XNYS:OCR Omnicare Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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
201 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
111,548,672
June 30, 2012


 
 
 
 
 
 




OMNICARE, INC. AND

SUBSIDIARY COMPANIES

FORM 10-Q QUARTERLY REPORT JUNE 30, 2012

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
 
 
PAGE
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II - OTHER INFORMATION
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.









ITEM 1. - FINANCIAL STATEMENTS

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

 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
Net sales
 
$
1,536,027

 
$
1,555,906

 
$
3,129,095

 
$
3,081,477

Cost of sales
 
1,168,681

 
1,219,513

 
2,393,649

 
2,410,124

Gross profit
 
367,346

 
336,393

 
735,446

 
671,353

Selling, general and administrative expenses
 
201,878

 
192,474

 
402,002

 
382,641

Provision for doubtful accounts
 
24,078

 
24,357

 
48,509

 
48,887

Settlement, litigation and other related charges
 
26,093

 
19,816

 
33,296

 
25,829

Other charges
 
49,209

 
2,332

 
60,721

 
4,221

Operating income
 
66,088

 
97,414

 
190,918

 
209,775

Interest expense, net of investment income
 
(35,574
)
 
(33,730
)
 
(66,408
)
 
(68,112
)
Income from continuing operations before income taxes
 
30,514

 
63,684

 
124,510

 
141,663

Income tax expense
 
11,822

 
27,403

 
50,079

 
56,227

Income from continuing operations
 
18,692

 
36,281

 
74,431

 
85,436

Loss from discontinued operations
 

 
(37,728
)
 

 
(57,579
)
Net income (loss)
 
$
18,692

 
$
(1,447
)
 
$
74,431

 
$
27,857

 
 
 
 
 
 
 
 
 
Earnings (loss) per common share - Basic:
 
 
 
 

 
 
 
 

Continuing operations
 
$
0.17

 
$
0.32

 
$
0.67

 
$
0.75

Discontinued operations
 

 
(0.33
)
 

 
(0.51
)
Net income (loss)
 
$
0.17

 
$
(0.01
)
 
$
0.67

 
$
0.24

 
 
 
 
 
 
 
 
 
Earnings (loss) per common share - Diluted:
 
 

 
 

 
 

 
 

Continuing operations
 
$
0.17

 
$
0.32

 
$
0.65

 
$
0.74

Discontinued operations
 

 
(0.33
)
 

 
(0.50
)
Net income (loss)
 
$
0.17

 
$
(0.01
)
 
$
0.65

 
$
0.24

 
 
 
 
 
 
 
 
 
Dividends per common share
 
$
0.07

 
$
0.04

 
$
0.14

 
$
0.0725

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
110,580

 
113,487

 
111,033

 
113,806

Diluted
 
113,472

 
114,701

 
114,987

 
115,081

 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
17,003

 
$
(981
)
 
$
73,164

 
$
24,944


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)
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
564,479

 
$
580,262

Restricted cash
2,922

 
2,336

Accounts receivable, less allowances of $287,909 (2011-$358,713)
931,411

 
931,314

Inventories
350,896

 
419,378

Deferred income tax benefits
152,750

 
153,444

Other current assets
209,064

 
210,637

Total current assets
2,211,522

 
2,297,371

Properties and equipment, at cost less accumulated depreciation
     of $322,528 (2011-$299,900)
256,964

 
225,257

Goodwill
4,243,356

 
4,250,579

Identifiable intangible assets, less accumulated amortization of
     $255,992 (2011-$246,200)
213,530

 
235,270

Other noncurrent assets
186,294

 
184,633

Total noncurrent assets
4,900,144

 
4,895,739

Total assets
$
7,111,666

 
$
7,193,110

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
210,773

 
$
273,768

Accrued employee compensation
66,864

 
61,019

Current debt
27,300

 
26,447

Other current liabilities
177,530

 
178,833

Total current liabilities
482,467

 
540,067

Long-term debt, notes and convertible debentures
2,024,169

 
1,968,274

Deferred income tax liabilities
872,827

 
838,857

Other noncurrent liabilities
45,117

 
50,476

Total noncurrent liabilities
2,942,113

 
2,857,607

Total liabilities
3,424,580

 
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, 132,474,000
    shares issued (2011-131,756,500 shares issued)
132,474

