Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - MEDCO HEALTH SOLUTIONS INC | c14507exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - MEDCO HEALTH SOLUTIONS INC | c14507exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - MEDCO HEALTH SOLUTIONS INC | c14507exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - MEDCO HEALTH SOLUTIONS INC | c14507exv32w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - MEDCO HEALTH SOLUTIONS INC | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 26, 2011
OR
o | 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) |
Registrants 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 þ No o
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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
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 þ | Accelerated filer o | Non-Accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of the close of business on April 15, 2011, the registrant had 399,799,325 shares of common
stock, $0.01 par value, issued and outstanding.
MEDCO HEALTH SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions, except for share data)
March 26, | December 25, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 127.1 | $ | 853.4 | ||||
Short-term investments |
44.0 | 56.7 | ||||||
Manufacturer accounts receivable, net |
1,915.7 | 1,895.1 | ||||||
Client accounts receivable, net |
2,322.7 | 2,553.1 | ||||||
Inventories, net |
1,108.8 | 1,013.2 | ||||||
Prepaid expenses and other current assets |
75.7 | 75.8 | ||||||
Deferred tax assets |
239.8 | 238.4 | ||||||
Total current assets |
5,833.8 | 6,685.7 | ||||||
Property and equipment, net |
986.3 | 993.6 | ||||||
Goodwill |
6,963.9 | 6,939.5 | ||||||
Intangible assets, net |
2,354.5 | 2,409.8 | ||||||
Other noncurrent assets |
72.7 | 68.7 | ||||||
Total assets |
$ | 16,211.2 | $ | 17,097.3 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Claims and other accounts payable |
$ | 2,969.7 | $ | 3,495.4 | ||||
Client rebates and guarantees payable |
2,522.4 | 2,453.2 | ||||||
Accrued expenses and other current liabilities |
886.9 | 910.2 | ||||||
Short-term debt |
26.9 | 23.6 | ||||||
Total current liabilities |
6,405.9 | 6,882.4 | ||||||
Long-term debt, net |
5,001.6 | 5,003.6 | ||||||
Deferred tax liabilities |
1,004.0 | 985.1 | ||||||
Other noncurrent liabilities |
202.3 | 239.4 | ||||||
Total liabilities |
12,613.8 | 13,110.5 | ||||||
Commitments and contingencies (See Note 7) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, par value $0.01 authorized: 10,000,000 shares; issued and outstanding: 0 |
| | ||||||
Common stock, par value $0.01 authorized: 2,000,000,000 shares; issued: 669,357,640
shares at March 26, 2011 and 666,836,033 shares at December 25, 2010 |
6.7 | 6.7 | ||||||
Accumulated other comprehensive loss |
(26.7 | ) | (53.5 | ) | ||||
Additional paid-in capital |
8,550.3 | 8,463.0 | ||||||
Retained earnings |
6,970.0 | 6,636.9 | ||||||
15,500.3 | 15,053.1 | |||||||
Treasury stock, at cost: 269,749,305 shares at March 26, 2011 and 256,298,405 shares at
December 25, 2010 |
(11,902.9 | ) | (11,066.3 | ) | ||||
Total stockholders equity |
3,597.4 | 3,986.8 | ||||||
Total liabilities and stockholders equity |
$ | 16,211.2 | $ | 17,097.3 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Table of Contents
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions, except for per share data)
Quarters Ended | ||||||||
March 26, | March 27, | |||||||
2011 | 2010 | |||||||
Product net revenues (Includes retail co-payments of $2,513 for 2011, and $2,471 for 2010) |
$ | 16,661.8 | $ | 16,083.7 | ||||
Service revenues |
357.8 | 227.2 | ||||||
Total net revenues |
17,019.6 | 16,310.9 | ||||||
Cost of operations: |
||||||||
Cost of product net revenues (Includes retail co-payments of $2,513 for 2011, and $2,471
for 2010) |
15,828.9 | 15,253.6 | ||||||
Cost of service revenues |
120.4 | 64.6 | ||||||
Total cost of revenues |
15,949.3 | 15,318.2 | ||||||
Selling, general and administrative expenses |
387.1 | 350.6 | ||||||
Amortization of intangibles |
73.2 | 70.5 | ||||||
Interest expense |
51.9 | 40.7 | ||||||
Interest (income) and other (income) expense, net |
2.3 | (1.4 | ) | |||||
Total costs and expenses |
16,463.8 | 15,778.6 | ||||||
Income before provision for income taxes |
555.8 | 532.3 | ||||||
Provision for income taxes |
222.7 | 211.8 | ||||||
Net income |
$ | 333.1 | $ | 320.5 | ||||
Basic weighted average shares outstanding |
405.5 | 467.7 | ||||||
Basic earnings per share |
$ | 0.82 | $ | 0.69 | ||||
Diluted weighted average shares outstanding |
414.2 | 478.2 | ||||||
Diluted earnings per share |
$ | 0.80 | $ | 0.67 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)
(Shares in thousands; $ in millions, except for per share data)
Shares of | Shares | Accumulated | ||||||||||||||||||||||||||||||
Common | of | $0.01 Par Value | Other | |||||||||||||||||||||||||||||
Stock | Treasury | Common | Comprehensive | Additional | ||||||||||||||||||||||||||||
Issued | Stock | Stock | Income (Loss) | Paid-in Capital | Retained Earnings | Treasury Stock | Total | |||||||||||||||||||||||||
Balances at December 25, 2010 |
666,836 | 256,298 | $ | 6.7 | $ | (53.5 | ) | $ | 8,463.0 | $ | 6,636.9 | $ | (11,066.3 | ) | $ | 3,986.8 | ||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||
Net income |
| | | | | 333.1 | | 333.1 | ||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||
Foreign currency translation gain and other |
| | | 9.5 | | | | 9.5 | ||||||||||||||||||||||||
Amortization of unrealized loss on cash flow hedge, net of tax
of $(0.3) |
| | | 0.6 | | | | 0.6 | ||||||||||||||||||||||||
Defined benefit plans, net of tax: |
||||||||||||||||||||||||||||||||
Net activity due to curtailments, net of tax of $(11.6) |
| | | 17.3 | | | | 17.3 | ||||||||||||||||||||||||
Amortization of prior service credit included in net periodic
benefit cost, net of tax of $0.4 |
| | | (0.7 | ) | | | | (0.7 | ) | ||||||||||||||||||||||
Net gains included in net periodic benefit cost, net of tax
of $(0.1) |
| | | 0.1 | | | | 0.1 | ||||||||||||||||||||||||
Other comprehensive income (loss) |
| | | 26.8 | | | | 26.8 | ||||||||||||||||||||||||
Total comprehensive income (loss) |
| | | 26.8 | | 333.1 | | 359.9 | ||||||||||||||||||||||||
Stock option activity, including tax benefit |
1,650 | | | | 85.9 | | | 85.9 | ||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan |
92 | | | | 5.7 | | | 5.7 | ||||||||||||||||||||||||
Restricted stock unit activity, including tax benefit |
780 | | | | (4.3 | ) | | | (4.3 | ) | ||||||||||||||||||||||
Treasury stock acquired |
| 13,451 | | | | | (836.6 | ) | (836.6 | ) | ||||||||||||||||||||||
Balances at March 26, 2011 |
669,358 | 269,749 | $ | 6.7 | $ | (26.7 | ) | $ | 8,550.3 | $ | 6,970.0 | $ | (11,902.9 | ) | $ | 3,597.4 | ||||||||||||||||
The accompanying notes are an integral part of this condensed consolidated financial statement.
3
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MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
Quarters Ended | ||||||||
March 26, | March 27, | |||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 333.1 | $ | 320.5 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
51.0 | 44.4 | ||||||
Amortization of intangibles |
73.2 | 70.5 | ||||||
Deferred income taxes |
(26.3 | ) | (74.3 | ) | ||||
Stock-based compensation on employee stock plans |
40.3 | 37.3 | ||||||
Tax benefit on employee stock plans |
45.8 | 52.7 | ||||||
Excess tax benefits from stock-based compensation arrangements |
(17.9 | ) | (27.5 | ) | ||||
Other |
0.6 | 32.1 | ||||||
Net changes in assets and liabilities (net of acquisition effects for 2010 only): |
||||||||
Manufacturer accounts receivable, net |
(20.4 | ) | (109.0 | ) | ||||
Client accounts receivable, net |
198.3 | 183.2 | ||||||
Income taxes receivable |
0.4 | 173.5 | ||||||
Inventories, net |
(94.8 | ) | 34.3 | |||||
Prepaid expenses and other current assets |
(0.3 | ) | (5.8 | ) | ||||
Other noncurrent assets |
(8.2 | ) | (7.9 | ) | ||||
Claims and other accounts payable |
(527.6 | ) | (666.2 | ) | ||||
Client rebates and guarantees payable |
69.2 | 166.3 | ||||||
Accrued expenses and other current and noncurrent liabilities |
(22.4 | ) | 76.2 | |||||
Net cash provided by operating activities |
94.0 | 300.3 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(44.5 | ) | (42.6 | ) | ||||
Purchases of securities and other assets |
(2.5 | ) | (19.5 | ) | ||||
Acquisitions of businesses, net of cash acquired |
| (19.4 | ) | |||||
Proceeds from sale of securities and other investments |
12.7 | 16.7 | ||||||
Net cash used by investing activities |
(34.3 | ) | (64.8 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from revolving credit facility |
3,612.2 | | ||||||
Repayments on revolving credit facility |
(3,612.2 | ) | | |||||
Proceeds from accounts receivable financing facility and other |
253.3 | 5.3 | ||||||
Repayments under accounts receivable financing facility |
(250.0 | ) | | |||||
Purchases of treasury stock |
(836.6 | ) | (1,229.9 | ) | ||||
Excess tax benefits from stock-based compensation arrangements |
17.9 | 27.5 | ||||||
Net proceeds (payments) from employee stock plans |
29.4 | (4.5 | ) | |||||
Net cash used by financing activities |
(786.0 | ) | (1,201.6 | ) | ||||
Net decrease in cash and cash equivalents |
(726.3 | ) | (966.1 | ) | ||||
Cash and cash equivalents at beginning of period |
853.4 | 2,528.2 | ||||||
Cash and cash equivalents at end of period |
$ | 127.1 | $ | 1,562.1 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
MEDCO HEALTH SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements of Medco Health
Solutions, Inc. and its subsidiaries (Medco or the Company) have been prepared pursuant to the
Securities and Exchange Commissions 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 Companys management, all adjustments necessary for a fair presentation of the
unaudited interim condensed consolidated financial statements have been included, and are of a
normal and recurring nature. 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 audited consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended December 25, 2010. The Companys first fiscal quarters for 2011 and 2010 each
consisted of 13 weeks and ended on March 26, 2011 and March 27, 2010, respectively.
Reclassifications. Certain prior year amounts have been reclassified to conform to the
current year presentation. Specifically, on the unaudited interim condensed consolidated balance
sheets, income taxes receivable has been combined with prepaid expenses and other current assets.
2. FAIR VALUE DISCLOSURES
Fair Value Measurements
Fair Value Hierarchy. The inputs used to measure fair value fall into the following
hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
data.
Level 3: Unobservable inputs reflecting the reporting entitys own assumptions.
The Company utilizes the best available information in measuring fair value. The following
tables set forth, by level within the fair value hierarchy, the Companys financial assets recorded
at fair value on a recurring basis ($ in millions):
Fair Value Measurements at Reporting Date | ||||||||||||
March 26, | ||||||||||||
Description | 2011 | Level 1 | Level 2 | |||||||||
Money market mutual funds |
$ | 74.0 | (1) | $ | 74.0 | $ | | |||||
Fair value of interest rate swap agreements |
14.4 | (2) | | 14.4 |
(1) | Reported in cash and cash equivalents on the unaudited interim condensed consolidated balance sheet. | |
(2) | Reported in other noncurrent assets on the unaudited interim condensed consolidated balance sheet. |
Fair Value Measurements at Reporting Date | ||||||||||||
December 25, | ||||||||||||
Description | 2010 | Level 1 | Level 2 | |||||||||
Money market mutual funds |
$ | 225.0 | (1) | $ | 225.0 | $ | | |||||
Fair value of interest rate swap agreements |
16.9 | (2) | | 16.9 |
(1) | Reported in cash and cash equivalents on the unaudited interim condensed consolidated balance sheet. | |
(2) | Reported in other noncurrent assets on the unaudited interim condensed consolidated balance sheet. |
5
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The Companys money market mutual funds are invested in funds that seek to preserve
principal, are highly liquid, and therefore are recorded on the consolidated balance sheets at the
principal amounts deposited, which equals the asset values quoted by the money market fund
custodians. The fair value of the Companys obligation under its interest rate swap agreements,
which hedge interest costs on the 7.25% senior notes, is based upon observable market-based inputs
that reflect the present values of the differences between estimated future fixed rate payments and
future variable rate receipts, and therefore are classified within Level 2. Historically, there
have not been significant fluctuations in the fair value of the Companys financial assets.
Fair Value of Financial Instruments
The term loan and revolving credit obligations under the Companys senior unsecured bank
credit facilities have a floating interest rate and as a result, the carrying amounts of the debt,
as well as the short-term and long-term investments approximated fair values as of March 26, 2011
and December 25, 2010. The Company estimates fair market value for these assets and liabilities
based on their market values or estimates of the present value of their future cash flows.
The carrying amounts and the fair values of the Companys senior notes are shown in the
following table ($ in millions):
March 26, 2011 | December 25, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount(1) | Value | Amount(1) | Value | |||||||||||||
7.25% senior notes due 2013 |
$ | 498.8 | $ | 562.2 | $ | 498.7 | $ | 567.2 | ||||||||
6.125% senior notes due 2013 |
299.3 | 325.3 | 299.2 | 327.1 | ||||||||||||
2.75% senior notes due 2015 |
499.8 | 496.6 | 499.8 | 496.1 | ||||||||||||
7.125% senior notes due 2018 |
1,190.4 | 1,412.0 | 1,190.1 | 1,412.2 | ||||||||||||
4.125% senior notes due 2020 |
498.9 | 487.2 | 498.9 | 481.3 |
(1) | Reported in long-term debt, net, on the unaudited interim condensed consolidated balance sheets, net of unamortized discount. |
The fair values of the senior notes are based on observable relevant market information.
Fluctuations between the carrying amounts and the fair values of the senior notes for the periods
presented are associated with changes in market interest rates.
3. EARNINGS PER SHARE (EPS)
The following is a reconciliation of the number of weighted average shares used in the basic
and diluted EPS calculations (amounts in millions):
Quarters Ended | ||||||||
March 26, | March 27, | |||||||
2011 | 2010 | |||||||
Basic weighted average shares outstanding |
405.5 | 467.7 | ||||||
Dilutive common stock equivalents: |
||||||||
Outstanding stock options, restricted stock
units and restricted stock |
8.7 | 10.5 | ||||||
Diluted weighted average shares outstanding |
414.2 | 478.2 | ||||||
The Company treats stock options and restricted stock units granted by the Company as
potential common shares outstanding in computing diluted earnings per share. Under the treasury
stock method on a grant by grant basis, the amount the employee or director must pay for exercising
the award, the amount of compensation cost for future service that the Company has not yet
recognized, and the amount of tax benefit that would be recorded in additional paid-in capital when
the award becomes deductible, are assumed to be used to repurchase shares at the average market
price during the period. For the quarters ended March 26, 2011 and March 27, 2010, there were
outstanding options to purchase 11.9 million and 5.9 million shares of Medco stock, respectively,
which were not dilutive to the EPS calculations when applying the
treasury stock method which primarily reflects the share price being
below the option exercise price. These
outstanding options may be dilutive to future EPS calculations. The decreases in the basic weighted
average shares outstanding and diluted weighted average shares outstanding for the quarter ended
March 26, 2011 compared to the same period in 2010 primarily result from the repurchase of
approximately 269.7 million shares of stock in connection with the Companys share repurchase
programs since inception in 2005 through the first quarter of 2011, compared to an equivalent
amount of 205.7 million shares repurchased inception-to-date through the end
of the first quarter of 2010. The Company repurchased approximately 13.5 million shares of
stock in the first quarter of 2011 compared to approximately 19.5 million shares in the first
quarter of 2010. In accordance with the FASBs earnings per
share standard, treasury shares are not considered part of the basic or diluted shares outstanding.
