, that was filed under seal with the U.S. District Court for the Northern District of Georgia, was unsealed by the Court. The U.S. Department of Justice has declined to intervene in this action. The Company was served with the complaint on November 23, 2011. The complaint was brought by Fox Rx, Inc. as a qui tam relator on behalf of the federal government. The action alleges civil violations of the False Claims Act based on allegations that the Company billed Medicare Part D for medically unnecessary antipsychotic drugs, increased the dispensing fees by artificially shortening the supply of prescribed medication, submitted claims for antipsychotic drugs without complying with Fox Rx, Inc.’s prior approval requirements, and waived or failed to collect copayments from patients to induce the use of prescription drugs. The Company filed a motion to dismiss on December 21, 2011. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.

On August 24, 2011, a class action complaint entitled Ansfield v. Omnicare, Inc., et al. was filed on behalf of a putative class of all purchasers of the Company's common stock from January 10, 2007 through August 5, 2010 against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Kentucky, alleging violations of federal securities law in connection with alleged false and misleading statements with respect to the Company's compliance with federal and state Medicare and Medicaid laws and regulations. On October 21, 2011, a class action complaint entitled Jacksonville Police & Fire Pension Fund v. Omnicare, Inc. et al. was filed on behalf of the same putative class of purchasers as is referenced in the Ansfield complaint, against the Company and certain of its current and former officers, in the U.S. District Court for the Eastern District of Kentucky. Plaintiffs allege substantially the same violations of federal securities law as are alleged in the Ansfield complaint. Both complaints seek unspecified money damages. The Court has appointed lead counsel and a consolidated amended

12



complaint is expected to be filed by May 11, 2012. The Company believes that the claims asserted are without merit and intends to defend against them vigorously.

On December 13, 2010, a qui tam complaint entitled United States ex rel. Bartz v. Ortho-McNeil Pharmaceuticals, Inc., Johnson & Johnson, Janssen Pharmaceutica, Inc., Janssen Pharmaceutica Products, LP, McKesson Corporation, McKesson Specialty Pharmaceutical, LLC and Omnicare, Inc., Civil Action No. 05-cv-6010, which had been filed under seal with the U.S. District Court in Philadelphia, Pennsylvania, was ordered unsealed by the court. The complaint was brought by Scott Bartz, a former employee of Johnson & Johnson, as a private party qui tam relator on behalf of the federal government and several state and local governments. The U.S. Department of Justice has notified the court that it has declined to intervene. The action alleges civil violations of the False Claims Act based on allegations that Johnson & Johnson and its affiliates provided the Company and McKesson with rebates, free drugs and other remuneration in order to limit Johnson & Johnson’s rebate liability to Medicaid. The court granted Johnson & Johnson’s motion to transfer the action to U.S. District Court in Boston, Massachusetts in February 2011. The Company filed a motion to dismiss the complaint on May 27, 2011. On June 10, 2011, the relator filed a notice of intent to voluntarily dismiss its claims against the Company and on April 20, 2012, the court granted relator's motion and dismissed the claims against Omnicare without prejudice.

On October 29, 2010, a qui tam complaint entitled United States ex rel. Banigan and Templin, et al. v. Organon USA, Inc., Omnicare, Inc. and Pharmerica, Inc., Civil No. 07-12153-RWZ, that had been filed under seal with the U.S. District Court in Boston, Massachusetts, was ordered unsealed by the court. The complaint was brought by James Banigan and Richard Templin, former employees of Organon, as private party qui tam relators on behalf of the federal government and several state and local governments. The action alleges civil violations of the False Claims Act based on allegations that Organon USA, Inc. and its affiliates paid the Company and several other long-term care pharmacies rebates, post-purchase discounts and other forms of remuneration in return for purchasing pharmaceuticals from Organon and taking steps to increase the purchase of Organon's drugs in violation of the Anti-Kickback Statute. The U.S. Department of Justice has notified the court that it has declined to intervene in this action. The Company filed a motion to dismiss the complaint on July 7, 2011. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.
 
The Drug Enforcement Administration ("DEA") is investigating alleged errors and deficiencies in paperwork requirements for controlled substance dispensing at several of the Company's pharmacies in Ohio. The United States Attorney's Office, Northern District of Ohio ("AUSA"), is conducting an investigation relating to this matter, and may seek monetary penalties. The AUSA is also conducting a criminal investigation of several current and former employees in connection with the DEA audits. The Company is cooperating with these investigations and intends to vigorously defend itself if these matters are pursued. The Company recorded a provision for this matter in the quarters ended December 31 and June 30, 2011 and December 31, 2010. The Company is no longer the subject of a criminal investigation by the AUSA in connection with the DEA audits.