 
131,757

Paid-in capital
2,414,524

 
2,488,941

Retained earnings
1,710,619

 
1,651,829

Treasury stock, at cost-20,925,300 shares (2011-18,132,600 shares)
(576,296
)
 
(484,123
)
Accumulated other comprehensive income
5,765

 
7,032

Total stockholders' equity
3,687,086

 
3,795,436

Total liabilities and stockholders' equity
$
7,111,666

 
$
7,193,110


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

4



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(in thousands)
 
Six months ended
 
June 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
74,431

 
$
27,857

Loss from discontinued operations

 
57,579

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

 
 

Depreciation
24,478

 
23,935

Amortization
42,826

 
40,630

Debt redemption loss and costs, net
35,092

 
(1,266
)
Other operating activities
35,261

 
(38,161
)
Changes in certain assets and liabilities, net of effects from acquisition and divestiture of businesses:
 

 
 

Inventories
68,535

 
62,750

Current and noncurrent assets
6,821

 
120,370

Accounts payable
(66,829
)
 
(12,819
)
Net cash flows from operating activities of continuing operations
220,615

 
280,875

Net cash flows from operating activities of discontinued operations

 
420

Net cash flows from operating activities
220,615

 
281,295

Cash flows from investing activities:
 
 
 

Acquisition of businesses, net of cash received
(568
)
 
(19,521
)
Divestiture of businesses, net

 
10,599

Capital expenditures
(46,435
)
 
(18,223
)
Other
(586
)
 
(2,516
)
Net cash flows used in investing activities of continuing operations
(47,589
)
 
(29,661
)
Net cash flows used in investing activities of discontinued operations

 
(413
)
Net cash flows used in investing activities
(47,589
)
 
(30,074
)
Cash flows from financing activities:
 

 
 

Payments on term loans
(11,250
)
 

Payments on long-term borrowings and obligations
(26,046
)
 
(175,664
)
Capped call transaction
(48,126
)
 

Payments for Omnicare common stock repurchases
(80,307
)
 
(70,061
)
Dividends paid
(15,521
)
 
(8,258
)
Other
(7,559
)
 
29,895

Net cash flows used in financing activities
(188,809
)
 
(224,088
)
Net (decrease) increase in cash and cash equivalents
(15,783
)
 
27,133

Less increase in cash and cash equivalents of discontinued operations

 
7

(Decrease) increase in cash and cash equivalents of continuing operations
(15,783
)
 
27,126

Cash and cash equivalents at beginning of period
580,262

 
494,484

Cash and cash equivalents at end of period
$
564,479

 
$
521,610


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 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 periodic 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.

Stock-Based Compensation

Stock-based compensation expense recognized in the Consolidated Statements of Comprehensive Income for stock options, restricted stock units, performance share units and stock awards totaled approximately $5.4 million and $8.9 million for the three and six months ended June 30, 2012, respectively, and approximately $5.3 million and $10.3 million for the three and six months ended June 30, 2011, respectively.

Accounts Receivable
The following table is an aging of the Company’s gross accounts receivable (net of allowances for contractual adjustments), aged based on payment terms and categorized based on the three primary overall types of accounts receivable characteristics (in thousands):
June 30, 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
 
$
261,913

 
$
181,181

 
$
443,094

Facility payors
 
393,128

 
184,458

 
577,586

Private Pay payors
 
71,827

 
126,813

 
198,640

Total gross accounts receivable
 
$
726,868

 
$
492,452

 
$
1,219,320

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



6



Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) balances by component and in the aggregate, follow (in thousands):
 
 
June 30,
2012
 
December 31, 2011
Cumulative foreign currency translation adjustments
 
$
7,795

 
$
8,338

Unrealized loss on fair value of investments
 
(279
)
 
(277
)
Pension and postemployment benefits
 
(1,751
)
 
(1,029
)
Total accumulated other comprehensive income, net
 
$
5,765

 
$
7,032


The amounts are net of applicable tax benefits which were not material at June 30, 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)
June 30, 2012
 
 
 
 
 
 
 
 
7.75% interest rate swap agreements - fair value hedge
 
$
44,588

 
$

 
$
44,588

 
$

Derivatives
 

 

 

 