6
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4. ACCOUNTS RECEIVABLE
The Company separately reports accounts receivable due from manufacturers and accounts
receivable due from clients. Client accounts receivable, net, are presented net of allowance for
doubtful accounts and include a reduction for rebates and guarantees payable to clients when such
are settled on a net basis in the form of an invoice credit. As of March 26, 2011 and December 25,
2010, identified net Specialty Pharmacy accounts receivable, primarily due from payors and
patients, amounted to $534.7 million and $524.5 million, respectively. The Companys client
accounts receivable also include receivables from the Centers for Medicare & Medicaid Services
(CMS) for the Companys Medicare Part D Prescription Drug Program (Medicare Part D) product
offerings and premiums from members. As of March 26, 2011 and December 25, 2010, the CMS receivable
was approximately $193.9 million and $216.1 million, respectively, the majority of which is
anticipated to be collected in the fourth quarter of 2011.
The Companys allowance for doubtful accounts as of March 26, 2011 and December 25, 2010 of
$164.9 million and $149.7 million, respectively, includes $105.4 million and $97.9 million,
respectively, related to the Specialty Pharmacy segment. The relatively higher allowance for the
Specialty Pharmacy segment reflects a different credit risk profile than the pharmacy benefit
management (PBM) business, and is characterized by reimbursement through medical coverage,
including government agencies, and higher patient co-payments. See Note 6, Segment and Geographic
Data, to the unaudited interim condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q for more information on the Specialty Pharmacy segment. The Companys
allowance for doubtful accounts as of March 26, 2011 and December 25, 2010 also includes $47.9
million and $38.2 million, respectively, related to certain diabetes supplies, which are primarily
reimbursed by government agencies and insurance companies. In addition, the Companys allowance
for doubtful accounts reflects amounts associated with member premiums for the Companys Medicare
Part D product offerings.
5. PENSION AND OTHER POSTRETIREMENT BENEFITS
Net Pension and Postretirement Benefit Cost.
The Company maintains an unfunded postretirement healthcare
benefit plan for a limited number of retirees. The net credit for these postretirement benefits consisted of the following
components ($ in millions):
Quarters Ended | ||||||||
March 26, | March 27, | |||||||
2011 | 2010 | |||||||
Service cost |
$ | 0.1 | $ | 0.3 | ||||
Interest cost |
0.1 | 0.2 | ||||||
Amortization of prior service credit |
(0.4 | ) | (1.0 | ) | ||||
Net amortization of actuarial losses |
0.1 | 0.1 | ||||||
Gain recognized due to curtailment |
(30.6 | ) | | |||||
Net postretirement benefit credit |
$ | (30.7 | ) | $ | (0.4 | ) | ||
In January 2011, the Company amended its postretirement healthcare benefit plan,
discontinuing the benefit for all active non-retirement eligible employees. The Company had
previously reduced and capped the benefit through a 2003 plan amendment, the effect of which
resulted in a prior service credit reflected as a component of accumulated other comprehensive loss
in stockholders equity. The prior service credit is associated with the plan in place before the
Company became an independent, publicly traded company in 2003. The elimination of the
postretirement healthcare benefit for all active non-retirement eligible employees was accounted
for as a curtailment of the plan and resulted in a gain of $30.6 million, pre-tax, $22.6 million of
which is reported in cost of product net revenues and $8.0 million of which is reported in
selling, general and administrative expenses on the unaudited interim condensed consolidated
statement of income for the quarter ended March 26, 2011.
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The net (benefit) cost for the Companys pension plans consisted of the following components ($ in
millions):
Quarters Ended | ||||||||
March 26, | March 27, | |||||||
2011 | 2010 | |||||||
Service cost |
$ | 1.2 | $ | 6.6 | ||||
Interest cost |
2.5 | 3.3 | ||||||
Expected return on plan assets |
(3.8 | ) | (3.0 | ) | ||||
Amortization of prior service cost |
| 0.1 | ||||||
Net amortization of actuarial losses |
| 0.5 | ||||||
Gain
recognized due to plan freeze(1) |
(9.7 | ) | | |||||
Net pension (benefit) cost |
$ | (9.8 | ) | $ | 7.5 | |||
(1) | In January 2011, the Company amended its defined benefit pension plans, freezing the benefit for all participants effective in the first quarter of 2011. The freeze of the defined benefit pension plans coincided with an enhanced 401(k) plan company match. |
Changes in Benefit Obligation and Funded Status. Summarized information about the funded
status and benefit obligation is as follows ($ in millions):
The pension and other postretirement benefits liabilities recognized at March 26, 2011 and
December 25, 2010 are as follows ($ in millions):
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
March 26, | December 25, | March 26, | December 25, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Accrued expenses and other current liabilities |
$ | (0.1 | ) | $ | (0.1 | ) | $ | (0.6 | ) | $ | (0.6 | ) | ||||
Other noncurrent liabilities |
(11.0 | ) | (64.1 | ) | (2.6 | ) | (18.0 | ) | ||||||||
Total pension and other postretirement liabilities |
$ | (11.1 | ) | $ | (64.2 | ) | $ | (3.2 | ) | $ | (18.6 | ) | ||||
At December 25, 2010, the accumulated benefit obligation for the defined benefit pension
plans was $200.7 million, and the projected benefit obligation was $253.6 million. The projected
benefit obligation amounts were higher because they included projected future salary increases
through expected retirement. Upon the freeze of the defined benefit
pension plans in the first
quarter of 2011, the projected benefit obligation decreased and became consistent with the accumulated
benefit obligation, resulting in a decrease to the underfunded status and related balance sheet
liability from $64.2 million as of December 25, 2010 to $11.1 million as of March 26, 2011.
At December 25, 2010, the accumulated postretirement benefit obligation for other
postretirement benefits was $18.6 million. As a result of the aforementioned plan curtailment, the
underfunded status and the related accumulated postretirement benefit obligation decreased to $3.2
million as of March 26, 2011.
Net actuarial gains and losses reflect experience differentials relating to differences
between expected and actual returns on plan assets, differences between expected and actual
demographic changes, differences between expected and actual healthcare cost increases, and the
effects of changes in actuarial assumptions. Net actuarial gains and losses, in excess of certain
thresholds, are amortized into the consolidated statement of income over the 12-year average
remaining service life of participants.
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The gain or loss due to curtailments and net prior service cost or credit recognized in other
comprehensive income and reclassification adjustments for the periods presented, pre-tax, are as
follows ($ in millions):
Other Postretirement | ||||||||
Pension Benefits | Benefits | |||||||
Balances at December 25, 2010, pre-tax |
$ | 43.3 | $ | (20.5 | ) | |||
(Loss) gain recognized due to curtailments |
(43.3 | ) | 30.6 | |||||
Prior service credit due to curtailment |
| (16.2 | ) | |||||
Amortization of actuarial loss included in net
periodic benefit cost |
| (0.2 | ) | |||||
Amortization of prior service (cost) credit |
| 1.1 | ||||||
Balances at March 26, 2011, pre-tax |
$ | | $ | (5.2 | ) | |||
Actuarial Assumptions. Actuarial weighted average assumptions for discount rate and
salary growth rate used to determine benefit obligations at fiscal year-end 2010 have not changed.
See Note 9, Pension and Other Postretirement Benefits to the Companys audited consolidated
financial statements included in Part II, Item 8 of its Form 10-K for the fiscal year ended
December 25, 2010 for more information.
Cash Flows.
Employer Contributions. The Company expects to contribute a cash payment for the
remaining minimum pension funding requirement of $28.6 million under the Internal Revenue Code
(IRC) during 2011 for the 2010 plan year.
Estimated Future Benefit Payments. The impact of the pension plan freeze and the curtailment
of the postretirement healthcare benefit plan upon the estimated future benefit payments is
currently being evaluated.
Other Plans.
The Company sponsors defined contribution retirement plans for all eligible employees, as
defined in the plan documents. These plans are qualified under Section 401(k) of the IRC.
Contributions to the plans are based on employee contributions and a Company matching contribution.
6. SEGMENT AND GEOGRAPHIC DATA
Reportable Segments. The Company has two reportable segments, PBM and Specialty Pharmacy. The
PBM segment primarily involves sales of traditional prescription drugs and supplies, as well as
diabetes testing supplies and related products, to the Companys clients and members or patients,
either through the Companys networks of contractually affiliated retail pharmacies or the
Companys mail-order pharmacies. The PBM segment also includes the operating results of Europa
Apotheek Venlo B.V. (Europa Apotheek), which primarily provides mail-order pharmacy services in Germany. It is expected that
Europa Apotheek will be contributed to a recently formed joint venture, Medco Celesio B.V., in
fiscal 2011. Commencing on the September 16, 2010 acquisition date, the PBM segment also includes
the operating results of United BioSource Corporation, which extends the Companys core
capabilities in data analytics and research.
The Specialty Pharmacy segment includes the sale of specialty pharmacy products and services
for the treatment of primarily complex and potentially life-threatening diseases, including
specialty infusion services. The Company defines the Specialty Pharmacy segment based on
a product set and associated services, broadly characterized to include drugs that are usually
high-cost, developed by biotechnology companies and often injectable or infusible, and may require
elevated levels of patient support. When dispensed, these products frequently require ancillary
administration equipment, special packaging, and a higher degree of patient-oriented customer
service, including in-home nursing services and administration. Specialty pharmacy products and
services are often covered through client PBM contracts. Specialty
pharmacy products and services are also covered through medical benefit programs with the
primary payors being insurance companies and government programs, and patients for amounts due for
co-payments and deductibles.
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Selected Segment Income and Asset Information. Total net revenues and operating
income are measures used by the chief operating decision maker to assess the performance of each of
the Companys operating segments. The following tables present selected financial information about
the Companys reportable segments, including a reconciliation of operating income to income before
provision for income taxes ($ in millions):
Quarter Ended March 26, 2011 | Quarter Ended March 27, 2010 | |||||||||||||||||||||||
Specialty | Specialty | |||||||||||||||||||||||
PBM | Pharmacy | Total | PBM | Pharmacy | Total | |||||||||||||||||||
Product net revenues |
$ | 13,605.1 | $ | 3,056.7 | $ | 16,661.8 | $ | 13,430.4 | $ | 2,653.3 | $ | 16,083.7 | ||||||||||||
Service revenues |
340.0 | 17.8 | 357.8 | 204.2 | 23.0 | 227.2 | ||||||||||||||||||
Total net revenues |
13,945.1 | 3,074.5 | 17,019.6 | 13,634.6 | 2,676.3 | 16,310.9 | ||||||||||||||||||
Total cost of revenues |
13,076.3 | 2,873.0 | 15,949.3 | 12,831.0 | 2,487.2 | 15,318.2 | ||||||||||||||||||
Selling, general and administrative expenses |
316.7 | 70.4 | 387.1 | 278.7 | 71.9 | 350.6 | ||||||||||||||||||
Amortization of intangibles |
62.7 | 10.5 | 73.2 | 59.8 | 10.7 | 70.5 | ||||||||||||||||||
Operating income |
$ | 489.4 | $ | 120.6 | $ | 610.0 | $ | 465.1 | $ | 106.5 | $ | 571.6 | ||||||||||||
Reconciling items to income before provision for
income taxes: |
||||||||||||||||||||||||
Interest expense |
51.9 | 40.7 | ||||||||||||||||||||||
Interest (income) and other (income) expense, net |
2.3 | (1.4 | ) | |||||||||||||||||||||
Income before provision for income taxes |
$ | 555.8 | $ | 532.3 | ||||||||||||||||||||
Capital expenditures |
$ | 40.1 | $ | 4.4 | $ | 44.5 | $ | 37.2 | $ | 5.4 | $ | 42.6 |
As of March 26, 2011 | As of December 25, 2010 | |||||||||||||||||||||||
Specialty | Specialty | |||||||||||||||||||||||
Identifiable Assets: | PBM | Pharmacy | Total | PBM | Pharmacy | Total | ||||||||||||||||||
Total identifiable assets |
$ | 12,461.1 | $ | 3,750.1 | $ | 16,211.2 | $ | 13,360.3 | $ | 3,737.0 | $ | 17,097.3 |
Geographic Information. The Companys net revenues from its foreign operations
represented less than 1% of the Companys consolidated net revenues for the quarters ended March
26, 2011 and March 27, 2010. All other revenues are earned in the United States.
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In the ordinary course of business, the Company is involved in litigation, claims, government
inquiries, investigations, charges and proceedings, including, but not limited to, those relating
to regulatory, commercial, employment, employee benefits and securities matters. The significant
matters are described below.
There is uncertainty regarding the possible course and outcome of the proceedings discussed
below. Although it is not feasible to predict or determine the final outcome of any proceedings
with certainty, the Company believes there is no litigation pending against the Company that could
have, individually or in the aggregate, a material adverse effect on the Companys business,
financial condition, liquidity and operating results. However, there can be no assurances that an
adverse outcome in any of the proceedings described below will not result in material fines,
penalties and damages, changes to the Companys business practices, loss of (or litigation with)
clients or a material adverse effect on the Companys business, financial condition, liquidity and
operating results. It is also possible that future results of operations for any particular
quarterly or annual period could be materially adversely affected by the ultimate resolution of one
or more of these matters, or changes in the Companys assumptions or its strategies related to
these proceedings. The Company continues to believe that its business practices comply in all
material respects with applicable laws and regulations and is vigorously defending itself in the
actions described below. The Company believes that most of the claims made in these proceedings
would not likely be covered by insurance.
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In accordance with the FASBs standard on accounting for contingencies, the Company records
accruals for contingencies when it is probable that a liability will be incurred and the amount of
loss can be reasonably estimated. These assessments can involve a series of complex judgments
about future events and may rely heavily on estimates and assumptions that have been deemed
reasonable by management. Due to the uncertainty surrounding the issues involved in each of the
below matters and based on the facts and circumstances of each matter known to date, the Company
believes that an estimate of any loss or range of loss that may be incurred cannot be made at this
time.
Government Proceedings and Requests for Information. The Company is aware of the existence of
three qui tam matterstwo are sealed and in the third, the government has declined to intervene
and the complaint has been unsealed. The sealed first action is filed in the Eastern District of
Pennsylvania and it appears to allege that the Company billed government payors using invalid or
out-of-date national drug codes (NDCs). The sealed second action is filed in the District of New
Jersey and appears to allege that the Company charged government payors a different rate than it
reimbursed pharmacies; engaged in duplicate billing; refilled prescriptions too soon; and billed
government payors for prescriptions written by unlicensed physicians and physicians with invalid
Drug Enforcement Agency authorizations. The Department of Justice has not yet made any decision as
to whether it will intervene in either of these matters. The matters are under seal and U.S.
District Court orders prohibit the Company from answering inquiries about the complaints. The
Company was notified of the existence of these two qui tam matters during settlement negotiations
on an unrelated matter with the Department of Justice in 2006. The Company does not know the
identities of the relators in either of these matters. The Company is not able to predict with
certainty the timing or outcome of these matters.
The third qui tam matter relates to PolyMedica, a subsidiary of the Company acquired in the
fourth quarter of 2007. The Company learned that the government declined to intervene in the qui
tam matter. This matter is progressing as a civil litigation, United States of America ex. rel.
Lucas W. Matheny and Deborah Loveland vs. Medco Health Solutions, Inc., et al., in the U.S.
District Court for the Southern District of Florida, although the government could decide to
intervene at any point during the course of the litigation. The complaint largely includes
allegations regarding the application of invoice payments. In July 2010, the U.S. District Court
for the Southern District of Florida dismissed the action without prejudice. The plaintiffs
re-filed the complaint and upon a motion to dismiss, the U.S. District Court for the Southern
District of Florida dismissed the complaint with prejudice in October 2010. The matter is currently
on appeal.