On April 14, 2010, a purported shareholder derivative action, entitled Manville Personal Injury Settlement Trust v. Gemunder, et al., Case No. 10-CI-01212, was filed in Kentucky State Court, against members of the Board and certain current and former officers of the Company, individually, purporting to assert claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and waste of corporate assets arising out of alleged violations of federal and state laws prohibiting the payment of illegal kickbacks and the submission of false claims in connection with the Medicare and Medicaid healthcare programs. Plaintiff alleges that the Board and senior management caused the company to violate these laws, which has resulted in over $100 million in fines and penalties paid by Omnicare and exposed the Company and certain individual defendants to potential civil and criminal liability. On April 27, 2011 the court entered an order denying defendants’ motion to dismiss the complaint for failure to make a pre-suit demand and failure to state a claim. Defendants filed a notice of appeal from the decision in the Kentucky Court of Appeals, and plaintiff moved to dismiss that appeal on the grounds that the order denying defendants’ motion to dismiss is not subject to an immediate appeal under Kentucky law. On October 6, 2011, the Kentucky Court of Appeals granted plaintiff’s motion on the grounds that the appeal was premature. The case is now in the discovery stage. The individual defendants have denied all allegations of wrongdoing, believe the claims against them to be completely without merit and intend to vigorously defend themselves in this action.

On April 2, 2010, a purported class action lawsuit, entitled Spindler, et al. v. Johnson & Johnson Corp., Omnicare, Inc. and Does 1-10, Case No. CV-10-1414, was filed in the United States District Court for the Northern District of California, San Francisco Division, against Johnson & Johnson (“J&J”), the Company and certain unnamed defendants asserting violations of federal antitrust law and California unfair competition law arising out of certain arrangements between J&J and the Company. Plaintiffs allege, among other things, that the Company violated these laws by entering into agreements with J&J to promote J&J products. On January 21, 2011, the court dismissed the amended complaint and granted permission to file a new amended complaint, which was filed in February 2011. On August 1, 2011, the court dismissed the second amended complaint and, on October 25, 2011,

13



after plaintiffs had declined the court's invitation to further amend the complaint, the district court dismissed the matter with prejudice. On November 17, 2011, plaintiffs filed a notice of appeal with the Ninth Circuit Court of Appeals. On March, 1 2012, the court granted the parties' stipulated motion to withdraw the appeal.

On January 8, 2010, a qui tam complaint, entitled United States ex rel. Resnick and Nehls v. Omnicare, Inc., Morris Esformes, Phillip Esformes and Lancaster Ltd. d/b/a Lancaster Health Group, No. 1:07cv5777, that was filed under seal with the U.S. District Court in Chicago, Illinois was unsealed by the court. The U.S. Department of Justice and the State of Illinois have notified the court that they have declined to intervene in this action. The complaint was brought by Adam Resnick and Maureen Nehls as private party “qui tam relators” on behalf of the federal government and two state governments. The action alleges civil violations of the False Claims Act and certain state statutes based on allegations that Omnicare acquired certain institutional pharmacies at above-market rates in violation of the Anti-Kickback Statute and applicable state statutes. On December 1, 2010, Resnick filed a motion to withdraw as a relator, which the court granted on December 14, 2010. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.

On or about March 12, 2010, a qui tam complaint entitled State of Illinois, ex rel. Adam B. Resnick and Maureen Nehls v. Omnicare, Inc. Morris Esformes, Phillip Esformes, and Tim Dacy, No. D6 L 1926 that was filed under seal in Illinois state court, was unsealed by the court. The State of Illinois notified the court that it declined to intervene in the action. This complaint was brought by the same two qui tam relators, Adam Resnick and Maureen Nehls, that brought the complaint in the United States District Court in Chicago described above. This complaint is based on allegations nearly identical to a portion of the allegations contained in that federal action. The Company was not served with the complaint in this action, and the Company was recently informed that the complaint was dismissed without prejudice. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.