Total
 
$
44,588

 
$

 
$
44,588

 
$

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
 
 
June 30, 2012
 
December 31, 2011
Financial Instrument
 
Book Value
 
Market Value
 
Book Value
 
Market Value
7.75% senior subordinated notes, due 2020
 
$
550,000

 
$
609,100

 
$
550,000

 
$
591,300

3.75% convertible senior subordinated notes, due 2025
 
 

 
 

 
 

 
 

Carrying value
 
202,206

 

 
361,345

 

Unamortized debt discount
 
115,848

 

 
213,655

 

Principal amount
 
318,054

 
419,800

 
575,000

 
816,500

4.00% junior subordinated convertible debentures, due 2033
 
 

 
 

 
 

 
 

Carrying value
 
204,945

 

 
203,675

 

Unamortized debt discount
 
140,055

 

 
141,325

 

Principal amount
 
345,000

 
297,800

 
345,000

 
318,800

3.25% convertible senior debentures, due 2035
 
 

 
 

 
 

 
 

Carrying value
 
370,534

 

 
384,799

 

Unamortized debt discount
 
56,966

 

 
67,701

 

Principal amount
 
427,500

 
415,200

 
452,500

 
404,600

3.75% convertible senior subordinated notes, due 2042
 
 

 
 

 
 

 
 

Carrying value
 
228,801

 

 

 

Unamortized debt discount
 
161,199

 

 

 

Principal amount
 
390,000

 
372,000

 

 


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
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
Acquisition and other related costs
$
1,117

 
$
2,332

 
$
4,226

 
$
4,221

Goodwill impairment

 

 
5,903

 

Separation costs
13,000

 

 
15,500

 

Debt related costs
35,092

 

 
35,092

 

Total - other charges
$
49,209

 
$
2,332

 
$
60,721

 
$
4,221


Separation Costs

On June 10, 2012, the Company's Chief Executive Officer ("CEO") resigned including as a member of the Board of Directors of the Company, effective immediately. The Company and the CEO entered into a Separation Agreement, dated June 10, 2012. In the three and six months ended June 30, 2012, the Company recorded charges of approximately $13.0 million and $15.5 million related to separation related costs with the CEO and other former executives. These charges are reflected in the "Other charges" caption of the Consolidated Statements of Comprehensive Income.


8



Common Stock Repurchase Program

In the six months ended June 30, 2012, the Company repurchased approximately 2.4 million shares through authorized share repurchase programs at an aggregate cost of approximately $80 million, for a cumulative amount of approximately 11.6 million shares repurchased at an aggregate cost of approximately $321 million through June 30, 2012.  The Company had approximately $179 million of combined share repurchase authority remaining as of June 30, 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.

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 and six months ended June 30, 2011, the Company recorded a combined pretax impairment loss of approximately $16 million and $57 million to reduce the carrying value of the CRO Services and Tidewater operations to fair value based on the final terms of the divestiture.  

Selected financial information related to the discontinued operations follows (in thousands):
 
 
Three months ended June 30, 2011
 
Six months ended June 30, 2011
Net sales from discontinued operations
 
$
13,300

 
$
47,832

Loss from operations - pretax
 
(3,302
)
 
(6,076
)
 
 
 
 
 
Loss from operations - aftertax
 
(1,969
)
 
(3,698
)
Impairment loss on discontinued operations - aftertax
 
(35,759
)
 
(53,881
)
Loss from discontinued operations
 
$
(37,728
)
 
$
(57,579
)

Note 4 – Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the six months ended June 30, 2012 are as follows (in thousands):
 
 
 
 
 
 
 
 
 
Long-Term Care Group
 
Specialty Care Group
 
Total
Goodwill balance as of December 31, 2011
 
$
3,571,951

 
$
678,628

 
$
4,250,579

 
 
 
 
 
 
 
Impairment losses
 
(5,903
)
 

 
(5,903
)
Other
 
$
(1,320
)
 
$

 
$
(1,320
)
 
 
 
 
 
 
 
Goodwill
 
3,570,631

 
678,628

 
4,249,259

Accumulated impairment losses
 
(5,903
)
 

 
(5,903
)
Goodwill, net of impairment as of June 30, 2012
 
$
3,564,728

 
$
678,628

 
$
4,243,356


On April 2, 2012, Omnicare signed a letter of intent (“LOI”) with a third party to sell the Company's Canadian Pharmacy, which expired in the second quarter. On June 8, 2012, the Company entered into a substantially similar LOI with a new third party. In the six months ended June 30, 2012, the Company recorded an impairment loss, reflected in "Other charges" on the Consolidated Statements of Comprehensive Income, of approximately $6 million to reduce the Canadian Pharmacy to fair value based on the terms of the LOI.