In April 2010, the Attorney General for the State of California requested information from the
Company about a former consultant who was engaged by
the Company in 2004 and again later in a year-to-year contract that ended in 2009. The Company has
been, and will continue to voluntarily provide information related to this request, including
providing various documents and making certain current and former employees available for
depositions. In March 2011, the Company received a subpoena from the SECs Los Angeles Regional
Office staff requesting the production of documents relating to an ongoing investigation of the
California Public Pension Funds.
The Company is cooperating with both the
SEC and the California Attorney Generals office. The Company is not able to predict with certainty
the timing or outcome of these matters.
ERISA and Similar Litigation. As disclosed in Note 14, Commitments and Contingencies, to the
Companys audited consolidated financial statements included in Part II, Item 8 of its Annual
Report on Form 10-K for the fiscal year ended December 25, 2010, the Gruer series of lawsuits were
subsequently settled on a class action basis in 2010, however, the plaintiffs in two of the
remaining actions in the Gruer series of cases, Blumenthal v. Merck-Medco Managed Care, L.L.C., et
al., and United Food and Commercial Workers Local Union No. 1529 and Employers Health and Welfare
Plan Trust v. Medco Health Solutions, Inc. and Merck & Co., Inc., elected to opt out of the
settlement. In June 2010, the Company filed for summary judgment against both of these plaintiffs.
The Company does not believe that it is a fiduciary under ERISA (except in those instances in
which it has expressly contracted to act as a fiduciary for limited purposes), and believes that
its business practices comply with all applicable laws and regulations.
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Antitrust and Related Litigation. In August 2003, a lawsuit captioned Brady Enterprises, Inc.,
et al. v. Medco Health Solutions, Inc., et al. was filed in the U.S. District Court for the Eastern
District of Pennsylvania against Merck & Co., Inc. (Merck) and the Company. The plaintiffs, who
seek to represent a national class of retail pharmacies that had contracted with the Company,
allege that the Company has conspired with, acted as the common agent for, and used the combined
bargaining power of plan sponsors to restrain competition in the market for the dispensing and sale
of prescription drugs. The plaintiffs allege that, through the alleged conspiracy, the Company has
engaged in various forms of anticompetitive conduct, including, among other things, setting
artificially low reimbursement rates to such pharmacies. The plaintiffs assert claims for violation
of the Sherman Act and seek treble damages and injunctive relief. The plaintiffs motion for class
certification is currently pending before the Multidistrict Litigation Court.
In October 2003, a lawsuit captioned North Jackson Pharmacy, Inc., et al. v. Medco Health
Solutions, Inc., et al. was filed in the U.S. District Court for the Northern District of Alabama
against Merck and the Company. In their Second Amended Complaint, the plaintiffs allege that Merck
and the Company engaged in price fixing and other unlawful concerted actions with others, including
other PBMs, to restrain trade in the dispensing and sale of prescription drugs to customers of
retail pharmacies who participate in programs or plans that pay for all or part of the drugs
dispensed, and conspired with, acted as the common agent for, and used the combined bargaining
power of plan sponsors to restrain competition in the market for the dispensing and sale of
prescription drugs. The plaintiffs allege that, through such concerted action, Merck and the
Company engaged in various forms of anticompetitive conduct, including, among other things, setting
reimbursement rates to such pharmacies at unreasonably low levels. The plaintiffs assert claims for
violation of the Sherman Act and seek treble damages and injunctive relief. The plaintiffs motion
for class certification has been granted, but this matter has been consolidated with other actions
where class certification remains an open issue.
In December 2005, a lawsuit captioned Mikes Medical Center Pharmacy, et al. v. Medco Health
Solutions, Inc., et al. was filed against the Company and Merck in the U.S. District Court for the
Northern District of California. The plaintiffs seek to represent a class of all pharmacies and
pharmacists that had contracted with the Company and California pharmacies that had indirectly
purchased prescription drugs from Merck and make factual allegations similar to those in the
Alameda Drug Company action discussed below. The plaintiffs assert claims for violation of the
Sherman Act, California antitrust law and California law prohibiting unfair business practices. The
plaintiffs demand, among other things, treble damages, restitution, disgorgement of unlawfully
obtained profits and injunctive relief.
In April 2006, the Brady plaintiffs filed a petition to transfer and consolidate various
antitrust actions against PBMs, including North Jackson, Brady, and Mikes Medical Center before a
single federal judge. The motion was granted in August 2006. These actions are now consolidated for
pretrial purposes in the U.S. District Court for the Eastern District of Pennsylvania. The
consolidated action is known as In re Pharmacy Benefit Managers Antitrust Litigation. The
plaintiffs motion for class certification in certain actions is currently pending before the
Multidistrict Litigation Court.
In January 2004, a lawsuit captioned Alameda Drug Company, Inc., et al. v. Medco Health
Solutions, Inc., et al. was filed against the Company and Merck in the Superior Court of
California. The plaintiffs, which seek to represent a class of all California pharmacies that had
contracted with the Company and that had indirectly purchased prescription drugs from Merck,
allege, among other things, that since the expiration of a 1995 consent injunction entered by the
U.S. District Court for the Northern District of California, if not earlier, the Company failed to
maintain an Open Formulary (as defined in the consent injunction), and that the Company and Merck
had failed to prevent nonpublic information received from competitors of Merck and the Company from
being disclosed to each other. The plaintiffs further allege that, as a result of these alleged
practices, the Company had been able to increase its market share and artificially reduce the level
of reimbursement to the retail pharmacy class members, and that the prices of prescription drugs
from Merck and other pharmaceutical manufacturers that do business with the Company had been fixed
and raised above competitive levels. The plaintiffs assert claims for violation of California
antitrust law and California law prohibiting unfair business practices. The plaintiffs demand,
among other things, compensatory damages, restitution, disgorgement of unlawfully obtained profits
and injunctive relief. In the complaint, the plaintiffs further allege, among other things, that
the Company acted as a purchasing agent for its plan sponsor customers, resulting in a system that
serves to suppress competition.
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Other Matters
In the ordinary course of business, the Company is involved in disputes with clients, retail
pharmacies and suppliers, which may involve litigation, claims, arbitrations and other proceedings.
Although it is not feasible to predict or determine the final outcome of any proceedings with
certainty, the Company does not believe that any of these disputes could have, individually or in
the aggregate, a material adverse effect on the Companys business, financial condition, liquidity
or operating results. In addition, the Company entered into an indemnification and insurance
matters agreement with Merck in connection with the Companys spin-off in 2003, which may require
the Company in some instances to indemnify Merck.
Purchase Commitments
As of March 26, 2011, the Company has contractual commitments to purchase inventory from
certain biopharmaceutical manufacturers and brand-name pharmaceutical manufacturers, the majority
of which are associated with the Companys Specialty Pharmacy business, and are either contracts
for fixed amounts or contracts for fixed amounts plus a variable component. The contracts for
fixed amounts include firm commitments of $251.7 million for 2011. The contracts with fixed amounts
plus a variable component include firm commitments of $56.7 million for 2011, with additional
commitments through 2012 that are subject to price increases or variable quantities based on
patient usage. The Company also has purchase commitments for diabetes supplies of $23.7
million, technology-related agreements of $42.9 million and advertising commitments of $1.8
million.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and
uncertainties that may cause results to differ materially from those set forth in the statements.
No forward-looking statement can be guaranteed, and actual results may differ materially from those
projected. We undertake no obligation to publicly update any forward-looking statement, whether as
a result of new information, future events or otherwise. Forward-looking statements are not
historical facts, but rather are based on current expectations, estimates, assumptions and
projections about the business and future financial results of the pharmacy benefit management
(PBM) and specialty pharmacy industries, and other legal, regulatory and economic developments.
We use words such as anticipates, believes, plans, expects, projects,
future, intends, may, will, should, could, estimates, predicts, potential,
continue and similar expressions to identify these forward-looking statements. Our actual results
could differ materially from the results contemplated by these forward-looking statements due to a
number of factors, including those set forth below.
| Competition in the PBM, specialty pharmacy and broader healthcare industry is intense and could impair our ability to attract and retain clients; | ||
| Failure to retain key clients and their members, either as a result of economic conditions, increased competition or other factors, could result in significantly decreased revenues, harm to our reputation and decreased profitability; | ||
| Government efforts to reduce healthcare costs and alter healthcare financing practices could lead to a decreased demand for our services or to reduced profitability; | ||
| Failure in continued execution of our retiree strategy, including the potential loss of Medicare Part D-eligible members, could adversely impact our business and financial results; | ||
| If we or our suppliers fail to comply with complex and evolving laws and regulations domestically and internationally, we could suffer penalties, be required to pay substantial damages and/or make significant changes to our operations; | ||
| If we do not continue to earn and retain purchase discounts, rebates and service fees from manufacturers at current levels, our gross margins may decline; |
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| From time to time we engage in transactions to acquire other companies or businesses and if we are unable to effectively integrate acquired businesses into ours, our operating results may be adversely affected. Even if we are successful, the integration of these businesses has required, and will likely continue to require, significant resources and management attention; | ||
| New legislative or regulatory initiatives that restrict or prohibit the PBM industrys ability to use patient identifiable information could limit our ability to use information critical to the operation of our business; | ||
| Our Specialty Pharmacy business is dependent on our relationships with a limited number of suppliers and our clinical research services are dependent on our relationships with a limited number of clients. As such, the loss of one or more of these relationships, or limitations on our ability to provide services to these suppliers or clients, could significantly impact our ability to sustain and/or improve our financial performance; | ||
| Our ability to grow our Specialty Pharmacy business could be limited if we do not expand our existing base of drugs or if we lose patients; | ||
| Our Specialty Pharmacy business, certain revenues from diabetes testing supplies and our Medicare Part D offerings expose us to increased billing, cash application and credit risks. Additionally, current economic conditions may expose us to increased credit risk; | ||
| Changes in reimbursement, including reimbursement for durable medical equipment, could negatively affect our revenues and profits; | ||
| Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, if the safety risk profiles of drugs increase or if drugs are withdrawn from the market, including as a result of manufacturing issues, or if prescription drugs transition to over-the-counter products; | ||
| Demand for our clinical research services depends on the willingness of companies in the pharmaceutical and biotechnology industries to continue to outsource clinical development and on our reputation for independent, high-quality scientific research and evidence development; | ||
| PBMs could be subject to claims under ERISA if they are found to be a fiduciary of a health benefit plan governed by ERISA; | ||
| Pending litigation could adversely impact our business practices and have a material adverse effect on our business, financial condition, liquidity and operating results; | ||
| Changes in industry pricing benchmarks could adversely affect our financial performance; | ||
| We are subject to a corporate integrity agreement and noncompliance may impede our ability to conduct business with the federal government; | ||
| The terms and covenants relating to our existing indebtedness could adversely impact our financial performance and liquidity; | ||
| We may be subject to liability claims for damages and other expenses not covered by insurance; | ||
| The success of our business depends on maintaining a well-secured pharmacy operation and technology infrastructure. Additionally, significant disruptions to our infrastructure or any of our facilities due to failure to execute security measures or failure to execute business continuity plans in the event of an epidemic or pandemic or some other catastrophic event could adversely impact our business; |
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| Business process and technology infrastructure improvements associated with our agile enterprise initiative may not be successfully or timely implemented or may fail to operate as designed and intended, causing the Companys performance to suffer; | ||
| We may be required to record a material non-cash charge to income if our recorded intangible assets or goodwill are impaired, or if we shorten intangible asset useful lives; | ||
| We are subject to certain risks associated with our international operations; and | ||
| Anti-takeover provisions of the Delaware General Corporation Law (DGCL), our certificate of incorporation and our bylaws could delay or deter a change in control and make it more difficult to remove incumbent officers and directors. |
The foregoing list of factors is not exhaustive. You should carefully consider the foregoing
factors and the other risks and uncertainties that affect our business described in our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q (including Part II, Item 1A, Risk Factors, of
this Quarterly Report on Form 10-Q) and other documents filed from time to time with the Securities
and Exchange Commission (SEC).
Overview
We are a leading healthcare company that is pioneering the worlds most advanced
pharmacy® and our clinical research and innovations are part of Medco making medicine
smarter for more than 65 million members. Medco provides clinically-driven pharmacy services
designed to improve the quality of care and lower total healthcare costs for private and public
employers, health plans, labor unions and government agencies of all sizes, and for individuals
served by Medicare Part D Prescription Drug Plans. In 2010, Medcos national Medicare Part D
Prescription Drug Plan (PDP) received the first and only five star rating from the Centers for
Medicare & Medicaid Services (CMS). Our unique Medco Therapeutic Resource Centers®,
which conduct therapy management programs using Medco Specialist Pharmacists who have expertise in
the medications used to treat certain chronic conditions, combined with Medcos personalized
medicine capabilities through the Medco Research Institute and genomics counseling services, as
well as Accredo Health Group, Medcos Specialty Pharmacy, represent innovative models for the care
of patients with chronic and complex conditions. Additionally, Medco now has capabilities and
expertise in post-approval safety and economics outcomes research such as Risk Evaluation and
Mitigation Strategies for biotechnology and other pharmaceutical drugs through our newly acquired
subsidiary, United BioSource Corporation (UBC).
Our business model requires collaboration with payors, retail pharmacies, physicians,
pharmaceutical manufacturers, CMS for Medicare, and, particularly in Specialty Pharmacy,
collaboration with other third-party payors such as health insurers, and state Medicaid agencies.
Our programs and services help control the cost and enhance the quality of prescription drug
benefits. We accomplish this by providing PBM services through our national networks of retail
pharmacies and our own mail-order pharmacies, as well as through Accredo Health Group, which we
believe is the nations largest specialty pharmacy based on reported revenues. We also provide a
suite of diabetes care supplies and services under our Liberty brand.
The complicated environment in which we operate presents us with opportunities, challenges and
risks. Our clients and members are paramount to our success; the retention of existing clients and
members and winning of new clients and members poses the greatest opportunity to us and the loss
thereof represents an ongoing risk. The preservation of our relationships with pharmaceutical
manufacturers, biopharmaceutical manufacturers and retail pharmacies is very important to the
execution of our business strategies. Our future success will be largely dependent on our ability
to drive mail-order volume and increase generic dispensing rates in light of the significant
brand-name drug patent expirations expected to occur over the next several years. In addition, our
future success depends on our ability to continue to provide innovative and competitive clinical
and other services to clients and members, including through our active participation in the
Medicare Part D Prescription Drug Plan (Medicare Part D) benefit, our growing specialty pharmacy
business, including the growth in biosimilars, our Therapeutic Resource Centers, as well as the
growing service revenue businesses that include our international services, our personalized
medicine services and our clinical research business capabilities through UBC.
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Additionally, our future success will depend on our continued ability to generate positive
cash flows from operations with a keen focus on asset management and maximizing return on invested
capital (ROIC). We are very focused on managing our ROIC to ensure we drive significant returns
to our shareholders. We believe there is a close correlation between strong ROIC and long-term
shareholder value and as such, we include ROIC as a component of our annual performance bonus grid.
Our financial performance benefits from the diversity of our client base and our
clinically-driven business model, which we believe provides better outcomes at lower costs for our
clients. We actively monitor the status of our accounts receivable and have mechanisms in place to
minimize the potential for incurring material accounts receivable credit risk. To date, we have
not experienced any significant deterioration in our client or manufacturer rebates accounts
receivable.
Our first fiscal quarters for 2011 and 2010 each consisted of 13 weeks and ended on March 26,
2011 and March 27, 2010, respectively.
When we use Medco, we, us and our, we mean Medco Health Solutions, Inc., a Delaware
corporation, and its consolidated subsidiaries. When we use the term mail order, we mean
inventory dispensed through Medcos mail-order pharmacy operations.
Recent Acquisitions and Joint Ventures
We reinforced our commitment to advancing the science of personalized medicine through our
January 2010 acquisition of DNA Direct, Inc. (DNA Direct), a leader in providing guidance and
decision support for genomic medicine to patients, providers, payors and employees. Additionally,
we extended our core capabilities in data analytics and research with the September 2010
acquisition of UBC. UBC is a leader in serving life sciences industry clients and is focused on
developing scientific evidence to guide the safe, effective and affordable use of medicines. UBC
has the capability to conduct post-approval research in strategic locations worldwide, including
North America, Europe and Asia. See Note 3, Acquisitions of Businesses and Joint Ventures, to our
audited consolidated financial statements included in Part II, Item 8 of our Annual Report on Form
10-K for the fiscal year ended December 25, 2010 for more information.