On June 11, 2010, a qui tam complaint, entitled United States ex rel. Stone v. Omnicare Inc., No. 1:09cv4319, that was filed under seal with the U.S. District Court in Chicago, Illinois was unsealed by the court. The U.S. Department of Justice and the various states named in the complaint have notified the court that they have declined to intervene in this action. The complaint was brought by John Stone, the Company’s former Vice President of Internal Audit, as a private party qui tam relator on behalf of the federal government and several state governments. The action alleges civil violations of the False Claims Act and certain state statutes based on allegations that the Company submitted claims for reimbursement for certain ancillary services that did not conform with Medicare and Medicaid regulations, submitted claims for reimbursement from newly acquired pharmacies that were in violation of certain Medicaid and Medicare regulations, violated certain FDA regulations regarding the storage and handling of a particular drug, and violated certain Medicaid billing regulations relating to usual and customary charges. Relator also asserts against the Company a retaliatory discharge claim under the False Claims Act. On November 1, 2010, the Company filed a motion to dismiss the lawsuit. Relator responded and conceded to dismissal of one of the counts. On July 7, 2011, the court granted the Company's motion in part and denied it in part. The court granted the motion as to the allegations that the Company submitted claims for reimbursement for certain ancillary services that did not conform with Medicare and Medicaid regulations and submitted claims for reimbursement from newly acquired pharmacies that were in violation of certain Medicaid and Medicare regulations; the court dismissed those counts without prejudice. The court denied the Company's motion as to the allegations that the Company violated certain FDA regulations regarding the storage and handling of a particular drug and retaliated against Relator. On September 15, 2011, Relator filed an Amended Complaint. He repeated his claim that the Company submitted false claims for certain ancillary services that did not conform with Medicare and Medicaid regulations. Relator also asserted a claim in the Amended Complaint that the Company submitted false claims to the Nevada Medicaid program for a particular drug. Relator repeated his retaliatory discharge claim. The Company filed a motion to dismiss the Amended Complaint on November 15, 2011. The Relator filed a response in opposition to that motion. On April 24, 2012, the court granted Omnicare's motion to dismiss without prejudice all claims except the retaliatory discharge claim. The Company believes that the remaining allegation is without merit and intends to vigorously defend itself in this action.

On November 19, 2010, the Company was served with a second amended qui tam complaint entitled United States ex rel. Rostholder v. Omnicare, Inc. and Omnicare Distribution Center, LLC f/k/a Heartland Repack Services LLC, No. CCB-07-1283, that was filed under seal with the U.S. District Court in Baltimore, Maryland in July 2009. The U.S. Department of Justice notified the court on April 22, 2009 that it declined to intervene in this action. The complaint was brought by Barry Rostholder as a private party qui tam relator on behalf of the federal government and several state and local governments. The action, in general, alleges civil violations of the False Claims Act based on allegations that the Company submitted claims for reimbursement for drugs that were repackaged at its Heartland repackaging facility in violation of certain FDA regulations. These allegations arise from the previously disclosed issues experienced by the Company at its Heartland repackaging facility, which suspended operations in 2006. On September 30, 2011, the Company filed a motion to dismiss the lawsuit in its entirety, which has now been fully briefed. The Company believes that the claims in the complaint are without merit and intends to vigorously defend itself in this action if pursued.

14




As part of the previously disclosed civil settlement agreement entered into by the Company with the U.S. Attorney’s Office, District of Massachusetts in November 2009, the Company also entered into an amended and restated corporate integrity agreement (“CIA”) with the Department of Health and Human Services Office of the Inspector General with a term of five years from November 2, 2009. Pursuant to the CIA, the Company is required, among other things, to (i) create procedures designed to ensure that each existing, new or renewed arrangement with any actual or potential source of health care business or referrals to Omnicare or any actual or potential recipient of health care 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 the Company’s compliance with the terms of the CIA and report to OIG regarding that compliance; and (iii) provide training for certain Company employees as to the Company’s requirements under the CIA. The requirements of the Company’s prior corporate integrity agreement obligating the Company 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 health care program beneficiaries in hospice programs, have been incorporated into the amended and restated CIA without modification. The requirements of the CIA have resulted in increased costs to maintain the Company’s compliance program and greater scrutiny by federal regulatory authorities. Violations of the corporate integrity agreement could subject the Company to significant monetary penalties. Consistent with the CIA, the Company is reviewing its contracts to ensure compliance with applicable laws and regulations. As a result of this review, pricing under certain of its consultant pharmacist services contracts have been increased and will continue to be increased, and these price increases have resulted and may continue to result in the loss of certain contracts.