9




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

The Company’s intangible amortization expense for the three and six months ended June 30, 2012 was approximately $11 million and $22 million, respectively, and was approximately $10 million and $20 million for the three and six months ended June 30, 2011, respectively.

Note 5 – Debt

A summary of debt follows (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Revolving credit facility
 
$

 
$

Senior term loan, due 2016
 
433,125

 
444,375

7.75% senior subordinated notes, due 2020
 
550,000

 
550,000

3.75% convertible senior subordinated notes, due 2025
 
318,054

 
575,000

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

 
345,000

3.25% convertible senior debentures, due 2035
 
427,500

 
452,500

3.75% convertible senior subordinated notes, due 2042
 
390,000

 

Capitalized lease and other debt obligations
 
17,270

 
15,054

Subtotal
 
2,480,949

 
2,381,929

Add interest rate swap agreements
 
44,588

 
35,473

(Subtract) unamortized debt discount
 
(474,068
)
 
(422,681
)
(Subtract) current portion of debt
 
(27,300
)
 
(26,447
)
Total long-term debt, net
 
$
2,024,169

 
$
1,968,274


At June 30, 2012, there was no outstanding balance under the Company’s revolving credit facility and $433.1 million in loans outstanding under the term loan.  The interest rate on the term loan was approximately 2.50% at June 30, 2012. As of June 30, 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 June 30, 2012 .

The Company amortized to expense approximately $1.5 million and $1.4 million of deferred debt issuance costs during the three months ended June 30, 2012 and 2011, respectively, and $3.0 million and $2.8 million during the six months ended June 30, 2012 and 2011, respectively. Interest expense for the three and six month 2012 periods includes approximately $4 million in debt redemption costs associated with the April 3, 2012 debt exchange described below and the second quarter of 2012 redemption of $25 million of its 3.25% convertible senior debentures, due 2035. The three and six month 2011 periods included approximately $0.2 million and $1.3 million, respectively, in debt redemption costs associated with the Company's redemption of approximately $175 million aggregate principal amount of its 6.125% Senior Subordinated Notes, due 2013.

Debt exchange
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 "2025 Notes") in exchange for its issuance of $390 million in aggregate principal amount of new 3.75% Convertible Senior Subordinated Notes due 2042 (the "2042 Notes"). The 2042 Notes are guaranteed by substantially all of the Company's subsidiaries, subject to certain exceptions.

The 2042 Notes mature in April 2042 and will pay interest semiannually at a rate of 3.75% per year. Commencing with the interest period beginning April 1, 2019, the 2042 Notes will also pay contingent interest under certain circumstances based on their then current trading price. The 2042 Notes are convertible, upon certain circumstances, into cash and, if applicable, shares of Omnicare common stock. The 2042 Notes have an initial conversion rate of 24.09639 shares of common stock per $1,000 original principal

10



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 2042 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 2042 Notes by paying par plus accrued but unpaid interest. In addition, holders may require the Company to repurchase all or part of their 2042 Notes upon a fundamental change (as defined in the indenture governing the 2042 Notes) at a cash repurchase price equal to par plus accrued but unpaid interest.

In connection with the issuance of the 2042 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 economic dilution upon conversion of the 2042 Notes.

The Company recognized a non-cash loss on the debt exchange of approximately $35 million in the three and six months ended June 30, 2012 which was reflected in "Other charges" on the Consolidated Statements of Comprehensive Income.

The Company has four convertible securities, its 2025 Notes, the Series B 4.00% junior subordinated convertible debentures, due 2033 (the “4.00% Convertible Debentures”), 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”) and the 2042 Notes.  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):
 
 
June 30,
2012
 
December 31,
2011
Carrying value of equity component
 
$
585,928

 
$
619,223

Principal amount of convertible debt
 
$
1,480,554

 
$
1,372,500

Unamortized debt discount
 
(474,068
)
 
(422,681
)
Net carrying value of convertible debt
 
$
1,006,486

 
$
949,819


As of June 30, 2012, the remaining amortization period for the debt discount was approximately 13.50, 21.00, 3.50 and 29.75 years for the 2025 Notes, 4.00% Convertible Debentures, 3.25% Convertible Debentures and 2042 Notes, respectively.