On September 10, 2010, Medco and Celesio AG (Celesio), a company based in Germany and one of
the leading service providers within the European pharmaceutical and healthcare markets, formed a
joint venture with a long-term goal of improving patient health and helping to relieve the
significant financial burden on healthcare payors across Europe. Headquartered in the Netherlands,
the 50/50 joint venture, Medco Celesio B.V., combines Medcos and Celesios strengths in
pharmacy-driven clinical care. Medco Celesio B.V. will target patients with chronic or complex
conditions, such as diabetes, asthma, high cholesterol and heart disease. It will concentrate on
delivering technology-enabled advanced clinical solutions designed to improve patient adherence,
integrate care across multiple providers, enhance safety and deliver greater value across European
healthcare systems.
In conjunction with the Medco Celesio B.V. joint venture, Medco will contribute to Medco
Celesio B.V. its wholly-owned subsidiary, Europa Apotheek Venlo B.V. (Europa Apotheek). As of
March 26, 2011, approximately 50% of the accumulated other comprehensive loss component of our
stockholders equity represents an unrecognized foreign currency translation loss, reflecting the
weakened euro since the Europa Apotheek acquisition. Concurrent with the contribution of Europa
Apotheek to Medco Celesio B.V., expected in fiscal 2011, and based on the foreign currency
translation at that time, this unrecognized balance will be recognized in our results of
operations. In addition, our investment in the joint venture will be recorded at fair value, and
the difference between the fair value and the book value of the Europa Apotheek asset contributed
to the joint venture will be recognized in our results of operations.
Key Indicators Reviewed by Management
Management reviews the following indicators in analyzing our consolidated financial
performance: net revenues, with a particular focus on mail-order volumes and revenue; adjusted
prescription volume; generic dispensing rate and generic volumes, particularly for mail order;
service revenue; gross margin percentage; cash flow from operations; return on invested capital;
diluted earnings per share; Specialty Pharmacy segment revenue and operating income; diluted
earnings per share, excluding all intangible amortization; Earnings Before Interest Income/Expense,
Taxes, Depreciation, and Amortization (EBITDA); and EBITDA per adjusted prescription. See
EBITDA further below for a definition and calculation of EBITDA and EBITDA per adjusted
prescription. We believe these measures highlight key business trends and are important in
evaluating our overall performance.
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Financial Performance Summary for the Quarter Ended March 26, 2011
Our diluted earnings per share increased 19.4% to $0.80 and net income increased 3.9% to
$333.1 million for the first quarter of 2011, compared to $0.67 per share and $320.5 million,
respectively, for the first quarter of 2010. Excluding all intangible amortization, our first
quarter of 2011 diluted earnings per share increased 19.7% to $0.91. These increases primarily
reflect higher generic dispensing rates and mail-order generic volumes, a decrease in the diluted
weighted average shares outstanding, increased service margin, as well as a benefit associated with
changes to the employee postretirement healthcare benefit plan of $30.6 million included in gross
margin and selling, general and administrative (SG&A) expenses, and growth in the Specialty
Pharmacy business. These are partially offset by the effect of client renewal pricing, as well as
increased SG&A expenses. For the three months ended March 26, 2011, we generated cash flow from
operations of $94.0 million and had cash and cash equivalents of $127.1 million on our consolidated
balance sheet at March 26, 2011.
The diluted weighted average shares outstanding were 414.2 million for the first quarter of
2011 compared to 478.2 million for the first quarter of 2010, representing a decrease of 13.4%
resulting primarily from our share repurchase programs.
Our total net revenues increased 4.3% to $17,019.6 million for the first quarter of 2011.
Product net revenues increased 3.6% to $16,661.8 million, which reflects higher retail and
mail-order prescription volume driven by new business, as well as higher prices charged by
brand-name pharmaceutical manufacturers, partially offset by a greater representation of
lower-priced generic drugs and higher client price discounts. Additionally, our service revenues
increased 57.5% to $357.8 million for the first quarter of 2011, reflecting higher manufacturer
service revenues primarily driven by the contributions from UBC, which was acquired in September
2010. Also included in the higher service revenues are increased client and other service revenues
primarily driven by higher formulary management fees, increased claims processing administrative
fees, as well as higher revenues associated with Medicare Part D-related product offerings and
clinical programs.
The total adjusted prescription volume, which adjusts mail-order prescription volume for the
difference in days supply between mail order and retail, increased 2.1% to 244.3 million for the
first quarter of 2011, and reflects higher mail-order and retail volumes attributed to new clients.
The increase in mail-order prescription volume for the first quarter of 2011 is driven by an
increase in generic volumes, as brand-name volumes were lower than in the first quarter of 2010.
The adjusted mail-order penetration rate was 33.7% for the first quarter of 2011 compared to 33.9%
for the first quarter of 2010.
Our overall generic dispensing rate increased to 73.1% for the first quarter of 2011 from
69.7% for the first quarter of 2010, reflecting the impact of the introduction of new generic
products in and subsequent to the first quarter of 2010, heightened use of previously released
generics, and the effect of client plan design changes promoting the use of lower-priced and more
steeply discounted generics. Higher generic volumes, which contribute to lower costs for clients
and members, resulted in reductions to net revenues of approximately $1,100 million for the first
quarter of 2011.
Our overall gross margin percentage increased to 6.3% for the first quarter of 2011 from 6.1%
for the first quarter of 2010, primarily reflecting increased generic dispensing rates and
mail-order generic volumes, as well as a higher mix of higher margin service revenues and the
margin component of the aforementioned benefit associated with the postretirement healthcare
benefit plan of $22.6 million. The gross margin percentage increase was partially offset by higher
retail volumes and a lower Specialty Pharmacy gross margin percentage due to product, channel and
new-client mix, as well as the effect of client renewal pricing.
SG&A expenses of $387.1 million for the first quarter of 2011 increased by $36.5 million, or
10.4%, from the first quarter of 2010, primarily reflecting UBC SG&A expenses, higher professional
fees and technology-related expenses
associated with strategic initiatives, and higher stock-based compensation expenses, partially
offset by the SG&A component of the aforementioned benefit associated with the postretirement
healthcare benefit plan of $8.0 million.
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Amortization of intangible assets of $73.2 million for the first quarter of 2011 increased
$2.7 million from the first quarter of 2010, primarily reflecting higher intangible amortization
from the acquisition of UBC, partially offset by lower intangible amortization from PolyMedica
Corporation (PolyMedica) associated with scheduled accelerated amortization of customer
relationships in the prior period.
Interest expense of $51.9 million for the first quarter 2011 increased by $11.2 million from
the first quarter of 2010, primarily reflecting higher expense as a result of increased borrowings
from our September 2010 senior notes issuance associated with the acquisition of UBC.
Interest (income) and other (income) expense, net, of $2.3 million of expense for the first
quarter of 2011 decreased $3.7 million from ($1.4) million of income for the first quarter of 2010,
primarily reflecting our joint venture activity and decreased interest income driven by lower cash
balances.
Our effective tax rate (defined as the percentage relationship of provision for income taxes
to income before provision for income taxes) was 40.1% for the first quarter of 2011 compared to
39.8% for the first quarter of 2010.
Key Financial Statement Components
Consolidated Statements of Income
Our net revenues are comprised primarily of product net revenues and are derived principally
from the sale of prescription drugs through our networks of contractually affiliated retail
pharmacies and through our mail-order pharmacies, and are recorded net of certain discounts,
rebates and guarantees payable to clients and members. The majority of our product net revenues are
derived on a fee-for-service basis. Our Specialty Pharmacy product net revenues represent revenues
from the sale of primarily biopharmaceutical drugs and are reported at the net amount billed to
third-party payors and patients.
In addition, our product net revenues include premiums associated with our Medicare Part D
Prescription Drug Plan risk-based product offerings. These products involve prescription dispensing
for beneficiaries enrolled in the CMS-sponsored Medicare Part D prescription drug benefit. Our two
insurance company subsidiaries have been operating under contracts with CMS since 2006, and
currently offer several Medicare PDP options. The products involve underwriting the benefit,
charging enrollees applicable premiums, providing covered prescription drugs and administering the
benefit as filed with CMS. We provide two Medicare drug benefit plan options for beneficiaries,
including a standard Part D benefit plan as mandated by statute, and a benefit plan with enhanced
coverage that exceeds the standard Part D benefit plan, available for an additional premium. We
also offer numerous customized benefit plan designs to employer group retiree plans under the
Medicare Part D prescription drug benefit.
The PDP premiums are determined based on our annual bid and related contractual arrangements
with CMS. The PDP premiums are primarily comprised of amounts received from CMS as part of a direct
subsidy and an additional subsidy from CMS for low-income member premiums, as well as premium
payments received from members. These premiums are recognized ratably to product net revenues over
the period in which members are entitled to receive benefits. Premiums received in advance of the
applicable benefit period are deferred and recorded in accrued expenses and other current
liabilities on the consolidated balance sheets. There is a possibility that the annual costs of
drugs may be higher or lower than premium revenues. As a result, CMS provides a risk corridor
adjustment for the standard drug benefit that compares our actual annual drug costs incurred to the
targeted premiums in our CMS-approved bid. Based on specific collars in the risk corridor, we will
receive from CMS additional premium amounts or be required to refund to CMS previously received
premium amounts. We calculate the risk corridor adjustment on a quarterly basis based on drug cost
experience to date and record an adjustment to product net revenues with a corresponding account
receivable from or payable to CMS reflected on the consolidated balance sheets.
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In addition to PDP premiums, there are certain co-payments and deductibles (the cost share)
due from members based on prescription orders by those members, some of which are subsidized by CMS
in cases of low-income membership. For subsidies received in advance, the amount is deferred and
recorded in accrued expenses and other current liabilities on the consolidated balance sheets. If
there is cost share due from members or CMS, the amount is accrued and recorded in client accounts
receivable, net, on the consolidated balance sheets. After the end of the contract year and based
on actual annual drug costs incurred, cost share amounts are reconciled with CMS and the
corresponding receivable or payable is settled. The cost share is treated consistently as other
co-payments derived from providing PBM services, as a component of product net revenues on the
consolidated statements of income.
For further details, see our critical accounting policies included in Use of Estimates and
Critical Accounting Policies and Estimates and Note 2, Summary of Significant Accounting
Policies, to our audited consolidated financial statements included in Part II, Items 7 and 8,
respectively, of our Annual Report on Form 10-K for the fiscal year ended December 25, 2010.
Premium revenues for our PDP products, which exclude member cost share, were $213 million, or
approximately 1% of total net revenues, in the first quarter of 2011 and $182 million, or
approximately 1% of total net revenues, in the first quarter of 2010.
Our agreements with CMS, as well as applicable Medicare Part D regulations and federal and
state laws, require us to, among other obligations: (i) comply with certain disclosure, filing,
record-keeping and marketing rules; (ii) operate quality assurance, drug utilization management and
medication therapy management programs; (iii) support e-prescribing initiatives; (iv) implement
grievance, appeals and formulary exception processes; (v) comply with payment protocols, which
include the return of overpayments to CMS and, in certain circumstances, coordination with state
pharmacy assistance programs; (vi) use approved networks and formularies, and provide access to
such networks to any willing pharmacy; (vii) provide emergency out-of-network coverage; and
(viii) implement a comprehensive Medicare and Fraud, Waste and Abuse compliance program. We have
various contractual and regulatory compliance requirements associated with participating in the
Medicare Part D benefit. Similar to our requirements with other clients, our policies and practices
associated with executing our PDP are subject to audit. If material contractual or regulatory
non-compliance was to be identified, monetary penalties and/or applicable sanctions, including
suspension of enrollment and marketing or debarment from participation in Medicare programs, may be
imposed. Additionally, each calendar year, payment will vary based on the annual
benchmark that applies as a result of Medicare Part D plan bids for the applicable year, as well as
for changes in the CMS methodology for calculating risk adjustment factors.
Service revenues consist principally of administrative fees and clinical program fees earned
from clients, sales of prescription services to pharmaceutical manufacturers, performance-oriented
fees paid by Specialty Pharmacy manufacturers, revenues from data analytics and research associated
with UBC, and other non-product-related revenues.
Cost of revenues is comprised primarily of cost of product net revenues and is principally
attributable to the dispensing of prescription drugs. Cost of product net revenues for
prescriptions dispensed through our networks of retail pharmacies is comprised of the contractual
cost of drugs dispensed by, and professional fees paid to, retail pharmacies in the networks,
including the associated member co-payments. Our cost of product net revenues relating to drugs
dispensed by our mail-order pharmacies consists primarily of the cost of inventory dispensed and
our costs incurred to process and dispense the prescriptions, including the associated fixed asset
depreciation. The operating costs of our call center pharmacies are also included in cost of
product net revenues. In addition, cost of product net revenues includes a credit for rebates
earned from brand-name pharmaceutical manufacturers whose drugs are included in our formularies.
These rebates generally take the form of formulary rebates, which are earned based on the volume of
a specific drug dispensed, or market share rebates, which are earned based on the achievement of
contractually specified market share levels.
Our cost of product net revenues also includes the cost of drugs dispensed by our mail-order
pharmacies or retail network for members covered under our Medicare PDP product offerings and are
recorded at cost as incurred. We receive a catastrophic reinsurance subsidy from CMS for
approximately 80% of costs incurred by individual members in excess of the individual annual
out-of-pocket maximum of $4,550 for both coverage years 2011 and 2010. The subsidy is reflected as
an offsetting credit in cost of product net revenues to the extent that catastrophic costs are
incurred. Catastrophic reinsurance subsidy amounts received in advance are deferred and recorded in
accrued expenses and other current liabilities on the consolidated balance sheets. If there are
catastrophic reinsurance subsidies due from CMS, the amount is accrued and recorded in client
accounts receivable, net, on the consolidated balance sheets. After the end of the
contract year and based on actual annual drug costs incurred, catastrophic reinsurance amounts
are reconciled with CMS and the corresponding receivable or payable is settled. Cost of service
revenues consists principally of labor and operating costs for delivery of services provided, as
well as costs associated with member communication materials.
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SG&A expenses reflect the costs of operations dedicated to executive management, the
generation of new sales, maintenance of existing client relationships, management of clinical
programs, enhancement of technology capabilities, direction of pharmacy operations, and performance
of reimbursement activities, in addition to finance, legal and other staff activities, and the
effect of certain legal settlements. SG&A also includes advertising expenses associated with
diabetes supplies, which are expensed as incurred.
Interest expense is incurred on our senior unsecured bank credit facilities, accounts
receivable financing facility, other short-term debt, and our senior notes, and includes net
interest on our interest rate swap agreements on $200 million of the $500 million of 7.25% senior
notes due 2013. In addition, it includes amortization of the effective portion of our settled
forward-starting interest rate swap agreements and amortization of debt issuance costs.
Interest (income) and other (income) expense, net, includes interest income generated by cash
and cash equivalent investments, and short-term and long-term investments in marketable securities,
as well as other (income) expense from the effect of foreign currency translation and our joint
venture activity.
For further details, see our critical accounting policies included in Use of Estimates and
Critical Accounting Policies and Estimates and Note 2, Summary of Significant Accounting
Policies, to our audited consolidated financial statements included in Part II, Items 7 and 8,
respectively, of our Annual Report on Form 10-K for the fiscal year ended December 25, 2010.
Consolidated Balance Sheets
Our primary assets include cash and cash equivalents, short-term and long-term investments,
manufacturer accounts receivable, client accounts receivable, inventories, fixed assets, deferred
tax assets, goodwill and intangible assets. Cash and cash equivalents reflect the accumulation of
net positive cash flows from our operations, investing and financing activities, and primarily
include time deposits with banks or other financial institutions, and money market mutual funds.
Our short-term and long-term investments include U.S. government securities that are held to
satisfy statutory capital requirements for our insurance subsidiaries.
