UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2004
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-31312
MEDCO HEALTH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 22-3461740 | |
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
| 100 Parsons Pond Drive, Franklin Lakes, NJ | 07417-2603 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: 201-269-3400
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 x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of the close of business on April 27, 2004, the registrant had 271,064,843 shares of common stock, $0.01 par value issued and outstanding.
MEDCO HEALTH SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I – FINANCIAL INFORMATION
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Medco Health Solutions, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| ($ in millions, except for share data) |
MARCH 27, 2004 |
DECEMBER 27, 2003 |
||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 643.2 | $ | 638.5 | ||||
| Short-term investments |
57.5 | 59.5 | ||||||
| Accounts receivable, net |
1,662.7 | 1,394.0 | ||||||
| Inventories, net |
1,247.6 | 1,213.4 | ||||||
| Prepaid expenses and other current assets |
76.7 | 95.5 | ||||||
| Deferred tax assets |
341.0 | 359.4 | ||||||
| Total current assets |
4,028.7 | 3,760.3 | ||||||
| Property and equipment, net |
717.7 | 757.3 | ||||||
| Goodwill, net |
3,310.2 | 3,310.2 | ||||||
| Intangible assets, net |
2,275.5 | 2,320.5 | ||||||
| Other noncurrent assets |
122.4 | 114.7 | ||||||
| Total assets |
$ | 10,454.5 | $ | 10,263.0 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Claims and other accounts payable |
$ | 2,174.6 | $ | 1,988.2 | ||||
| Accrued expenses and other current liabilities |
570.4 | 567.1 | ||||||
| Current portion of long-term debt |
60.0 | 50.0 | ||||||
| Total current liabilities |
2,805.0 | 2,605.3 | ||||||
| Noncurrent liabilities: |
||||||||
| Long-term debt, net of current portion |
1,236.6 | 1,346.1 | ||||||
| Deferred tax liabilities |
1,159.9 | 1,177.5 | ||||||
| Other noncurrent liabilities |
55.2 | 54.1 | ||||||
| Total liabilities |
5,256.7 | 5,183.0 | ||||||
| Commitments and contingencies (See Note 9) |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, par value $0.01 – authorized: 10,000,000 shares; issued and outstanding: 0 shares |
— | — | ||||||
| Common stock, par value $0.01 – authorized: 1,000,000,000 shares; issued and outstanding: 270,962,480 shares in 2004 and 270,532,667 shares in 2003 |
2.7 | 2.7 | ||||||
| Accumulated other comprehensive income |
— | — | ||||||
| Additional paid-in capital |
4,926.4 | 4,913.4 | ||||||
| Unearned compensation |
(6.2 | ) | (7.4 | ) | ||||
| Retained earnings |
274.9 | 171.3 | ||||||
| Total stockholders’ equity |
5,197.8 | 5,080.0 | ||||||
| Total liabilities and stockholders’ equity |
$ | 10,454.5 | $ | 10,263.0 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Medco Health Solutions, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
| FISCAL QUARTERS ENDED (In millions, except for per share data) |
MARCH 27, 2004 |
MARCH 29, 2003 |
|||||
| Product net revenues (Includes retail co-payments of $1,795 for 2004 and $1,677 for 2003) |
$ | 8,826.0 | $ | 8,237.9 | |||
| Service revenues |
79.9 | 96.2 | |||||
| Total net revenues |
8,905.9 | 8,334.1 | |||||
| Cost of operations: |
|||||||
| Cost of product net revenues (Includes retail co-payments of $1,795 for 2004 and $1,677 for 2003) |
8,452.6 | 7,939.5 | |||||
| Cost of service revenues |
32.6 | 45.1 | |||||
| Total cost of revenues |
8,485.2 | 7,984.6 | |||||
| Selling, general and administrative expenses |
178.9 | 163.0 | |||||
| Amortization of intangibles |
45.0 | 23.6 | |||||
| Interest and other (income) expense, net |
22.0 | (11.7 | ) | ||||
| Total cost of operations |
8,731.1 | 8,159.5 | |||||
| Income before provision for income taxes |
174.8 | 174.6 | |||||
| Provision for income taxes |
71.2 | 72.6 | |||||
| Net income |
$ | 103.6 | $ | 102.0 | |||
| Basic earnings per share: |
|||||||
| Weighted average shares outstanding |
270.8 | 270.0 | |||||
| Earnings per share |
$ | 0.38 | $ | 0.38 | |||
| Diluted earnings per share: |
|||||||