The effective interest rates for the liability components of the 2025 Notes, 4.00% Convertible Debentures, 3.25% Convertible Debentures and 2042 Notes were 8.25%, 8.01%, 7.625% and 7.11%, respectively, for the period ended June 30, 2012.


11



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 June 30,
2012:
 
Income (Numerator)
 
Common Shares(Denominator)
 
Per Common
Share Amounts
Basic EPS
 
 
 
 
 
 
Income from continuing operations
 
$
18,692

 
 
 
$
0.17

Loss from discontinued operations
 

 
 
 

Net income
 
18,692

 
110,580

 
$
0.17

Effect of Dilutive Securities
 
 

 
 

 
 

Convertible securities
 
72

 
2,309

 
 

Stock options, warrants, units and awards
 

 
583

 
 

Diluted EPS
 
 

 
 

 
 

Income from continuing operations plus assumed conversions
 
18,764

 
 

 
$
0.17

Loss from discontinued operations
 

 
 

 

Net income plus assumed conversions
 
$
18,764

 
113,472

 
$
0.17

2011:
 
 

 
 

 
 

Basic EPS
 
 

 
 

 
 

Income from continuing operations
 
$
36,281

 
 

 
$
0.32

Loss from discontinued operations
 
(37,728
)
 
 

 
(0.33
)
Net loss
 
(1,447
)
 
113,487

 
$
(0.01
)
Effect of Dilutive Securities
 
 

 
 

 
 

4.00% junior subordinated convertible debentures
 
72

 
275

 
 

Stock options, warrants, units and awards
 

 
939

 
 

Diluted EPS
 
 

 
 

 
 

Income from continuing operations plus assumed conversions
 
36,353

 
 

 
$
0.32

Loss from discontinued operations
 
(37,728
)
 
 

 
(0.33
)
Net loss plus assumed conversions
 
$
(1,375
)
 
114,701

 
$
(0.01
)


12



 
 
Six months ended June 30,
2012:
 
Income (Numerator)
 
Common Shares(Denominator)
 
Per Common
Share Amounts
Basic EPS
 
 
 
 
 
 
Income from continuing operations
 
$
74,431

 
 
 
$
0.67

Loss from discontinued operations
 

 
 
 

Net income
 
74,431

 
111,033

 
$
0.67

Effect of Dilutive Securities
 
 
 
 
 
 
Convertible securities
 
143

 
3,314

 
 
Stock options, warrants, units and awards
 

 
640

 
 
Diluted EPS
 
 
 
 
 
 
Income from continuing operations plus assumed conversions
 
74,574

 
 
 
$
0.65

Loss from discontinued operations
 

 
 
 

Net income plus assumed conversions
 
$
74,574

 
114,987

 
$
0.65

2011:
 
 
 
 
 
 
Basic EPS
 
 
 
 
 
 
Income from continuing operations
 
$
85,436

 
 
 
$
0.75

Loss from discontinued operations
 
(57,579
)
 
 
 
(0.51
)
Net income
 
27,857

 
113,806

 
$
0.24

Effect of Dilutive Securities
 
 
 
 
 
 
4.00% junior subordinated convertible debentures
 
144

 
275

 
 
Stock options, warrants, units and awards
 

 
1,000

 
 
Diluted EPS
 
 
 
 
 
 
Income from continuing operations plus assumed conversions
 
85,580

 
 
 
$
0.74

Loss from discontinued operations
 
(57,579
)
 
 
 
(0.50
)
Net income plus assumed conversions
 
$
28,001

 
115,081

 
$
0.24


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 $27.36, $40.82, $79.26 and $41.50 for the 2025 Notes, 4.00% Convertible Debentures, 3.25% Convertible Debentures and 2042 Notes, respectively.

Weighted average shares outstanding, assuming dilution, excludes the impact of 2.3 million and 2.6 million stock options, warrants and awards for the three and six months ended June 30, 2012, respectively, and 2.3 million and 2.4 million for the three and six months ended June 30, 2011, respectively, due to the exercise prices of these stock options, warrants and awards being greater than the average fair market value of our common stock during the period.