Manufacturer accounts receivable balances primarily include amounts due from brand-name
pharmaceutical manufacturers for earned rebates and other prescription services. Client accounts
receivable represent amounts due from clients, other payors and patients for prescriptions
dispensed from retail pharmacies in our networks or from our mail-order pharmacies, including fees
due to us, net of allowances for doubtful accounts, as well as contractual allowances and any
applicable rebates and guarantees payable when these payables are settled on a net basis in the
form of an invoice credit. In cases where rebates and guarantees are settled with the client on a
net basis, and the rebates and guarantees payable are greater than the corresponding client
accounts receivable balances, the net liability is reclassified to client rebates and guarantees
payable. When these payables are settled in the form of a check or wire, they are recorded on a
gross basis and the entire liability is reflected in client rebates and guarantees payable. Our
client accounts receivable also includes receivables from CMS for our Medicare PDP product
offerings and premiums from members. Additionally, we have receivables from Medicare and Medicaid
for a portion of our Specialty Pharmacy business, and for diabetes supplies dispensed by
PolyMedica.
Inventories reflect the cost of prescription products held for dispensing by our mail-order
pharmacies and are recorded on a first-in, first-out basis, net of allowances for losses. Deferred
tax assets primarily represent temporary differences between the financial statement basis and the
tax basis of certain accrued expenses, stock-based compensation, and client rebate pass-back
liabilities. Fixed assets include investments in our corporate headquarters, mail-order
pharmacies, call center pharmacies, account service offices, and information technology, including
capitalized software development. Goodwill and intangible assets for the PBM segment are comprised
primarily of the goodwill and intangibles that had been pushed down to our consolidated balance
sheets and existed when we became an independent, publicly traded company in 2003, and, to a
significantly lesser extent, goodwill and intangibles recorded upon our acquisitions subsequent
to 2003. Goodwill and intangible assets for the Specialty Pharmacy segment include goodwill
and intangible assets recorded primarily from our acquisition of Accredo Health, Incorporated in 2005.
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Our primary liabilities include claims and other accounts payable, client rebates and
guarantees payable, accrued expenses and other current liabilities, debt and deferred tax
liabilities. Claims and other accounts payable primarily consist of amounts payable to retail
network pharmacies for prescriptions dispensed and services rendered by the retail pharmacies, as
well as amounts payable for mail-order prescription inventory purchases and other purchases made in
the normal course of business. Client rebates and guarantees payable include amounts due to clients
that will ultimately be settled in the form of a check or wire, as well as any residual liability
in cases where the payable is settled as an invoice credit and exceeds the corresponding client
accounts receivable balances. Accrued expenses and other current liabilities primarily consist of
employee- and facility-related cost accruals incurred in the normal course of business, as well as
income taxes payable. Accrued expenses and other current liabilities are also comprised of certain
premiums, and may also include cost share, and catastrophic reinsurance payments received in
advance from CMS for our Medicare PDP product offerings. Our debt is primarily comprised of a
senior unsecured term loan facility, a senior unsecured revolving credit facility, and senior
notes. In addition, we have a net deferred tax liability primarily associated with our recorded
intangible assets. We do not have any material off-balance sheet arrangements, other than purchase
commitments and lease obligations. See Commitments and Contractual Obligations below.
Our stockholders equity includes an offset for purchases of our common stock under our share
repurchase programs. The accumulated other comprehensive loss component of stockholders equity
includes: unrealized investment gains and losses, foreign currency translation adjustments
resulting primarily from the translation of Europa Apotheeks assets, liabilities and results of
operations, unrealized gains and losses on effective cash flow hedges, and the net gains and losses
and prior service costs and credits related to our pension and other postretirement benefit plans.
Consolidated Statements of Cash Flows
An important element of our operating cash flows is the timing of billing cycles, which are
generally two-week periods of accumulated billings for retail and mail-order prescriptions. We bill
the cycle activity to clients on this bi-weekly schedule and generally collect from our clients
before we pay our obligations to the retail pharmacies for that same cycle. At the end of any given
reporting period, unbilled PBM receivables can represent up to two weeks of dispensing activity and
will fluctuate at the end of a fiscal month depending on the timing of these billing cycles. A
portion of the Specialty Pharmacy business includes reimbursement by payors, such as insurance
companies, under a medical benefit, or by Medicare or Medicaid. These transactions also involve
higher patient co-payments than experienced in the PBM business. As a result, this portion of the
Specialty Pharmacy business experiences slower accounts receivable turnover than in the
aforementioned PBM cycle and has a different credit risk profile. Our operating cash flows are also
impacted by timing associated with our Medicare PDP product offerings, including premiums, cost
share, and catastrophic reinsurance received from CMS. In addition, our operating cash flows
include tax benefits for employee stock plans up to the amount associated with compensation
expense. In the first quarter of 2010, our operating cash flows reflected a benefit of $173.5
million for the collection of income taxes receivable from the IRS and certain states associated
with the approval of a favorable accounting method change.
Ongoing operating cash flows are associated with expenditures to support our mail-order,
retail pharmacy network operations, call center pharmacies and other SG&A functions. The largest
components of these expenditures include payments to retail pharmacies; mail-order inventory
purchases, which are paid in accordance with payment terms offered by our suppliers to take
advantage of appropriate discounts; rebate and guarantee payments to clients; employee payroll and
benefits; facility operating expenses and income taxes. In addition, earned brand-name
pharmaceutical manufacturers rebates are recorded monthly based upon prescription dispensing, with
actual bills rendered on a quarterly basis and paid by the manufacturers within an agreed-upon
term. Payments of rebates to clients are generally made after our receipt of the rebates from the
brand-name pharmaceutical manufacturers, although some clients may receive more accelerated rebate
payments in exchange for other elements of pricing in their contracts.
Ongoing investing cash flows are primarily associated with capital expenditures, including
technology investments, as well as purchases of securities and other assets, and proceeds from the
sale of securities and other investments, which primarily relate to investment activities of our
insurance companies. Acquisitions will also generally result in cash
outflows from investing activities. Ongoing financing cash flows primarily include share
repurchases, proceeds from employee stock plans, and the benefits of realized tax deductions in
excess of tax benefits on compensation expense.
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Clients
We have clients in a broad range of industry categories, including various Blue Cross/Blue
Shield plans; health plans; insurance carriers; third-party benefit plan administrators; employers;
federal, state and local government agencies; and union-sponsored benefit plans. For the first
quarter of 2011, our ten largest clients based on revenue accounted for approximately 46% of our
net revenues, including UnitedHealth Group Incorporated (UnitedHealth Group), our largest client,
which represented approximately $2,800 million, or 17%, of our net revenues. For the first quarter
of 2010, our ten largest clients based on revenue accounted for approximately 47% of our net
revenues, including UnitedHealth Group, which represented approximately $2,800 million, or 17%, of
our net revenues. The UnitedHealth Group account has a lower than average mail-order penetration
and, because of its size, steeper pricing than the average client, and consequently generally
yields lower profitability as a percentage of net revenues than smaller client accounts. In
addition, with respect to mail-order volume, which is an important contributor to our overall
profitability, the mail-order volume associated with this account represented less than 10% of our
overall mail-order volume for both the first quarters of 2011 and 2010. Under our current
agreement with UnitedHealth Group, we are providing pharmacy benefit services through December 31,
2012. None of our other clients individually represented more than 10% of our net revenues in the
first quarter of 2011 or 2010.
Segment Discussion
We have two reportable segments, PBM and Specialty Pharmacy. The PBM segment primarily
involves sales of traditional prescription drugs and supplies, as well as diabetes testing supplies
and related products, to our clients and members or patients, either through our networks of
contractually affiliated retail pharmacies or our mail-order pharmacies. The PBM segment also
includes the operating results of Europa Apotheek, which primarily provides mail-order pharmacy services in Germany. It is
expected that Europa Apotheek will be contributed to a recently formed joint venture, Medco Celesio
B.V., in fiscal 2011. Commencing on the September 16, 2010 acquisition date, the PBM segment also
includes the operating results of UBC, which extends our core capabilities in data analytics and
research.
The Specialty Pharmacy segment includes the sale of specialty pharmacy products and services
for the treatment of primarily complex and potentially life-threatening diseases, including
specialty infusion services. We define the Specialty Pharmacy segment based on a product set and
associated services, broadly characterized to include drugs that are usually high-cost, developed
by biotechnology companies and often injectable or infusible, and may require elevated levels of
patient support. When dispensed, these products frequently require ancillary administration
equipment, special packaging, and a higher degree of patient-oriented customer service, including
in-home nursing services and administration. Specialty pharmacy products and services are often
covered through client PBM contracts. Specialty pharmacy products and services are also covered
through medical benefit programs with the primary payors being insurance companies and government
programs, and patients for amounts due for co-payments and deductibles.
The PBM segment is measured and managed on an integrated basis, and there is no distinct
measurement that separates the performance and profitability of mail order and retail. We offer
fully integrated PBM services to virtually all of our PBM clients and their members. The PBM
services we provide to our clients are generally delivered and managed under a single contract for
each client. The PBM and Specialty Pharmacy segments primarily operate in the United States and
have relatively small activities in Puerto Rico, Germany and the United Kingdom. Additionally, UBC
has the capability to conduct post-approval research in strategic locations worldwide, including
North America, Europe and Asia.
As a result of the nature of our integrated PBM services and contracts, the chief operating
decision maker views Medcos PBM operations as a single segment for purposes of making decisions
about resource allocations and in assessing performance.
For segment financial information, see Segment Results of Operations below and Note 6,
Segment and Geographic Data, to our unaudited interim condensed consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Consolidated
Results of Operations
The following table presents selected consolidated comparative results of operations and
volume performance ($ and volumes in millions):
Quarter | Quarter | |||||||||||||||
Ended | Ended | |||||||||||||||
March 26, | March 27, | |||||||||||||||
2011(1) | Variance | 2010 | ||||||||||||||
Net Revenues |
||||||||||||||||
Retail product(2) |
$ | 10,297.8 | $ | 262.1 | 2.6 | % | $ | 10,035.7 | ||||||||
Mail-order product |
6,364.0 | 316.0 | 5.2 | % | 6,048.0 | |||||||||||
Total product(2) |
$ | 16,661.8 | $ | 578.1 | 3.6 | % | $ | 16,083.7 | ||||||||
Client and other service |
$ | 234.3 | $ | 45.6 | 24.2 | % | $ | 188.7 | ||||||||
Manufacturer service |
123.5 | 85.0 | N/M | * | 38.5 | |||||||||||
Total service |
$ | 357.8 | $ | 130.6 | 57.5 | % | $ | 227.2 | ||||||||
Total net revenues(2) |
$ | 17,019.6 | $ | 708.7 | 4.3 | % | $ | 16,310.9 | ||||||||
Cost of Revenues |
||||||||||||||||
Product(2) |
$ | 15,828.9 | $ | 575.3 | 3.8 | % | $ | 15,253.6 | ||||||||
Service |
120.4 | 55.8 | 86.4 | % | 64.6 | |||||||||||
Total cost of revenues(2) |
$ | 15,949.3 | $ | 631.1 | 4.1 | % | $ | 15,318.2 | ||||||||
Gross Margin(3) |
||||||||||||||||
Product |
$ | 832.9 | $ | 2.8 | 0.3 | % | $ | 830.1 | ||||||||
Product gross margin percentage |
5.0 | % | (0.2 | )% | 5.2 | % | ||||||||||
Service |
$ | 237.4 | $ | 74.8 | 46.0 | % | $ | 162.6 | ||||||||
Service gross margin percentage |
66.3 | % | (5.3 | )% | 71.6 | % | ||||||||||
Total gross margin |
$ | 1,070.3 | $ | 77.6 | 7.8 | % | $ | 992.7 | ||||||||
Gross margin percentage |
6.3 | % | 0.2 | % | 6.1 | % | ||||||||||
Volume Information |
||||||||||||||||
Generic mail-order prescriptions |
17.7 | 1.5 | 9.3 | % | 16.2 | |||||||||||
Brand mail-order prescriptions |
10.0 | (1.0 | ) | (9.1 | )% | 11.0 | ||||||||||
Total mail-order prescriptions |
27.7 | 0.5 | 1.8 | % | 27.2 | |||||||||||
Retail prescriptions |
162.0 | 3.9 | 2.5 | % | 158.1 | |||||||||||
Total prescriptions |
189.7 | 4.4 | 2.4 | % | 185.3 | |||||||||||
Adjusted prescriptions(4) |
244.3 | 5.1 | 2.1 | % | 239.2 | |||||||||||
Adjusted mail-order penetration(5) |
33.7 | % | (0.2 | )% | 33.9 | % | ||||||||||
Generic Dispensing Rate Information |
||||||||||||||||
Retail generic dispensing rate |
74.7 | % | 3.3 | % | 71.4 | % | ||||||||||
Mail-order generic dispensing rate |
63.8 | % | 4.5 | % | 59.3 | % | ||||||||||
Overall generic dispensing rate |
73.1 | % | 3.4 | % | 69.7 | % |
* | Not Meaningful | |
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Includes retail co-payments of $2,513 million for the first quarter of 2011 and $2,471 million for the first quarter of 2010. | |
(3) | Represents total net revenues minus total cost of revenues. | |
(4) | Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three times the amount of product days supplied compared with retail prescriptions. | |
(5) | Represents the percentage of adjusted mail-order prescriptions to total adjusted prescriptions. |
Net Revenues
Retail. The increase in retail net revenues of $262 million for the first quarter of 2011
reflects net volume increases of $247 million, primarily from new business. Also contributing to
the higher retail net revenues were net price increases of $15 million for the first quarter of
2011 driven by higher prices charged by brand-name pharmaceutical manufacturers, partially offset
by higher client price discounts. The aforementioned net price variance includes the offsetting
effect of approximately $685 million from a greater representation of lower-priced generic drugs in
the first quarter of 2011.
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Mail-Order. The increase in mail-order net revenues of $316 million for the first quarter of
2011 reflects net volume increases of $109 million driven by higher generic volumes. The volumes of
lower-priced generic drugs were higher than the first quarter of 2010; however, the higher-priced
brand-name volumes were lower, in part as a result of the economy and plan designs and member
financial incentives encouraging the use of generics. Also contributing to the mail-order net
revenue increase are net price increases of $207 million driven by higher prices charged by
brand-name pharmaceutical manufacturers, partially offset by higher client price discounts. The
aforementioned net price variance includes the offsetting effect of approximately $415 million from
a greater representation of lower-priced generic drugs in the first quarter of 2011.
Our overall generic dispensing rate increased to 73.1% for the first quarter of 2011, compared
to 69.7% for the first quarter of 2010. Mail-order and retail generic dispensing rates increased to
63.8% and 74.7%, respectively, for the first quarter of 2011, compared to 59.3% and 71.4%,
respectively, for the first quarter of 2010. These increases reflect the impact of the introduction
of new generic products in and subsequent to the first quarter of 2010 and the effect of programs
and client plan design changes promoting the use of lower-priced and more steeply discounted
generics.
Service revenues increased $130.6 million in the first quarter of 2011 reflecting higher
manufacturer service revenues of $85.0 million primarily driven by the contributions from UBC,
which was acquired in September 2010. Also included in the higher service revenues are increased
client and other service revenues of $45.6 million, primarily driven by higher formulary management
fees, increased claims processing administrative fees, as well as higher revenues associated with
Medicare Part D-related product offerings and clinical programs.
Gross Margin
Our overall gross margin increased to $1,070.3 million or 6.3% for the first quarter of 2011
from $992.7 million or 6.1% for the first quarter of 2010. Our product gross margin increased to
$832.9 million or 5.0% for the first quarter of 2011 from $830.1 million or 5.2% for the first
quarter of 2010. Product gross margin reflects increased generic dispensing rates and mail-order
generic volumes, the margin component of the aforementioned benefit associated with the
postretirement healthcare benefit plan of $22.6 million, and
business efficiencies offset by the effect of client renewal
pricing. The lower product gross margin percentage also reflects higher retail volumes and a lower
Specialty Pharmacy gross margin percentage due to product, channel and new client mix. Our overall
gross margin also benefited from a higher mix of higher margin service revenues. Service gross
margin of $237.4 million for the first quarter of 2011 increased $74.8 million compared to $162.6
million for the first quarter of 2010. The service gross margin dollar increase reflects the
aforementioned increase in service revenues of $130.6 million, partially offset by an increase in
cost of service revenues of $55.8 million, which primarily results from UBC. Service gross margin
percentage was 66.3% for the first quarter of 2011 compared to 71.6% for the first quarter of 2010,
and the decrease reflects the UBC mix.