In February 2006, two substantially similar putative class action lawsuits were filed in the United States District Court for the Eastern District of Kentucky, and were consolidated and entitled Indiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., et al., No. 2:06cv26. The amended consolidated complaint was filed against Omnicare, three of its officers and two of its directors and purported to be brought on behalf of all open-market purchasers of Omnicare common stock from August 3, 2005 through July 27, 2006, as well as all purchasers who bought their shares in the Company's public offering in December 2005. The complaint contained claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (and Rule 10b-5) and Section 11 of the Securities Act of 1933 and sought, among other things, compensatory damages and injunctive relief. Plaintiffs alleged that Omnicare (i) artificially inflated its earnings (and failed to file GAAP-compliant financial statements) by engaging in improper generic drug substitution, improper revenue recognition and overvaluation of receivables and inventories; (ii) failed to timely disclose its contractual dispute with UnitedHealth Group Inc.; (iii) failed to timely record certain special litigation reserves; and (iv) made other allegedly false and misleading statements about the Company’s business, prospects and compliance with applicable laws and regulations. The defendants filed a motion to dismiss the amended complaint on March 12, 2007, and on October 12, 2007, the court dismissed the case. On November 9, 2007, plaintiffs appealed the dismissal to the United States Court of Appeals for the Sixth Circuit. On October 21, 2009, the Sixth Circuit Court of Appeals generally affirmed the district court's dismissal, dismissing plaintiff's claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. However, the appellate court reversed the dismissal for the claim brought for violation of Section 11 of the Securities Act of 1933, and returned the case to the district court for further proceedings. On December 30, 2010, plaintiffs filed a motion in the district court requesting permission to file a third amended complaint. On February 4, 2011, the defendants filed a motion to dismiss the sole remaining claim in plaintiff's second amended complaint. On July 14, 2011, the court granted both motions and deemed the third amended complaint filed. This complaint asserts a claim under Section 11 of the Securities Act of 1933 on behalf of all purchasers of Omnicare common stock in the December 2005 public offering. The new complaint alleges that the 2005 registration statement contained false and misleading statements regarding Omnicare's policy of compliance with all applicable laws and regulations with particular emphasis on allegations of violation of the federal anti-kickback law in connection with three of Omnicare's acquisitions, Omnicare's contracts with two of its suppliers and its provision of pharmacist consultant services. On August 19, 2011, the defendants filed a motion to dismiss plaintiffs' most recent complaint and on February 13, 2012 the court dismissed the case and struck the case from the docket. On March 12, 2012, plaintiffs filed a notice of appeal in the United States Court of Appeals for the Sixth Circuit.

On February 13, 2006, two substantially similar shareholder derivative actions, entitled Isak v. Gemunder, et al., Case No. 06-CI-390, and Fragnoli v. Hutton, et al., Case No. 06-CI-389, were filed in Kentucky State Circuit Court, Kenton Circuit, against the members of Omnicare’s board of directors, individually, purporting to assert claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment arising out of the Company’s alleged violations of federal and state health care laws based upon the same purportedly improper generic drug substitution that is the subject of the federal purported class action lawsuits. The complaints seek, among other things, damages, restitution and injunctive relief. The Isak and Fragnoli actions were later consolidated by agreement of the parties. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.

15





During 2006, the Company experienced certain quality control and product recall issues, as well as fire damage, at one of its repackaging facilities.  In connection with the resolution of these matters (the “Repack Matters”) the Company decided not to reopen this facility.  The Company has been cooperating with federal and state officials who have been conducting investigations relating to the Repack Matters and certain billing issues.

The three months ended March 31, 2012 and 2011 included charges of $7.2 million and $6.0 million, respectively, reflected in “other charges” on the Consolidated Statements of Income, primarily for estimated litigation and other related settlements and associated professional expenses for resolution of certain regulatory matters with the federal government and various states, certain large customer disputes, the investigation by the federal government and certain states relating to drug substitutions and costs associated with the purported class and derivative actions against the Company.  In connection with Omnicare’s participation in Medicare, Medicaid and other healthcare programs, the Company is subject to various inspections, audits, inquiries and investigations by governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company is subject.  Further, the Company maintains a compliance program which establishes certain routine periodic monitoring of the accuracy of the Company’s billing systems and other regulatory compliance matters and encourages the reporting of errors and inaccuracies.  As a result of the compliance program, Omnicare has made, and will continue to make, disclosures to the applicable governmental agencies of amounts, if any, determined to represent over-payments from the respective programs and, where applicable, those amounts, as well as any amounts relating to certain inspections, audits, inquiries and investigations activity are included in “Settlement, litigation and other related charges” of the Consolidated Statements of Income.