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 by the end of 2012 with the completion of the relocation of the Corporate office in the third quarter of 2012 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.

13




As of June 30, 2012, the Company has made cumulative payments of approximately $3.0 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 $0.3 million was utilized in the six months ended June 30, 2012.  The remaining liabilities of $0.1 million at June 30, 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.


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.

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 complaint was filed on May 11, 2012. The Company filed a motion to dismiss on July 16, 2012. The Company believes that the claims asserted are without merit and intends to defend against them vigorously.

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 Court denied the Company's motion to dismiss on June 1, 2012. The Company filed a motion for reconsideration or, in the alternative certification under 28 U.S.C. § 1292(b) on July 2,

14



2012. 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") investigated alleged errors and deficiencies in paperwork requirements for controlled substance dispensing at several of the Company's pharmacies in Ohio and the United States Attorney's Office, Northern District of Ohio ("AUSA"), conducted an investigation relating to this matter. The AUSA conducted a criminal investigation of several current and former employees in connection with the DEA audits. The Company recorded a provision for this matter in the quarters ended December 31 and June 30, 2011 and December 31, 2010. On May 10, 2012, the Company agreed to a nationwide settlement of all matters subject to the DEA investigation in exchange for a payment of $50 million. The settlement included a release of all Omnicare owned pharmacies, all Omnicare joint venture pharmacies, and all present and former directors, officers, and employees from any civil penalty claim, or any administrative action, including denial, suspension, or revocation of any DEA registration, related to the subject matter of the investigation. The Company and current and former employees are no longer the subject of a criminal investigation by the AUSA in connection with the DEA audits.

The United States Department of Justice, through the United States Attorney's Office for the Western District of Virginia, is investigating whether the Company's activities in connection with agreements it had with the manufacturer of the pharmaceutical Depakote violated the False Claims Act or the Anti-Kickback Statute. The Company is cooperating with this investigation and believes that it has complied with applicable laws and regulations with respect to this matter.

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 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 recorded a provision for this matter in the quarter ended June 30, 2012.

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

15



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. On May 29, 2012, Relator filed a Second Amended Complaint. The Company filed a motion to dismiss on June 28, 2012. The Company believes that the allegations are 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 Court held oral argument on the Company's motion to dismiss on June 28, 2012. The Company believes that the claims in the complaint are without merit and intends to vigorously defend itself in this action if pursued.

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

16



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.

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 and six months ended June 30, 2012 included charges of $26.1 million and $33.3 million, respectively, and approximately $19.8 million and $25.8 million for the three and six months ended June 30, 2011, respectively, reflected in “Settlement, litigation and other related charges” on the Consolidated Statements of Comprehensive 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 and a qui tam lawsuit, 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” on the Consolidated Statements of Comprehensive 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

17



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.


18



Note 9 – Segment Information

The Company is organized in two operating segments, Long-Term Care Group ("LTC") and Specialty Care Group ("SCG"). These segments are based on the operations of the underlying businesses and the customers they serve. 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 specialty pharmacy, key commercialization services for the biopharmaceutical industry and 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 June 30,
2012:
 
LTC
 
SCG
 
Corporate/Other
 
Consolidated
Totals
Net sales
 
$
1,202,801

 
$
330,137

 
$
3,089

 
$
1,536,027

Depreciation and amortization expense
 
(17,556
)
 
(4,083
)
 
(13,204
)
 
(34,843
)
Operating income (loss) from continuing operations
 
122,801

 
31,671

 
(88,384
)
 
66,088

2011:
 
 
 
 
 
 
 
 
Net sales
 
$
1,289,426

 
$
262,657

 
$
3,823

 
$
1,555,906

Depreciation and amortization expense
 
(15,580
)
 
(4,200
)
 
(12,975
)
 
(32,755
)
Operating income (loss) from continuing operations
 
107,781

 
24,535

 
(34,902
)
 
97,414

 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30,
2012:
 
LTC
 
SCG
 
Corporate/Other
 
Consolidated
Totals
Net sales
 
$
2,499,056

 
$
623,397

 
$
6,642

 
$
3,129,095

Depreciation and amortization expense
 
(34,190
)
 
(8,059
)
 
(25,055
)
 
(67,304
)
Operating income (loss) from continuing operations
 
260,780

 
61,820

 
(131,682
)
 
190,918

2011:
 
 
 