Rebates from brand-name pharmaceutical manufacturers, which are reflected as a reduction of
cost of product net revenues, totaled $1,502 million for the first quarter of 2011 and $1,452
million for the first quarter of 2010, with formulary rebates representing 85.8% and 83.6% of total
rebates, respectively. The overall increases in rebates reflect volume from new clients and
favorable pharmaceutical manufacturer rebate contract revisions, as well as improved formulary
management and patient compliance, partially offset by brand-name drug volumes that have converted
to generic drugs. The increase in the formulary rebate percentage of total rebates reflects the
composition of new client business and manufacturer contract revisions. We retained approximately
$174 million, or 11.6%, of total rebates in the first quarter of 2011, and $176 million, or 12.1%,
in the first quarter of 2010. The decrease in the retained rebate percentage is reflective of
client mix and the associated client preferences regarding the rebate sharing aspects of their
overall contract pricing structure.
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The following table presents additional selected consolidated comparative results of
operations ($ in millions):
Quarter | Quarter | |||||||||||||||
Ended | Ended | |||||||||||||||
March 26, | March 27, | |||||||||||||||
2011(1) | Variance | 2010 | ||||||||||||||
Gross margin(2) |
$ | 1,070.3 | $ | 77.6 | 7.8 | % | $ | 992.7 | ||||||||
Selling, general and
administrative expenses |
387.1 | 36.5 | 10.4 | % | 350.6 | |||||||||||
Amortization of intangibles |
73.2 | 2.7 | 3.8 | % | 70.5 | |||||||||||
Interest expense |
51.9 | 11.2 | 27.5 | % | 40.7 | |||||||||||
Interest (income) and other
(income) expense, net |
2.3 | 3.7 | N/M | * | (1.4 | ) | ||||||||||
Income before provision for
income taxes |
555.8 | 23.5 | 4.4 | % | 532.3 | |||||||||||
Provision for income taxes |
222.7 | 10.9 | 5.1 | % | 211.8 | |||||||||||
Net income |
$ | 333.1 | $ | 12.6 | 3.9 | % | $ | 320.5 | ||||||||
Diluted weighted average shares
outstanding |
414.2 | (64.0 | ) | (13.4 | )% | 478.2 | ||||||||||
Diluted earnings per share |
$ | 0.80 | $ | 0.13 | 19.4 | % | $ | 0.67 | ||||||||
Adjustment for the amortization
of intangible
assets(3) |
$ | 0.11 | $ | 0.02 | 22.2 | % | $ | 0.09 | ||||||||
Diluted earnings per share,
excluding all intangible
amortization |
$ | 0.91 | $ | 0.15 | 19.7 | % | $ | 0.76 | ||||||||
* | Not Meaningful | |
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Represents total net revenues minus total cost of revenues. | |
(3) | This adjustment represents the per-share effect of all intangible amortization. |
Selling, General and Administrative Expenses
SG&A expenses of $387.1 million for the first quarter of 2011 increased by $36.5 million, or
10.4%, from the first quarter of 2010, primarily reflecting UBC SG&A expenses, higher professional
fees and technology-related expenses associated with strategic initiatives, and higher stock-based
compensation expenses, partially offset by business efficiencies and the SG&A component of the aforementioned benefit
associated with the postretirement healthcare benefit plan of $8.0 million.
Amortization of Intangibles
Amortization of intangible assets of $73.2 million for the first quarter of 2011 increased
$2.7 million from the first quarter of 2010, primarily reflecting higher intangible amortization
from the acquisition of UBC, partially offset by lower intangible amortization from PolyMedica
associated with scheduled accelerated amortization of customer
relationships in the prior period.
Interest Expense
Interest expense of $51.9 million for the first quarter 2011 increased by $11.2 million from
the first quarter of 2010, primarily reflecting higher expense as a result of increased borrowings
from our September 2010 senior notes issuance associated with the acquisition of UBC.
The weighted average interest rate on our indebtedness was approximately 3.6% for the first
quarter of 2011, compared to approximately 4.0% for the first quarter of 2010, reflecting lower
interest rates on the floating rate components of outstanding debt, partially offset by a higher
mix of fixed rate compared with variable rate outstanding debt.
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Interest (Income) and Other (Income) Expense, Net
Interest (income) and other (income) expense, net, of $2.3 million of expense for the first
quarter of 2011 decreased $3.7 million from ($1.4) million of income for the first quarter of 2010,
primarily reflecting our joint venture activity and decreased interest income driven by lower cash
balances.
Provision for Income Taxes
Our effective tax rate (defined as the percentage relationship of provision for income taxes
to income before provision for income taxes) was 40.1% for the first quarter of 2011 compared to
39.8% for the first quarter of 2010.
Net Income and Earnings per Share
Net income as a percentage of net revenues was consistent at 2.0% for the first quarter of
2011 and the first quarter of 2010.
Diluted earnings per share increased 19.4% to $0.80 in the first quarter of 2011, from $0.67
in the first quarter of 2010. Excluding all intangible amortization, our first-quarter
2011 diluted earnings per share increased 19.7% to $0.91, compared to $0.76 per share in the first
quarter of 2010. The diluted earnings per share increases reflect the aforementioned consolidated
results of operations trending factors, as well as lower diluted weighted average shares
outstanding.
The diluted weighted average shares outstanding were 414.2 million for the first quarter of
2011, compared to 478.2 million for the first quarter of 2010, representing a decrease of 13.4%.
The decrease primarily results from the repurchase of approximately 269.7 million shares of stock
in connection with our share repurchase programs since inception in 2005 through the first quarter
of 2011, compared to an equivalent amount of 205.7 million shares repurchased inception-to-date
through the end of the first quarter of 2010. There were approximately 13.5 million shares
repurchased in the first quarter of 2011, compared to approximately 19.5 million in the first
quarter of 2010.
Segment Results of Operations
PBM Segment
The PBM segment primarily involves sales of traditional prescription drugs and supplies, as
well as diabetes testing supplies and related products to our clients and members or patients,
either through our networks of contractually affiliated retail pharmacies or our mail-order
pharmacies. The following table presents selected PBM segment comparative results of operations ($
in millions):
Quarter | Quarter | |||||||||||||||
Ended | Ended | |||||||||||||||
March 26, | March 27, | |||||||||||||||
2011(1) | Variance | 2010 | ||||||||||||||
Product net revenues |
$ | 13,605.1 | $ | 174.7 | 1.3 | % | $ | 13,430.4 | ||||||||
Service revenues |
340.0 | 135.8 | 66.5 | % | 204.2 | |||||||||||
Total net revenues |
13,945.1 | 310.5 | 2.3 | % | 13,634.6 | |||||||||||
Total cost of revenues |
13,076.3 | 245.3 | 1.9 | % | 12,831.0 | |||||||||||
Total gross margin(2) |
$ | 868.8 | $ | 65.2 | 8.1 | % | $ | 803.6 | ||||||||
Gross margin percentage |
6.2 | % | 0.3 | % | 5.9 | % | ||||||||||
Selling, general and
administrative expenses |
316.7 | 38.0 | 13.6 | % | 278.7 | |||||||||||
Amortization of intangibles |
62.7 | 2.9 | 4.8 | % | 59.8 | |||||||||||
Operating income |
$ | 489.4 | $ | 24.3 | 5.2 | % | $ | 465.1 | ||||||||
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Represents total net revenues minus total cost of revenues. |
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PBM total net revenues of $13,945.1 million for the first quarter of 2011 increased
$310.5 million, compared to the revenues of $13,634.6 million for the first quarter of 2010. The
increase primarily reflects higher mail-order generic and retail volume driven by new business, as
well as higher prices charged by brand-name pharmaceutical manufacturers, partially offset by a
greater representation of lower-priced generic drugs and higher client price discounts.
Gross margin was 6.2% of net revenues for the first quarter of 2011, compared to 5.9% for the
first quarter of 2010, primarily reflecting increased generic dispensing rates and mail-order
generic volumes, as well as a higher mix of higher margin service revenues and the aforementioned
benefit associated with the postretirement healthcare benefit plan. The gross margin percentage
increase was partially offset by higher retail volumes and the effect of client renewal pricing.
SG&A expenses were $316.7 million for the first quarter of 2011, and increased from the first
quarter of 2010 by $38.0 million. The increase primarily reflects UBC SG&A expenses, higher
professional fees and technology-related expenses associated with strategic initiatives, and higher
stock-based compensation expenses, partially offset by the aforementioned benefit associated with
the postretirement healthcare benefit plan.
Amortization of intangible assets was $62.7 million for the first quarter of 2011, compared to
$59.8 million for the first quarter of 2010. The increase primarily reflects higher intangible
amortization from the acquisition of UBC, partially offset by lower intangible amortization from
PolyMedica associated with scheduled accelerated amortization of
customer relationships in the prior period.
Operating income of $489.4 million for the first quarter of 2011 increased $24.3 million, or
5.2%, from the first quarter of 2010, reflecting the aforementioned factors.
For additional information on the PBM segment, see Note 6, Segment and Geographic Data, to
the unaudited interim condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
Specialty Pharmacy Segment
The
Specialty Pharmacy segment includes the sale of specialty pharmacy products
and services for the treatment of chronic and complex (potentially life-threatening) diseases. The
following table presents selected Specialty Pharmacy segment comparative results of operations ($
in millions):
Quarter | Quarter | |||||||||||||||
Ended | Ended | |||||||||||||||
March 26, | March 27, | |||||||||||||||
2011 | Variance | 2010 | ||||||||||||||
Product net revenues |
$ | 3,056.7 | $ | 403.4 | 15.2 | % | $ | 2,653.3 | ||||||||
Service revenues |
17.8 | (5.2 | ) | (22.6 | )% | 23.0 | ||||||||||
Total net revenues |
3,074.5 | 398.2 | 14.9 | % | 2,676.3 | |||||||||||
Total cost of revenues |
2,873.0 | 385.8 | 15.5 | % | 2,487.2 | |||||||||||
Total gross margin(1) |
$ | 201.5 | $ | 12.4 | 6.6 | % | $ | 189.1 | ||||||||
Gross margin percentage |
6.6 | % | (0.5 | )% | 7.1 | % | ||||||||||
Selling, general and
administrative expenses |
70.4 | (1.5 | ) | (2.1 | )% | 71.9 | ||||||||||
Amortization of intangibles |
10.5 | (0.2 | ) | (1.9 | )% | 10.7 | ||||||||||
Operating income |
$ | 120.6 | $ | 14.1 | 13.2 | % | $ | 106.5 | ||||||||
(1) | Represents total net revenues minus total cost of revenues. |
Specialty Pharmacy total net revenues of $3,074.5 million for the first quarter of 2011
increased $398.2 million, compared to revenues of $2,676.3 million for the first quarter of 2010,
primarily reflecting higher prices charged by pharmaceutical manufacturers, as well as increased
volume from existing clients.
Gross margins were 6.6% of net revenues for the first quarter of 2011, compared to 7.1% for
the first quarter of 2010, primarily reflecting product, channel and new-client mix effects
experienced as 2010 progressed.
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SG&A expenses of $70.4 million for the first quarter of 2011 decreased $1.5 million
compared to $71.9 million for the first quarter 2010, primarily reflecting lower
employee-related expenses, partially offset by higher professional fees. Amortization of
intangible assets was $10.5 million for the first quarter of 2011, compared to $10.7 million for
the first quarter of 2010.
Operating income of $120.6 million for the first quarter of 2011 increased $14.1 million, or
13.2%, from the first quarter of 2010, reflecting the aforementioned factors.
For additional information on the Specialty Pharmacy segment, see Note 6, Segment and
Geographic Data, to the unaudited interim condensed consolidated financial statements included in
Part I, Item 1 of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
Cash Flows
The following table presents selected data from our unaudited interim condensed
consolidated statements of cash flows ($ in millions):
Quarter | Quarter | |||||||||||
Ended | Ended | |||||||||||
March 26, | March 27, | |||||||||||
2011(1) | Variance | 2010 | ||||||||||
Net cash provided by operating activities |
$ | 94.0 | $ | (206.3 | ) | $ | 300.3 | |||||
Net cash used by investing activities |
(34.3 | ) | 30.5 | (64.8 | ) | |||||||
Net cash used by financing activities |
(786.0 | ) | 415.6 | (1,201.6 | ) | |||||||
Net decrease in cash and cash equivalents |
(726.3 | ) | 239.8 | (966.1 | ) | |||||||
Cash and cash equivalents at beginning of period |
853.4 | (1,674.8 | ) | 2,528.2 | ||||||||
Cash and cash equivalents at end of period |
$ | 127.1 | $ | (1,435.0 | ) | $ | 1,562.1 | |||||
(1)
Includes UBC's operating results commencing on the September 16, 2010
acquisition date.
Operating Activities. Net cash provided by operating activities of $94.0 million for the
first quarter of 2011 primarily reflects net income of $333.1 million, with non-cash adjustments
for depreciation, amortization and stock-based compensation of $164.5 million. In addition, there
were net cash inflows of $198.3 million from a decrease in client accounts receivable, net,
primarily due to the timing of our billing cycles, and net cash inflows of $69.2 million from an
increase in client rebates and guarantees payable reflecting increased client rebates passed back
to clients and payment timing. These increases were partially offset by net cash outflows of
$527.6 million from a decrease in claims and other accounts payable, primarily due to the timing of
our payment cycles, as well as net cash outflows of $94.8 million from inventories, net, and $20.4
million from an increase in manufacturer accounts receivable, net. The $206.3 million decrease in
net cash provided by operating activities for the first quarter of 2011 compared to the first
quarter of 2010 is primarily due to decreased cash flows of $173.1 million from the receipt of
income taxes receivable, primarily from the IRS, in the first quarter of 2010 for tax years 2003
through 2005.
Investing Activities. The net cash used by investing activities of $34.3 million for the first
quarter of 2011 is primarily attributable to capital expenditures of $44.5 million associated with
capitalized software development in connection with client-related programs and our Medicare PDP
product offerings, technology initiatives, and pharmacy operations hardware investments. These cash
outflows were partially offset by proceeds from the sale of securities and other investments of
$12.7 million. The $30.5 million decrease in net cash used by investing activities for the first
quarter of 2011 compared to the first quarter of 2010 is primarily due to cash paid of $19.4
million, net of cash acquired, in the first quarter of 2010, primarily reflecting our acquisition
of DNA Direct, and a $17.0 million decrease in purchases of securities and other assets.
Financing Activities. The net cash used by financing activities of $786.0 million for the
first quarter of 2011 primarily results from $836.6 million in share repurchases, partially offset
by net proceeds from employee stock plans of $29.4 million and excess tax benefits from stock-based
compensation arrangements of $17.9 million. The decrease in net cash used by financing activities
of $415.6 million for the first quarter of 2011 compared to the first quarter of 2010 primarily
results from lower share repurchases of $393.3 million.
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Total cash and short-term investments as of March 26, 2011 were $171.1 million, including
$127.1 million in cash and cash equivalents. Total cash and short-term investments as of December
25, 2010 were $910.1 million, including $853.4 million in cash and cash equivalents. The decrease
of $726.3 million in cash and cash equivalents for the first quarter of 2011 primarily reflects the
use of cash associated with share repurchase activity and capital expenditures, partially offset by
net cash inflows from operating activities.