Although the Company cannot know the ultimate outcome of the matters described in the preceding paragraphs other than as disclosed, there can be no assurance that the resolution of these matters will not have a material adverse impact on the Company’s consolidated results of operations, financial position or cash flows or, in the case of other billing matters, that these matters will be resolved in an amount that would not exceed the amount of the pretax charges previously recorded by the Company.

As part of its ongoing operations, the Company is 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 the Company is subject. Further, under the federal False Claims Act, 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. Some states have adopted similar state whistleblower and false claims provisions. The Company from time to time receives government inquiries from federal and state agencies regarding compliance with various healthcare laws. In addition, the Company is also involved in various legal actions arising in the normal course of business. At any point in time, the Company is in varying stages of discussions on these matters. Omnicare records accruals for such contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These matters are continuously being evaluated and, in many cases, are being contested by the Company and the outcome is not predictable. The inherently 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 proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. Consequently, no estimate of the possible loss or range of loss in excess of the amounts accrued, if any, can be made at this time regarding the matters described above. Further, there can be no assurance that the ultimate resolution of these matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.

The Company indemnifies the directors and officers of the Company for certain liabilities that might arise from the performance of their job responsibilities for the Company.  Additionally, in the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications.  The Company’s maximum exposure under these arrangements is unknown, as this involves the resolution of claims made, or future claims that may be made, against the Company, its directors and/or officers, the outcomes of which is unknown and not currently predictable.  Accordingly, no liabilities have been recorded for the indemnifications.


16



Note 9 – Segment Information

The Company is organized in two operating segments. These segments are based on the operations of the underlying businesses and the customers they serve. Based on the "management approach", as defined by the authoritative guidance for disclosures about segments and enterprise related information, the Company's two reporting segments are Long-Term Care Group ("LTC") and Specialty Care Group ("SCG"). The Company's larger reportable segment is LTC, which primarily provides distribution of pharmaceuticals, related pharmacy consulting and other ancillary services and medical supplies. LTC's customers are primarily skilled nursing, assisted living and other providers of healthcare services. The Company’s other reportable segment is SCG, which provides key commercialization services for the biopharmaceutical industry in addition to end-of-life pharmaceutical care management for hospice care agencies. The primary components of the "Corporate/Other" segment are the Company's corporate management oversight and administration, including its information technology and data management services, as well as other consolidating and eliminating entries, which have not been charged to reportable segments. The Company evaluates the performance of its segments based on revenue and operating income, and does not include segment assets or nonoperating income/expense items for management reporting purposes.
 
 
For the three months ended March 31,
2012:
 
LTC
 
SCG
 
Corporate/Other
 
Consolidated
Totals
Net sales
 
$
1,296,255

 
$
293,260

 
$
3,553

 
$
1,593,068

Depreciation and amortization expense
 
(16,634
)
 
(3,976
)
 
(11,851
)
 
(32,461
)
Other charges
 
(16,215
)
 

 
(2,500
)
 
(18,715
)
Operating income (loss) from continuing operations
 
137,979

 
30,149

 
(43,298
)
 
124,830

2011:
 
 
 
 
 
 
 
 
Net sales
 
$
1,290,109

 
$
231,295

 
$
4,167

 
$
1,525,571

Depreciation and amortization expense
 
(15,912
)
 
(4,305
)
 
(11,593
)
 
(31,810
)
Other charges
 
(7,902
)
 

 

 
(7,902
)
Operating income (loss) from continuing operations
 
122,490

 
21,295

 
(31,424
)
 
112,361


Note 10 – Guarantor Subsidiaries

At March 31, 2012, the Company’s 7.75% Senior Subordinated Notes due 2020 and the 3.75% Convertible Notes due 2025 are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly-owned subsidiaries of the Company (the “Guarantor Subsidiaries”).  The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. (“Parent”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of March 31, 2012 and December 31, 2011 for the balance sheets, as well as the three months ended March 31, 2012 and 2011 for the statements of comprehensive income and the statements of cash flows.  Management believes separate complete financial statements of the Guarantor Subsidiaries would not provide information that would be necessary for evaluating the sufficiency of the Guarantor Subsidiaries, and thus are not presented.  The equity method has been used with respect to the Parent company’s investment in subsidiaries.  No consolidating/eliminating adjustment column is presented for the condensed consolidating statements of cash flows since there were no significant consolidating/eliminating adjustment amounts during the periods presented.