 
 
 
 
 
Net sales
 
$
2,579,535

 
$
493,952

 
$
7,990

 
$
3,081,477

Depreciation and amortization expense
 
(31,492
)
 
(8,505
)
 
(24,568
)
 
(64,565
)
Operating income (loss) from continuing operations
 
230,271

 
45,830

 
(66,326
)
 
209,775


Note 10 – Guarantor Subsidiaries

The Company’s 7.75% Senior Subordinated Notes due 2020, 2025 Notes and 2042 Notes are fully and unconditionally guaranteed, subject to certain customary release provisions, 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 June 30, 2012 and December 31, 2011 for the balance sheets, as well as the three and six months ended June 30, 2012 and 2011 for the statements of comprehensive income and the statements of cash flows for the six months ended June 30, 2012 and 2011.  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.


19



Note 10 – Guarantor Subsidiaries (Continued)

Summary Consolidating
Statements of Comprehensive Income
(in thousands)

 
 
Three months ended June 30,
2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating / 
Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
Net sales
 
$

 
$
1,501,324

 
$
34,703

 
$

 
$
1,536,027

Cost of sales
 

 
1,146,567

 
22,114

 

 
1,168,681

Gross profit
 

 
354,757

 
12,589

 

 
367,346

Selling, general and administrative expenses
 
1,119

 
194,618

 
6,141

 

 
201,878

Provision for doubtful accounts
 

 
23,619

 
459

 

 
24,078

Settlement, litigation and other related charges
 

 
26,093

 

 

 
26,093

Other charges
 
35,092

 
14,117

 

 

 
49,209

Operating income (loss)
 
(36,211
)
 
96,310

 
5,989

 

 
66,088

Interest expense, net of investment income
 
(35,133
)
 
(255
)
 
(186
)
 

 
(35,574
)
Income (loss) from continuing operations before income taxes
 
(71,344
)
 
96,055

 
5,803

 

 
30,514

Income tax (benefit) expense
 
(27,570
)
 
37,152

 
2,240

 

 
11,822

Income (loss) from continuing operations
 
(43,774
)
 
58,903

 
3,563

 

 
18,692

Equity of net income of subsidiaries
 
62,466

 

 

 
(62,466
)
 

Net income
 
$
18,692

 
$
58,903

 
$
3,563

 
$
(62,466
)
 
$
18,692

Comprehensive Income
 
$
17,003

 
$
58,903

 
$
1,876

 
$
(60,779
)
 
$
17,003

2011:
 
 

 
 

 
 

 
 

 
 

Net sales
 
$

 
$
1,523,824

 
$
32,082

 
$

 
$
1,555,906

Cost of sales
 

 
1,197,232

 
22,281

 

 
1,219,513

Gross profit
 

 
326,592

 
9,801

 

 
336,393

Selling, general and administrative expenses
 
2,307

 
185,164

 
5,003

 

 
192,474

Provision for doubtful accounts
 

 
23,881

 
476

 

 
24,357

Settlement, litigation and other related charges
 

 
19,816

 

 

 
19,816

Other charges
 

 
2,332

 

 

 
2,332

Operating income (loss)
 
(2,307
)
 
95,399

 
4,322

 

 
97,414

Interest expense, net of investment income
 
(33,563
)
 
(167
)
 

 

 
(33,730
)
Income (loss) from continuing operations before income taxes
 
(35,870
)
 
95,232

 
4,322

 

 
63,684

Income tax (benefit) expense
 
(13,443
)
 
39,158

 
1,688

 

 
27,403

Income (loss) from continuing operations
 
(22,427
)
 
56,074

 
2,634

 

 
36,281

Loss from discontinued operations
 

 
(36,297
)
 
(1,431
)
 

 
(37,728
)
Equity of net income of subsidiaries
 
20,980

 

 

 
(20,980
)
 

Net income (loss)
 
$
(1,447
)
 
$
19,777

 
$
1,203

 
$
(20,980
)
 
$
(1,447
)
Comprehensive Income (loss)
 
$
(981
)
 
$
19,777

 
$
1,735

 
$
(21,512
)
 
$
(981
)

20



Note 10 – Guarantor Subsidiaries (Continued)

Summary Consolidating
Statements of Comprehensive Income
(in thousands)

 
 
Six months ended June 30,
2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating / 
Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
Net sales
 