Share Repurchase Programs
Since 2005, when we commenced our first share repurchase program, we have executed share
repurchases of 269.7 million shares at a cost of $11.9 billion and at an average per-share cost of
$44.13 through the end of the first fiscal quarter of 2011. In May 2010, our Board of Directors
approved a $3 billion share repurchase program (the 2010 Program), authorizing the purchase of up
to $3 billion of our common stock over a two-year period commencing May 17, 2010. From December 26,
2010 (the first day of the 2011 fiscal year) through January 18, 2011, we repurchased 7.0 million
shares at a total cost of $436.6 million with an average per-share cost of $62.06, which completed
the 2010 Program. In February 2011, our Board of Directors approved a new $3 billion share
repurchase program, authorizing the purchase of up to $3 billion of our common stock over a
two-year period commencing February 24, 2011. Repurchases commenced under the new program in fiscal
March 2011, and totaled 6.4 million shares at a cost of $400.0 million and at an average per-share
cost of $62.35.
The timing and extent of any repurchases depend upon market conditions, corporate requirements
and other factors. We intend to fund share repurchases with our existing cash balances and
operating cash flows. Our Board of Directors periodically reviews our share repurchase programs
and approves the associated trading parameters.
See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, of this
Quarterly Report on Form 10-Q for more information.
Looking Forward
We believe that our current liquidity and prospects for strong cash flows from operations,
including effective working capital management, assist in limiting the effects on our business from
economic factors. As of March 26, 2011, we had additional committed borrowing capacity under our
revolving credit facility of $992.5 million and we had additional borrowing capacity of $600
million from our 364-day accounts receivable financing facility, which is renewable annually in
July at the option of both Medco and the banks. We have no
required long-term debt payments until 2012. For 2011, we anticipate that our cash flows from
operations will be approximately $2 billion.
Our
current intention is to purchase approximately $2 billion of our common stock during fiscal year
2011. We intend to fund share repurchases with existing cash balances and operating cash flows. The timing and extent of any share repurchases under our share
repurchase program depend upon market conditions, corporate
requirements and other factors. See
Share Repurchase Programs, above for more information. For our cash on hand, any investments
we make are within Board-approved investing guidelines and we continue to monitor ongoing events
and make investment decisions accordingly.
As of March 26, 2011, approximately 50% of the accumulated other comprehensive loss component
of our stockholders equity represents an unrecognized foreign currency translation loss,
reflecting the weakened euro since the Europa Apotheek acquisition.
Concurrent with the contribution of Europa Apotheek to Medco Celesio B.V., expected in fiscal 2011,
and based on the foreign currency translation at that time, this unrecognized balance will be
recognized in our results of operations. In addition, our investment in the joint venture will be
recorded at fair value, and the difference between the fair value and the book value of the Europa
Apotheek asset contributed to the joint venture will be recognized in our results of operations.
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We anticipate that our 2011 capital expenditures, for
investments in compliance with
healthcare reform, technology initiatives, clinical advances and UBC will be approximately $325
million. We expect that capital expenditures will be funded primarily by our cash flows from
operations.
We have clients in various industries, including governmental agencies. We actively monitor
the status of our accounts receivable and have mechanisms in place to minimize the potential for
incurring material accounts receivable credit risk. To date, we have not experienced any
significant deterioration in our client or manufacturer rebates accounts receivables.
Fiscal year 2011 will consist of 53 weeks.
We currently have no plans to pay cash dividends.
Financing Facilities
Five-Year Credit Facilities
We have senior unsecured bank credit facilities consisting of a $1 billion, 5-year senior
unsecured term loan and a $2 billion, 5-year senior unsecured revolving credit facility. The term
loan matures on April 30, 2012, at which time the entire facility is required to be repaid. If
there are pre-payments on the term loan prior to the maturity date, that portion of the loan would
be extinguished. At our current debt ratings, the credit facilities bear interest at London
Interbank Offered Rate (LIBOR) plus a 0.45 percent margin, with a 10 basis point commitment fee
due on the unused portion of the revolving credit facility.
The outstanding balance under the revolving credit facility was $1.0 billion as of March 26,
2011 and December 25, 2010. There were draw-downs of $3.6 billion and repayments of $3.6 billion
under the revolving credit facility during the first quarter of 2011. As of March 26, 2011, we had
$992.5 million available for borrowing under our revolving credit facility, after giving effect to
prior net draw-downs of $1 billion and $7.5 million in issued letters of credit. As of December 25,
2010, we had $993.5 million available for borrowing under our revolving credit facility, after
giving effect to prior net draw-downs of $1 billion and $6.5 million in issued letters of credit.
The revolving credit facility is available through April 30, 2012.
Accounts Receivable Financing Facility and Other Short-Term Debt
Through a wholly-owned subsidiary, we have a $600 million, 364-day renewable accounts
receivable financing facility that is collateralized by our pharmaceutical manufacturer rebates
accounts receivable. During the first quarter of 2011, we drew down $250 million and repaid $250
million under the facility, which resulted in no amounts outstanding and $600 million available for
borrowing under the facility as of March 26, 2011. We pay interest on amounts borrowed under the
agreement based on the funding rates of the bank-related commercial paper programs that provide the
financing, plus an applicable margin and liquidity fee determined by our credit rating. This
facility is renewable annually in July at the option of both Medco and the banks. Additionally, we had short-term debt of $26.9 million and $23.6 million outstanding as of
March 26, 2011 and December 25, 2010, respectively, under a short-term revolving credit facility.
Interest Rates
The weighted average interest rate on our indebtedness was approximately 3.6% for the first
quarter of 2011, compared to approximately 4.0% for the first quarter of 2010, reflecting lower
interest rates on the floating rate components of outstanding debt, partially offset by a higher
mix of fixed rate compared with variable rate outstanding debt. Several factors could change the
weighted average annual interest rate, including but not limited to, a change in our debt ratings,
reference rates used under our senior unsecured bank credit facilities and accounts receivable
financing facility, swap agreements and the fixed/variable mix of our debt.
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Swap Agreements
In December 2007, we entered into forward-starting interest rate swap agreements to manage our
exposure to changes in benchmark interest rates and to mitigate the impact of fluctuations in the
interest rates prior to the issuance of the long-term fixed rate financing. The cash flow hedges
entered into were for a notional amount of $500 million on the then-current 10-year treasury
interest rate, and for a notional amount of $250 million on the then-current 30-year treasury
interest rate. In March 2008, following the issuance of $300 million aggregate principal amount of
5-year senior notes and $1.2 billion aggregate principal amount of 10-year senior notes, the cash
flow hedges were settled and the ineffective portion was immediately expensed. The effective
portion was recorded in accumulated other comprehensive income and is reclassified to interest
expense over the ten-year period in which we hedged our exposure to variability in future cash
flows. The unamortized effective portion reflected in accumulated other comprehensive loss as of
March 26, 2011 and December 25, 2010 was $15.4 million and $15.9 million, net of tax, respectively.
In 2004, we entered into five interest rate swap agreements on $200 million of the $500
million in 7.25% senior notes due in 2013. These swap agreements were entered into as an effective
hedge to (i) convert a portion of the senior note fixed rate debt into floating rate debt; (ii)
maintain a capital structure containing appropriate amounts of fixed and floating rate debt; and
(iii) lower the interest expense on these notes in the near term. The fair value of our obligation
under our interest rate swap agreements, represented net receivables of $14.4 million and $16.9
million as of March 26, 2011 and December 25, 2010, respectively, which are reported in other
noncurrent assets, with offsetting amounts reported in long-term debt, net, on our consolidated
balance sheets. We do not expect our future cash flows to be affected to any significant degree by
a sudden change in market interest rates.
Covenants
All of the senior notes discussed above are subject to customary affirmative and negative
covenants, including limitations on sale/leaseback transactions; limitations on liens; limitations
on mergers and similar transactions; and a covenant with respect to certain change of control
triggering events. The 6.125% senior notes and the 7.125% senior notes are also subject to an
interest rate adjustment in the event of a downgrade in the ratings to below investment grade. In
addition, the senior unsecured bank credit facilities and the accounts receivable financing
facility are subject to covenants, including, among other items, maximum leverage ratios. We were
in compliance with all covenants at March 26, 2011 and December 25, 2010.
Debt Ratings
Medcos debt ratings, all of which represent investment grade, reflect the following as of the
filing date of this Quarterly Report on Form 10-Q: Moodys Investors Service, Baa3; Standard &
Poors, BBB+; and Fitch Ratings, BBB.
Non-GAAP Measures
EBITDA
We calculate and use EBITDA and EBITDA per adjusted prescription as indicators of our ability
to generate cash from our reported operating results. These measurements are used in concert with
net income and cash flows from operations, which measure actual cash generated in the period. In
addition, we believe that EBITDA and EBITDA per adjusted prescription are supplemental measurement
tools used by analysts and investors to help evaluate overall operating performance and the ability
to incur and service debt and make capital expenditures. EBITDA does not represent funds available
for our discretionary use and is not intended to represent or to be used as a substitute for net
income or cash flows from operations data, as measured under U.S. generally accepted accounting
principles. The items excluded from EBITDA, but included in the calculation of reported net income,
are significant components of the consolidated statements of income and must be considered in
performing a comprehensive assessment of overall financial performance. EBITDA, and the associated
year-to-year trends, should not be considered in isolation. Our calculation of EBITDA may not be
consistent with calculations of EBITDA used by other companies.
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EBITDA per adjusted prescription is calculated by dividing EBITDA by the adjusted prescription
volume for the period. This measure is used as an indicator of EBITDA performance on a per-unit
basis, providing insight into the cash-generating ability of each prescription. EBITDA, and as a
result, EBITDA per adjusted prescription, are affected by the changes in prescription volumes
between retail and mail order, the relative representation of brand-name, generic and specialty
pharmacy drugs, as well as the level of efficiency in the business. Adjusted prescription volume
equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions.
These mail-order prescriptions are multiplied by three to adjust for the fact that they include
approximately three times the amount of product days supplied compared with retail prescriptions.
The following table reconciles our reported net income to EBITDA and presents EBITDA per
adjusted prescription for each of the respective periods (in millions, except for EBITDA per
adjusted prescription data):
Quarters Ended | ||||||||
March 26, | March 27, | |||||||
2011(1) | 2010 | |||||||
Net income |
$ | 333.1 | $ | 320.5 | ||||
Add: |
||||||||
Interest expense |
51.9 | 40.7 | ||||||
Interest (income) and other (income) expense, net |
2.3 | (1.4 | ) | |||||
Provision for income taxes |
222.7 | 211.8 | ||||||
Depreciation expense |
51.0 | 44.4 | ||||||
Amortization expense |
73.2 | 70.5 | ||||||
EBITDA |
$ | 734.2 | $ | 686.5 | ||||
Adjusted prescriptions(2) |
244.3 | 239.2 | ||||||
EBITDA per adjusted prescription |
$ | 3.01 | $ | 2.87 | ||||
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three times the amount of product days supplied compared with retail prescriptions. |
For the first quarter of 2011 compared to the first quarter of 2010, EBITDA increased by
6.9%, compared to an increase in net income of 3.9%, and an increase in EBITDA per adjusted
prescription of 4.9%. The higher rate of increase for EBITDA compared with net income primarily
reflects the aforementioned higher interest, depreciation and intangible amortization expenses, as
well as a higher effective tax rate. The lower rate of increase for EBITDA per adjusted
prescription compared to EBITDA reflects higher retail volumes, which are generally less profitable
than mail order, as well as client renewal pricing, partially offset by higher generic dispensing
rates.
Diluted EPS, Excluding All Intangible Amortization
We use diluted earnings per share, excluding all intangible amortization, as a supplemental
measure of operating performance. We believe that diluted earnings per share, excluding all
intangible amortization, is a valuable supplemental measurement tool used by analysts and investors
to compare our overall operating performance with our industry peers. The following table
reconciles our reported diluted earnings per share to diluted earnings per share, excluding all
intangible amortization, for the respective periods:
Quarters Ended | ||||||||
March 26, | March 27, | |||||||
2011 | 2010 | |||||||
Diluted earnings per share |
$ | 0.80 | $ | 0.67 | ||||
Adjustment for the amortization of intangible assets(1) |
0.11 | 0.09 | ||||||
Diluted earnings per share, excluding all intangible amortization |
$ | 0.91 | $ | 0.76 | ||||
(1) | This adjustment represents the per-share effect of all intangible amortization. |
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Table of Contents
Commitments and Contractual Obligations
The following table presents our commitments and contractual obligations as of March 26, 2011,
as well as our long-term debt obligations ($ in millions):
Payments Due By Period
Remainder | ||||||||||||||||||||
Total | of 2011 | 2012-2013 | 2014-2015 | Thereafter | ||||||||||||||||
Long-term debt obligations (1) |
$ | 5,000.0 | $ | | $ | 2,800.0 | $ | 500.0 | $ | 1,700.0 | ||||||||||
Interest payments on long-term debt obligations(2) |
989.9 | 142.3 | 326.0 | 235.7 | 285.9 | |||||||||||||||
Operating lease obligations(3) |
232.3 | 52.7 | 97.7 | 50.3 | 31.6 | |||||||||||||||
Prescription drug purchase commitments(4) |
308.4 | 308.4 | | | | |||||||||||||||
Other(5) |
142.0 | 69.0 | 60.4 | 12.6 | | |||||||||||||||
Total |
$ | 6,672.6 | $ | 572.4 | $ | 3,284.1 | $ | 798.6 | $ | 2,017.5 | ||||||||||
(1) | Long-term debt obligations exclude $12.8 million in total unamortized discounts on our senior notes, and the fair value of interest rate swap agreements of $14.4 million on $200 million of the $500 million in 7.25% senior notes. | |
(2) | The variable component of interest expense for the senior unsecured credit facility is based on the March 2011 LIBOR. The LIBOR fluctuates and may result in differences in the presented interest expense on long-term debt obligations. | |
(3) | Primarily reflects contractual operating lease commitments to lease pharmacy and call center pharmacy facilities, offices and warehouse space, as well as pill dispensing and counting devices and other operating equipment for use in our mail-order pharmacies and computer equipment for use in our data centers and corporate headquarters. | |
(4) | Represents contractual commitments to purchase inventory from certain biopharmaceutical manufacturers and brand-name pharmaceutical manufacturers, the majority of which are associated with our Specialty Pharmacy business, and are either contracts for fixed amounts or contracts for fixed amounts plus a variable component. The contracts for fixed amounts include firm commitments of $251.7 million for 2011. The contracts with fixed amounts plus a variable component include firm commitments of $56.7 million for 2011, with additional commitments through 2012 that are subject to price increases or variable quantities based on patient usage. | |
(5) | Consists of purchase commitments for diabetes supplies of $23.7 million, technology-related agreements of $42.9 million and advertising commitments of $1.8 million. Additionally, $73.6 million represents various purchase obligations anticipated to be fully settled by 2014, most of which are included in other noncurrent liabilities in the unaudited interim condensed consolidated balance sheet as of March 26, 2011. |
We have a remaining minimum pension funding requirement of $28.6 million under the
Internal Revenue Code (IRC) during 2011 for the 2010 plan year.
As of March 26, 2011, we had letters of credit outstanding of approximately $8.0 million, $7.5
million of which were issued under our senior unsecured revolving credit facility, primarily as
collateral for the deductible portion of our workers compensation coverage, and $0.5 million of
which were assumed upon the acquisition of UBC and are to secure compliance and performance on
certain leases.
As of March 26, 2011, we had total gross liabilities for income tax contingencies of $125.9
million on our unaudited interim condensed consolidated balance sheet. The majority of the income
tax contingencies are subject to statutes of limitations that are scheduled to expire by the end of
2015. In addition, approximately 18% of the income tax contingencies are anticipated to settle over
the next twelve months.
For additional information regarding operating lease obligations, long-term debt, pension and
other postretirement obligations, and information on deferred income taxes, see Notes 6, 8, 9 and
10, respectively, to our audited consolidated financial statements included in Part II, Item 8 of
our Annual Report on Form 10-K for the fiscal year ended December 25, 2010.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than purchase commitments and lease
obligations. See Commitments and Contractual Obligations above.