17



Note 10 – Guarantor Subsidiaries (Continued)

Summary Consolidating
Statements of Comprehensive Income
(in thousands)

 
 
Three months ended March 31,
2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating / 
Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
Net sales
 
$

 
$
1,557,403

 
$
35,665

 
$

 
$
1,593,068

Cost of sales
 

 
1,201,149

 
23,819

 

 
1,224,968

Gross profit
 

 
356,254

 
11,846

 

 
368,100

Selling, general and administrative expenses
 
1,003

 
188,723

 
10,398

 

 
200,124

Provision for doubtful accounts
 

 
23,966

 
465

 

 
24,431

Other charges
 

 
18,715

 

 

 
18,715

Operating income (loss)
 
(1,003
)
 
124,850

 
983

 

 
124,830

Investment income (loss)
 
216

 
(188
)
 

 

 
28

Interest expense
 
(30,604
)
 
(95
)
 
(163
)
 

 
(30,862
)
Income (loss) from continuing operations before income taxes
 
(31,391
)
 
124,567

 
820

 

 
93,996

Income tax (benefit) expense
 
(12,086
)
 
47,755

 
2,588

 

 
38,257

Income (loss) from continuing operations
 
(19,305
)
 
76,812

 
(1,768
)
 

 
55,739

Equity of net income of subsidiaries
 
75,044

 

 

 
(75,044
)
 

Net income
 
$
55,739

 
$
76,812

 
$
(1,768
)
 
$
(75,044
)
 
$
55,739

Comprehensive income
 
$
55,017

 
$
76,812

 
$
(624
)
 
$
(75,044
)
 
$
56,161

2011:
 
 

 
 

 
 

 
 

 
 

Net sales
 
$

 
$
1,492,904

 
$
32,667

 
$

 
$
1,525,571

Cost of sales
 

 
1,168,138

 
22,474

 

 
1,190,612

Gross profit
 

 
324,766

 
10,193

 

 
334,959

Selling, general and administrative expenses
 
3,600

 
182,799

 
3,767

 

 
190,166

Provision for doubtful accounts
 

 
24,051

 
479

 

 
24,530

Other charges
 

 
7,902

 

 

 
7,902

Operating income (loss)
 
(3,600
)
 
110,014

 
5,947

 

 
112,361

Investment income
 
216

 
80

 

 

 
296

Interest expense
 
(34,347
)
 
(325
)
 
(6
)
 

 
(34,678
)
Income (loss) from continuing operations before income taxes
 
(37,731
)
 
109,769

 
5,941

 

 
77,979

Income tax (benefit) expense
 
(14,172
)
 
40,712

 
2,284

 

 
28,824

Income (loss) from continuing operations
 
(23,559
)
 
69,057

 
3,657

 

 
49,155

Loss from discontinued operations
 

 
(18,735
)
 
(1,116
)
 

 
(19,851
)
Equity of net income of subsidiaries
 
52,863

 

 

 
(52,863
)
 

Net income
 
$
29,304

 
$
50,322

 
$
2,541

 
$
(52,863
)
 
$
29,304

Comprehensive income
 
$
28,088

 
$
50,322

 
$
378

 
$
(52,863
)
 
$
25,925


18



Note 10 – Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
As of March 31, 2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating/Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
505,499

 
$
97,581

 
$
19,097

 
$

 
$
622,177

Restricted cash
 

 
1,824

 

 

 
1,824

Accounts receivable, net (including intercompany)
 

 
979,470

 
134,300

 
(120,978
)
 
992,792

Inventories
 

 
347,802

 
6,468

 

 
354,270

Deferred income tax benefits, net-current
 

 
155,549

 

 
(3,417
)
 
152,132

Other current assets
 
4,557

 
168,796

 
14,697

 
(10,225
)
 
177,825

Total current assets
 
510,056

 
1,751,022

 
174,562

 
(134,620
)
 
2,301,020

Properties and equipment, net
 

 
231,705

 
8,222

 

 
239,927

Goodwill
 

 
4,167,301

 
74,309

 