| Weighted average shares outstanding |
273.7 | 270.0 | |||||
| Earnings per share |
$ | 0.38 | $ | 0.38 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Medco Health Solutions, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
| Number of (In Thousands) |
Amount (In millions, except for per share data) | ||||||||||||||||||||
| Common Stock |
$0.01 Par Value Common Stock |
Accumulated Other Comprehensive Income (Loss) |
Additional Paid-in Capital |
Unearned Compensation |
Retained Earnings |
Total Stockholders’ Equity | |||||||||||||||
| Balances at December 27, 2003 |
270,533 | $ | 2.7 | $ | — | $ | 4,913.4 | $ | (7.4 | ) | $ | 171.3 | $ | 5,080.0 | |||||||
| Net income |
— | — | — | — | — | 103.6 | 103.6 | ||||||||||||||
| Total comprehensive income |
— | — | — | — | — | 103.6 | 103.6 | ||||||||||||||
| Changes in stockholders’ equity related to employee stock plans |
429 | — | — | 13.0 | 1.2 | — | 14.2 | ||||||||||||||
| Balances at March 27, 2004 |
270,962 | $ | 2.7 | $ | — | $ | 4,926.4 | $ | (6.2 | ) | $ | 274.9 | $ | 5,197.8 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Medco Health Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| FISCAL QUARTERS ENDED ($ in millions) |
MARCH 27, 2004 |
MARCH 29, 2003 |
||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | 103.6 | $ | 102.0 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation |
62.2 | 46.1 | ||||||
| Amortization of intangibles |
45.0 | 23.6 | ||||||
| Deferred income taxes |
0.7 | (40.9 | ) | |||||
| Other |
11.1 | 11.2 | ||||||
| Net changes in assets and liabilities: |
||||||||
| Accounts receivable |
(269.1 | ) | 30.6 | |||||
| Inventories |
(34.2 | ) | 130.1 | |||||
| Other noncurrent assets |
(8.5 | ) | 0.8 | |||||
| Current liabilities |
189.8 | 209.8 | ||||||
| Other noncurrent liabilities |
1.1 | 4.7 | ||||||
| Other |
18.8 | (1.3 | ) | |||||
| Net cash provided by operating activities |
120.5 | 516.7 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Capital expenditures |
(22.7 | ) | (34.3 | ) | ||||
| Purchases of securities and other investments |
(2.9 | ) | (13.1 | ) | ||||
| Proceeds from sale of securities and other investments |
2.0 | 10.8 | ||||||
| Net cash used by investing activities |
(23.6 | ) | (36.6 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Proceeds from long-term debt |
800.0 | — | ||||||
| Repayments on debt |
(900.0 | ) | — | |||||
| Debt issuance costs |
(3.8 | ) | — | |||||
| Proceeds from exercise of stock options |
11.6 | — | ||||||
| Intercompany transfer from (to) Merck, net |
— | (486.8 | ) | |||||
| Net cash used by financing activities |
(92.2 | ) | (486.8 | ) | ||||
| Net increase (decrease) in cash and cash equivalents |
$ | 4.7 | $ | (6.7 | ) | |||
| Cash and cash equivalents at beginning of period |
$ | 638.5 | $ | 14.4 | ||||
| Cash and cash equivalents at end of period |
$ | 643.2 | $ | 7.7 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Medco Health Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been
prepared pursuant to the Securities and Exchange Commission’s rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for
complete consolidated financial statements are not included herein. In the opinion of the Company’s management, all adjustments, which include adjustments of a normal recurring nature, necessary for a fair presentation of the financial
position, results of operations and cash flows at the dates and for the periods presented have been included. The results of operations for any interim period are not necessarily indicative of the results of operations for the full year. The
unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of December 27, 2003 included in the Company’s Annual Report on Form
10-K. The
Company’s fiscal quarters end on the last Saturday of March and consisted of 13 weeks for both 2004 and 2003.
2. Accounts Receivable, Net
Accounts receivable includes billed and estimated unbilled receivables from clients and manufacturers. In addition, rebates payable to clients are estimated and accrued as a reduction in accounts receivable, net, based upon the prescription drugs dispensed by the pharmacies in the Company’s retail networks, or dispen