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Table of Contents
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We have floating rate debt with our bank credit facility and accounts receivable financing
facility, and investments in marketable securities that are subject to interest rate volatility,
which is our principal market risk. In addition, we have interest rate swap agreements on $200
million of the $500 million in 7.25% senior notes. As a result of these interest rate swap
agreements, the $200 million of senior notes is subject to interest rate volatility. A 25 basis
point change in the weighted average interest rate relating to the credit facilities balances
outstanding and interest rate swap agreements as of March 26, 2011, which are subject to variable
interest rates based on LIBOR, and the accounts receivable financing facility, which is subject to
the commercial paper rate, would yield a change of approximately $5.5 million in annual interest
expense. We do not expect our future cash flows to be affected to any significant degree by a
sudden change in market interest rates.
We operate our business primarily within the
United States and execute the vast majority of
our transactions in U.S. dollars. However, as a result of our acquisitions of Europa Apotheek,
based in the Netherlands, and UBC, with operations in Europe and Asia, as well as our joint venture with
United Drug plc, Medco Health Solutions (U.K.), which is based in the United Kingdom, and our joint venture
with Celesio AG, Medco Celesio B.V., which is based in the
Netherlands, we have become subject to foreign currency translation risk. As of March 26, 2011,
approximately 50% of the accumulated other comprehensive loss component of our stockholders equity
represents an unrecognized foreign currency translation loss, reflecting the weakened euro since
the Europa Apotheek acquisition. Concurrent with the contribution of Europa Apotheek to the Medco
Celesio B.V. joint venture, expected in fiscal 2011, and based on the foreign currency translation
at that time, this unrecognized balance will be recognized in our results of operations.
Item 4. | Controls and Procedures |
The Company maintains disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed by the Company in reports that we
file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized, and reported within the
time periods specified in SEC rules and forms, and is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. As of the end of the period covered by this Report, our
management, with the participation of the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures were effective to provide reasonable assurance that
the objectives described above were met as of the end of the period covered by this Quarterly
Report on Form 10-Q.
There have been no changes in internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) for the period covered by this Quarterly Report on
Form 10-Q that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
In the ordinary course of business, the Company is involved in litigation, claims, government
inquiries, investigations, charges and proceedings, including, but not limited to, those relating
to regulatory, commercial, employment, employee benefits and securities matters. Descriptions of
certain legal proceedings to which the Company is a party are contained in Note 7, Commitments and
ContingenciesLegal Proceedings, to the unaudited interim condensed consolidated financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and are incorporated by
reference herein. Such descriptions include the following recent developments:
In April 2010, the Attorney General for the State
of California requested information from the
Company about a former consultant who was engaged by
the Company in 2004 and again later in a year-to-year contract that ended in 2009. The Company has
been, and will continue to voluntarily provide information related to this request, including
providing various documents and making certain current and former employees available for
depositions. In March 2011, the Company received a subpoena from the SECs Los Angeles Regional
Office staff requesting the production of documents relating to an ongoing investigation of the
California Public Pension Funds.
The Company is cooperating with both the
SEC and the California Attorney Generals office. The Company is not able to predict with certainty
the timing or outcome of these matters.
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Table of Contents
Item 1A. | Risk Factors |
Reference is made to the risk factors set forth in Part I, Item 1A, Risk Factors, of our
Annual Report on Form 10-K for the fiscal year ended December 25, 2010, which are incorporated by
reference herein. There have been no material changes with regard to the risk factors disclosed in
such report.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In May 2010, the Companys Board of Directors approved a $3 billion share repurchase program,
authorizing the purchase of up to $3 billion of the Companys common stock over a two-year period
commencing May 17, 2010 (the 2010 Program). From December 26, 2010 (the first day of the 2011
fiscal year) through January 18, 2011, the Company repurchased 7.0 million shares at a total cost
of $436.6 million with an average per-share cost of $62.06, which completed the 2010 Program. In
February 2011, the Companys Board of Directors approved a new $3 billion share repurchase program,
authorizing the purchase of up to $3 billion of the Companys common stock over a two-year period
commencing February 24, 2011 (the 2011 Program). The Companys Board of Directors periodically
reviews any share repurchase programs and approves the associated trading parameters.
The following is a summary of the Companys share repurchase activity for the three months
ended March 26, 2011:
Issuer Purchases of Equity Securities(1)
Approximate | ||||||||||||||||
Total number of | dollar value of | |||||||||||||||
shares purchased | shares | |||||||||||||||
as part of | that may yet be | |||||||||||||||
Total number | Average | publicly | purchased under | |||||||||||||
of shares | price paid | announced | the programs | |||||||||||||
Fiscal Period | purchased | per share(2) | programs | (in thousands) | ||||||||||||
Balances at December 25, 2010 |
44,865,920 | $ | 436,668 | |||||||||||||
December 26 to January 22, 2011 |
7,036,216 | $ | 62.06 | 7,036,216 | $ | | ||||||||||
January 23 to February 19, 2011 |
| $ | | | $ | 3,000,000 | ||||||||||
February 20 to March 26, 2011 |
6,414,684 | $ | 62.35 | 6,414,684 | $ | 2,600,052 | ||||||||||
First quarter 2011 totals |
13,450,900 | $ | 62.20 | 13,450,900 | ||||||||||||
(1) | All information set forth in the table above relates to the Companys 2010 and 2011 Programs. The 2010 Program was announced in May 2010 and pursuant to the 2010 Program, the Company was authorized to repurchase up to $3 billion of its common stock over a two-year period commencing May 17, 2010. From December 26, 2010 (the first day of the 2011 fiscal year) through January 18, 2011, the Company repurchased 7.0 million shares at a total cost of $436.6 million with an average per-share cost of $62.06, which completed the 2010 Program. The 2011 Program was announced in February 2011 and pursuant to the 2011 Program, the Company is authorized to repurchase up to $3 billion of its common stock over a two-year period commencing February 24, 2011. | |
(2) | Dollar amounts include transaction costs. The total average price paid per share in the table above represents the average price paid per share for repurchases settled during the three months ended March 26, 2011. The average per-share cost for repurchases under the 2010 Program from inception through completion was $57.80. The average per-share cost for repurchases under the 2011 Program in fiscal March 2011 was $62.35. |
35
Table of Contents
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
(a) Rule 10b5-1 Sales Plans. Medcos comprehensive compliance program includes a broad policy
against insider trading. Executive officers are prohibited from trading in Company stock during
the period that begins on the first day of the last month of the fiscal period and ends on the
third trading day after the release of earnings. In addition, executive officers are required to
pre-clear all of their trades. Medcos executive officers are also subject to share ownership
guidelines and retention requirements. The ownership targets are based on a multiple of salary (5,
3 or 1.5 times salary), but are expressed as a number of shares. The targets are determined using
base salary and the closing price of our stock on the date of our Annual Meeting of Shareholders.
The number of shares required to be held has been calculated using a $58.82 stock price, the
closing price of our stock on the date of the 2010 Annual Meeting of Shareholders.
To facilitate compliance with the ownership guidelines and retention requirements, Medcos
Board of Directors authorized the use of prearranged trading plans under Rule 10b5-1 of the
Securities Exchange Act of 1934. Rule 10b5-1 permits insiders to adopt predetermined plans for
selling specified amounts of stock or exercising stock options under specified conditions and at
specified times. Executive officers may only enter into a trading plan during an open trading
window and they must not possess material nonpublic information regarding the Company at the time
they adopt the plan. Using trading plans, insiders can diversify their investment portfolios while
avoiding concerns about transactions occurring at a time when they might possess material nonpublic
information. Under Medcos policy, sales instructions made pursuant to a written trading plan may
be executed during a blackout period. In addition, the use of trading plans provides Medco with a
greater ability to monitor trading and compliance with its stock ownership guidelines. Generally,
under these trading plans, the individual relinquishes control over the transactions once the
trading plan is put into place. Accordingly, sales under these plans may occur at any time,
including possibly before, simultaneously with, or immediately after significant events involving
our company.
All trading plans adopted by Medco executives are reviewed and approved by the Office of the
General Counsel. For ease of administration, executives have been permitted to add new orders to
existing plans rather than requiring the adoption of a new plan. Once modified, a plan cannot be
changed for at least 90 days. Both new plans and modifications are subject to a mandatory waiting
period designed to safeguard the plans from manipulation or market timing.
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Table of Contents
The following table, which we are providing on a voluntary basis, sets forth the Rule 10b5-1
sales plans entered into by our executive officers in effect as of April 11, 2011(1):
Number of Shares | Number of Shares | Projected | Projected | |||||||||||||||
to be Sold Under | Sold Under the | Beneficial | Aggregate | |||||||||||||||
Name and Position | the Plan(2) | Timing of Sales Under the Plan | Plan(3) | Ownership(4) | Holdings(5) | |||||||||||||
John P. Driscoll President, New Markets |
33,167 | Option exercise of 33,167 shares shall occur when stock reaches a specific price. | 177,786 | 206,989 | 427,076 | |||||||||||||
Robert S. Epstein President, Advanced Clinical Science and Research and Chief Clinical Research and Development Officer |
35,220 | Option exercise of 35,220 shares shall occur when stock reaches a specific price. | 35,312 | 194,824 | 278,054 | |||||||||||||
Brian T. Griffin President, International and Chief Executive Officer, Medco Celesio B.V. |
61,806 | Option exercise of 61,806 shares shall occur when stock reaches a specific price. | 206,358 | 161,856 | 399,677 | |||||||||||||
Laizer D. Kornwasser Senior Vice President, Retail, Mail and Diabetes Markets |
22,962 | Option exercise of 22,962 shares shall occur when stock reaches a specific price. | 58,181 | 135,867 | 295,251 | |||||||||||||
Thomas M. Moriarty General Counsel, Secretary and President, Global Pharmaceutical Strategies |
33,678 | Option exercise of 33,678 shares shall occur when stock reaches a specific price. | 80,854 | 173,842 | 430,036 | |||||||||||||
Karin V. Princivalle Senior Vice President, Human Resources |
111,750 | Option exercise of an aggregate of 111,750 shares shall occur in various tranches when stock reaches specific prices. | 0 | 27,460 | 148,610 | |||||||||||||
Jack A. Smith Senior Vice President, Chief Marketing Officer |
18,000 | Option exercise of 18,000 shares shall occur when stock reaches a specific price. | 26,440 | 207,192 | 335,232 | |||||||||||||
Glen D. Stettin Senior Vice President and Chief Medical Officer |
27,524 | Option exercise of an aggregate of 23,476 shares shall occur in various tranches when stock reaches a specific price. | 0 | 28,708 | 95,865 | |||||||||||||
Timothy C. Wentworth Group President, Employer/Key Accounts
|
129,995 | Option exercise of an aggregate of 121,275 shares shall occur in various tranches when stock reaches a specific price. | 0 | 90,151 | 329,108 |
(1) | This table does not include any trading plans entered into by any executive officer that have been terminated or expired by their terms or have been fully executed through April 11, 2011. | |
(2) | This column reflects the number of shares remaining to be sold as of April 11, 2011. |
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Table of Contents
(3) | This column reflects the number of shares sold under the plan through April 11, 2011. | |
(4) | This column reflects an estimate of the number of whole shares each identified executive officer will beneficially own following the sale of all shares under the Rule 10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of April 11, 2011, and includes shares of our common stock subject to options or restricted stock units that were then vested or exercisable and unvested options and restricted stock units that are included in a current trading plan for sales periods that begin after the applicable vesting date. Options cannot be exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since April 11, 2011 outside of the plan. | |
(5) | This column reflects an estimate of the total aggregate number of whole shares each identified executive officer will have an interest in following the sale of all shares under the Rule 10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of April 11, 2011, and includes shares of our common stock subject to options (whether or not currently exercisable) or restricted stock units (whether or not vested). Options cannot be exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since April 11, 2011 outside of the plan. |
The following table, which we are providing on a voluntary basis, sets forth the Rule
10b5-1 sales plans entered into by our directors in effect as of April 11, 2011(1):
Number of | ||||||||||||||||||
Number of | Shares Sold | Projected | Projected | |||||||||||||||
Shares to be Sold | Under the | Beneficial | Aggregate | |||||||||||||||
Name and Position | Under the Plan(2) | Timing of Sales Under the Plan | Plan(3) | Ownership(4) | Holdings(5) | |||||||||||||
John L. Cassis Director |
16,000 | Option exercise of 16,000 shall trigger if stock reaches a specific price. | 0 | 50,500 | 58,900 | |||||||||||||
Blenda J. Wilson Director |
3,500 | Option exercise of 3,500 shall trigger if stock reaches a specific price. | 7,250 | 57,150 | 65,550 |
(1) | This table does not include any trading plans entered into by any director that have been terminated or expired by their terms or have been fully executed through April 11, 2011. | |
(2) | This column reflects the number of shares remaining to be sold as of April 11, 2011. | |
(3) | This column reflects the number of shares sold under the plan through April 11, 2011. | |
(4) | This column reflects an estimate of the number of whole shares each identified director will beneficially own following the sale of all shares under the Rule 10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of April 11, 2011, and includes shares of our common stock subject to options or restricted stock units that were then vested or exercisable and unvested options and restricted stock units that are included in a current trading plan for sales periods that begin after the applicable vesting date. Options cannot be exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since April 11, 2011 outside of the plan. | |
(5) | This column reflects an estimate of the total aggregate number of whole shares each identified director will have an interest in following the sale of all shares under the Rule 10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of April 11, 2011, and includes shares of our common stock subject to options (whether or not currently exercisable) or restricted stock units (whether or not vested). Options cannot be exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since April 11, 2011 outside of the plan. |
(b) Additional Information. Medcos public Internet site is http://www.medcohealth.com.
Medco makes available free of charge, through the Investor Relations page of its Internet site at
http://www.medcohealth.com/investor, its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Medco also makes available, through the Investor Relations page of its Internet site, statements of beneficial ownership of Medcos equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act. In addition, Medco makes available on the Investor Relations page of its Internet site, its most recent proxy statements and its most recent annual reports to stockholders. Medco uses the Investor Relations page of its Internet site at http://www.medcohealth.com/investor to disclose important information to the public.
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Medco also makes available, through the Investor Relations page of its Internet site, statements of beneficial ownership of Medcos equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act. In addition, Medco makes available on the Investor Relations page of its Internet site, its most recent proxy statements and its most recent annual reports to stockholders. Medco uses the Investor Relations page of its Internet site at http://www.medcohealth.com/investor to disclose important information to the public.
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Table of Contents
Information contained on Medcos Internet site, or that can be accessed through its
Internet site, does not constitute a part of this Quarterly Report on Form 10-Q. Medco has
included its Internet site address only as an inactive textual reference and does not intend it to
be an active link to its Internet site. Our corporate headquarters are located at 100 Parsons Pond
Drive, Franklin Lakes, New Jersey 07417 and the telephone number at this location is (201)
269-3400.
Item 6. | Exhibits |
Number | Description | Method of Filing | ||
3.1
|
Amended and Restated Certificate of Incorporation of Medco Health Solutions, Inc. (incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed May 14, 2010). | Incorporated by reference. | ||
3.2
|
Amended and Restated Bylaws of Medco Health Solutions, Inc. as of May 12, 2010 (incorporated by reference to Exhibit 3.2 to the Registrants Current Report on Form 8-K filed May 14, 2010). | Incorporated by reference. | ||
31.1
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed with this document. | ||
31.2
|
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed with this document. | ||
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed with this document. | ||
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed with this document. | ||
101.INS
|
XBRL Instance Document. | Furnished with this document. | ||
101.SCH
|
XBRL Taxonomy Extension Schema. | Furnished with this document. | ||
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase. | Furnished with this document. | ||
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase. | Furnished with this document. | ||
101.LAB
|
XBRL Taxonomy Extension Label Linkbase. | Furnished with this document. | ||
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase. | Furnished with this document. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MEDCO HEALTH SOLUTIONS, INC. (Registrant) |
||||
Date: April 28, 2011 | By: | /s/ David B. Snow, Jr. | ||
Name: | David B. Snow, Jr. | |||
Title: | Chairman and Chief Executive Officer |
|||
Date: April 28, 2011 | By: | /s/ Richard J. Rubino | ||
Name: | Richard J. Rubino | |||
Title: | Senior Vice President, Finance and Chief Financial Officer |
40