 
4,241,610

Identifiable intangible assets, net
 

 
222,082

 
5,930

 

 
228,012

Other noncurrent assets
 
71,547

 
103,334

 
18,760

 
(15,722
)
 
177,919

Investment in subsidiaries
 
5,599,362

 

 

 
(5,599,362
)
 

Total assets
 
$
6,180,965

 
$
6,475,444

 
$
281,783

 
$
(5,749,704
)
 
$
7,188,488

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities
 
$
75,680

 
$
520,508

 
$
33,879

 
$
(131,203
)
 
$
498,864

Long-term debt, notes and convertible debentures
 
1,953,557

 
12,029

 
5,000

 
(5,000
)
 
1,965,586

Deferred income tax liabilities
 
323,687

 
509,602

 
19,666

 
(3,417
)
 
849,538

Other noncurrent liabilities
 

 
57,181

 

 
(10,722
)
 
46,459

Stockholders' equity
 
3,828,041

 
5,376,124

 
223,238

 
(5,599,362
)
 
3,828,041

Total liabilities and stockholders' equity
 
$
6,180,965

 
$
6,475,444

 
$
281,783

 
$
(5,749,704
)
 
$
7,188,488

As of December 31, 2011:
 
 

 
 

 
 

 
 

 
 

ASSETS
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
460,253

 
$
101,786

 
$
18,223

 
$

 
$
580,262

Restricted cash
 

 
2,336

 

 

 
2,336

Accounts receivable, net (including intercompany)
 

 
920,829

 
119,614

 
(109,129
)
 
931,314

Inventories
 

 
412,081

 
7,297

 

 
419,378

Deferred income tax benefits, net-current
 

 
156,139

 

 
(2,695
)
 
153,444

Other current assets
 
3,865

 
193,079

 
13,693

 

 
210,637

Total current assets
 
464,118

 
1,786,250

 
158,827

 
(111,824
)
 
2,297,371

Properties and equipment, net
 

 
220,066

 
5,191

 

 
225,257

Goodwill
 

 
4,168,035

 
79,251

 

 
4,247,286

Identifiable intangible assets, net
 

 
232,344

 
6,219

 

 
238,563

Other noncurrent assets
 
77,485

 
100,725

 
6,423

 

 
184,633

Investment in subsidiaries
 
5,593,155

 

 

 
(5,593,155
)
 

Total assets
 
$
6,134,758

 
$
6,507,420

 
$
255,911

 
$
(5,704,979
)
 
$
7,193,110

 
 
 

 
 

 
 

 
 

 
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
59,596

 
$
569,623

 
$
19,977

 
$
(109,129
)
 
$
540,067

Long-term debt, notes and convertible debentures
 
1,957,167

 
11,107

 

 

 
1,968,274

Deferred income tax liabilities
 
322,559

 
500,242

 
18,751

 
(2,695
)
 
838,857

Other noncurrent liabilities
 

 
50,476

 

 

 
50,476

Stockholders' equity
 
3,795,436

 
5,375,972

 
217,183

 
(5,593,155
)
 
3,795,436

Total liabilities and stockholders' equity
 
$
6,134,758

 
$
6,507,420

 
$
255,911

 
$
(5,704,979
)
 
$
7,193,110

 
 
 
 
 
 
 
 
 
 
 

19



Note 10 – Guarantor Subsidiaries (Continued)

Condensed Consolidating Statements of Cash Flows - Unaudited
(in thousands)
 
 
Three months ended March 31,
2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Omnicare, Inc. and Subsidiaries
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net cash flows from operating activities
 
$
3,153

 
$
94,417

 
$
2,847

 
$
100,417

Cash flows from investing activities:
 
 

 
 

 
 

 
 

Acquisition of businesses, net of cash received
 

 
(563
)
 

 
(563
)
Capital expenditures
 

 
(19,432
)
 
(807
)
 
(20,239
)
Other
 

 
513

 
(1
)
 
512

Net cash flows used in investing activities
 

 
(19,482
)
 
(808
)
 
(20,290
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

Payments on long-term borrowings and obligations
 
(6,587
)
 

 

 
(6,587
)
Increase (decrease) in cash overdraft balance
 
290

 
(3,441
)
 

 
(3,151
)
Payments for Omnicare common stock repurchase
 
(22,328
)
 

 

 
(22,328
)
Dividends paid
 
(7,825
)
 