$

 
$
3,058,727

 
$
70,368

 
$

 
$
3,129,095

Cost of sales
 

 
2,347,716

 
45,933

 

 
2,393,649

Gross profit
 

 
711,011

 
24,435

 

 
735,446

Selling, general and administrative expenses
 
2,122

 
383,341

 
16,539

 

 
402,002

Provision for doubtful accounts
 

 
47,585

 
924

 

 
48,509

Settlement, litigation and other related charges
 

 
33,296

 

 

 
33,296

Other charges
 
35,092

 
25,629

 

 

 
60,721

Operating income (loss)
 
(37,214
)
 
221,160

 
6,972

 

 
190,918

Interest expense, net of investment income
 
(65,521
)
 
(538
)
 
(349
)
 

 
(66,408
)
Income (loss) from continuing operations before income taxes
 
(102,735
)
 
220,622

 
6,623

 

 
124,510

Income tax (benefit) expense
 
(39,656
)
 
84,907

 
4,828

 

 
50,079

Income (loss) from continuing operations
 
(63,079
)
 
135,715

 
1,795

 

 
74,431

Equity of net income of subsidiaries
 
137,510

 

 

 
(137,510
)
 

Net income
 
$
74,431

 
$
135,715

 
$
1,795

 
$
(137,510
)
 
$
74,431

Comprehensive Income
 
$
73,164

 
$
135,715

 
$
1,252

 
$
(136,967
)
 
$
73,164

2011:
 
 

 
 

 
 

 
 

 
 

Net sales
 
$

 
$
3,016,728

 
$
64,749

 
$

 
$
3,081,477

Cost of sales
 

 
2,365,369

 
44,755

 

 
2,410,124

Gross profit
 

 
651,359

 
19,994

 

 
671,353

Selling, general and administrative expenses
 
5,907

 
367,964

 
8,770

 

 
382,641

Provision for doubtful accounts
 

 
47,932

 
955

 

 
48,887

Settlement, litigation and other related charges
 

 
25,829

 

 

 
25,829

Other charges
 

 
4,221

 

 

 
4,221

Operating income (loss)
 
(5,907
)
 
205,413

 
10,269

 

 
209,775

Interest expense, net of investment income
 
(67,694
)
 
(412
)
 
(6
)
 

 
(68,112
)
Income (loss) from continuing operations before income taxes
 
(73,601
)
 
205,001

 
10,263

 

 
141,663

Income tax (benefit) expense
 
(27,615
)
 
79,870

 
3,972

 

 
56,227

Income (loss) from continuing operations
 
(45,986
)
 
125,131

 
6,291

 

 
85,436

Loss from discontinued operations
 

 
(55,032
)
 
(2,547
)
 

 
(57,579
)
Equity of net income of subsidiaries
 
73,843

 

 

 
(73,843
)
 

Net income
 
$
27,857

 
$
70,099

 
$
3,744

 
$
(73,843
)
 
$
27,857

Comprehensive Income
 
$
24,944

 
$
70,099

 
$
2,113

 
$
(72,212
)
 
$
24,944



21



Note 10 – Guarantor Subsidiaries (Continued)

Condensed Consolidating Balance Sheets
(in thousands)
As of June 30, 2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating/Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
445,237

 
$
100,036

 
$
19,206

 
$

 
$
564,479

Restricted cash
 

 
2,922

 

 

 
2,922

Accounts receivable, net (including intercompany)
 

 
920,921

 
138,961

 
(128,471
)
 
931,411

Inventories
 

 
344,482

 
6,414

 

 
350,896

Deferred income tax benefits, net-current
 

 
156,541

 

 
(3,791
)
 
152,750

Other current assets
 
4,672

 
198,948

 
15,969

 
(10,525
)
 
209,064

Total current assets
 
449,909

 
1,723,850

 
180,550

 
(142,787
)
 
2,211,522

Properties and equipment, net
 

 
248,760

 
8,204

 

 
256,964

Goodwill
 

 
4,170,375

 
72,981

 

 
4,243,356

Identifiable intangible assets, net
 

 
207,430

 
6,100

 

 
213,530

Other noncurrent assets
 
82,797

 
99,140

 
20,746

 
(16,389
)
 
186,294

Investment in subsidiaries
 
5,575,281

 

 

 
(5,575,281