 

 
(7,825
)
Other
 
78,543

 
(75,699
)
 
(1,165
)
 
1,679

Net cash flows from (used in) financing activities
 
42,093

 
(79,140
)
 
(1,165
)
 
(38,212
)
Net increase (decrease) in cash and cash equivalents
 
45,246

 
(4,205
)
 
874

 
41,915

Less increase in cash and cash equivalents of discontinued operations
 

 

 

 

Increase (decrease) in cash and cash equivalents of continuing operations
 
45,246

 
(4,205
)
 
874

 
41,915

Cash and cash equivalents at beginning of period
 
460,253

 
101,786

 
18,223

 
580,262

Cash and cash equivalents at end of period
 
$
505,499

 
$
97,581

 
$
19,097

 
$
622,177

2011:
 
 

 
 

 
 

 
 

Cash flows from operating activities:
 
 

 
 

 
 

 
 

Net cash flows from operating activities
 
$
2,028

 
$
141,754

 
$
593

 
$
144,375

Cash flows from investing activities:
 
 

 
 

 
 

 
 

Acquisition of businesses, net of cash received
 

 
(9,496
)
 

 
(9,496
)
Capital expenditures
 

 
(8,214
)
 
(351
)
 
(8,565
)
Other
 

 
(1,537
)
 
(5
)
 
(1,542
)
Net cash flows used in investing activities
 

 
(19,247
)
 
(356
)
 
(19,603
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

Payments on long-term borrowings and obligations
 
(125,050
)
 

 

 
(125,050
)
Decrease in cash overdraft balance
 
(7,248
)
 
(2,468
)
 

 
(9,716
)
Payments for Omnicare common stock repurchase
 
(28,748
)
 

 

 
(28,748
)
Dividends paid
 
(3,730
)
 

 

 
(3,730
)
Other
 
109,569

 
(110,210
)
 
(383
)
 
(1,024
)
Net cash flows used in financing activities
 
(55,207
)
 
(112,678
)
 
(383
)
 
(168,268
)
Net increase (decrease) in cash and cash equivalents
 
(53,179
)
 
9,829

 
(146
)
 
(43,496
)
Less increase (decrease) in cash and cash equivalents of discontinued operations
 

 
236

 
(163
)
 
73

Increase (decrease) in cash and cash equivalents of continuing operations
 
(53,179
)
 
9,593

 
17

 
(43,569
)
Cash and cash equivalents at beginning of period
 
460,778

 
17,598

 
16,108

 
494,484

Cash and cash equivalents at end of period
 
$
407,599

 
$
27,191

 
$
16,125

 
$
450,915


20



Note 10 – Guarantor Subsidiaries (Continued)

The Company’s 3.25% convertible senior debentures due 2035 (with optional redemption by Omnicare on or after, or an optional repurchase right of holders on, December 15, 2015, at par) are fully and unconditionally guaranteed on an unsecured basis by Omnicare Purchasing Company, LP, a wholly-owned subsidiary of the Company (the “Guarantor Subsidiary”).  The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. (“Parent”), the Guarantor Subsidiary and the Non-Guarantor Subsidiaries as of March 31, 2012 and December 31, 2011 for the balance sheets, as well as the three months ended March 31, 2012 and 2011 for the statements of comprehensive income and the statements of cash flows.  Management believes separate complete financial statements of the Guarantor Subsidiary would not provide information that would be necessary for evaluating the sufficiency of the Guarantor Subsidiary, and thus are not presented.  The Guarantor Subsidiary does not have any material net cash flows in the condensed consolidating statements of cash flows.  The equity method has been used with respect to the Parent company’s investment in subsidiaries.  No consolidating/eliminating adjustments column is presented for the condensed consolidating statements of cash flows since there were no significant consolidating/eliminating adjustment amounts during the periods presented.

21



Note 10 – Guarantor Subsidiaries (Continued)

Summary Consolidating
Statements of Comprehensive Income
(in thousands)

 
 
Three months ended March 31,
2012:
 
Parent
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Consolidating / 
Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
Net sales
 
$

 
$

 
$
1,593,068

 
$

 
$
1,593,068

Cost of sales
 

 

 
1,224,968

 

 
1,224,968

Gross profit
 

 

 
368,100

 

 
368,100

Selling, general and administrative expenses
 
1,003

 
322

 
198,799

 

 
200,124

Provision for doubtful accounts