UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 25, 2011
OR
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o |
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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)
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Delaware
(State or other jurisdiction of incorporation)
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22-3461740
(I.R.S. Employer Identification No.) |
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100 Parsons Pond Drive, Franklin Lakes, NJ
(Address of principal executive offices)
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07417-2603
(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.
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Large accelerated filer þ
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Accelerated filer o
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Non-Accelerated filer o
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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 July 21, 2011, the registrant had
385,541,543 shares of common
stock, $0.01 par value, issued and outstanding.
MEDCO HEALTH SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions, except for share data)
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June 25, |
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December 25, |
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2011 |
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2010 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
92.4 |
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$ |
853.4 |
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Short-term investments |
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8.2 |
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56.7 |
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Manufacturer accounts receivable, net |
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1,911.9 |
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1,895.1 |
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Client accounts receivable, net |
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2,483.5 |
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2,553.1 |
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Inventories, net |
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833.0 |
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1,013.2 |
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Prepaid expenses and other current assets |
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83.6 |
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75.8 |
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Deferred tax assets |
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248.3 |
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238.4 |
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Total current assets |
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5,660.9 |
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6,685.7 |
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Property and equipment, net |
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1,001.9 |
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993.6 |
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Goodwill |
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6,956.6 |
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6,939.5 |
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Intangible assets, net |
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2,285.6 |
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2,409.8 |
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Other noncurrent assets |
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85.8 |
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68.7 |
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Total assets |
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$ |
15,990.8 |
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$ |
17,097.3 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Claims and other accounts payable |
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$ |
3,384.8 |
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$ |
3,495.4 |
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Client rebates and guarantees payable |
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2,260.3 |
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2,453.2 |
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Accrued expenses and other current liabilities |
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683.6 |
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910.2 |
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Short-term debt |
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31.9 |
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23.6 |
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Current portion of long-term debt |
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2,000.0 |
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Total current liabilities |
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8,360.6 |
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6,882.4 |
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Long-term debt, net |
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3,004.2 |
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5,003.6 |
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Deferred tax liabilities |
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980.6 |
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985.1 |
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Other noncurrent liabilities |
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201.2 |
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239.4 |
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Total liabilities |
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12,546.6 |
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13,110.5 |
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Commitments and contingencies (See Note 9) |
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Stockholders equity: |
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Preferred stock, par value $0.01 authorized: 10,000,000 shares;
issued and outstanding: 0 |
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Common stock, par value $0.01 authorized: 2,000,000,000 shares;
issued: 670,898,695 shares at June 25, 2011 and 666,836,033
shares at December 25, 2010 |
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6.7 |
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|
6.7 |
|
Accumulated other comprehensive loss |
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|
(25.9 |
) |
|
|
(53.5 |
) |
Additional paid-in capital |
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8,653.5 |
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8,463.0 |
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Retained earnings |
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|
7,312.8 |
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6,636.9 |
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15,947.1 |
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15,053.1 |
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Treasury stock, at cost: 279,358,024 shares at June 25, 2011 and
256,298,405 shares at December 25, 2010 |
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(12,502.9 |
) |
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(11,066.3 |
) |
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Total stockholders equity |
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3,444.2 |
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3,986.8 |
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Total liabilities and stockholders equity |
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$ |
15,990.8 |
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$ |
17,097.3 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions, except for per share data)
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Quarters Ended |
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Six Months Ended |
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June 25, 2011 |
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June 26, 2010 |
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June 25, 2011 |
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June 26, 2010 |
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Product net revenues (Includes retail
co-payments of $2,255 and $2,279 in the second
quarters of 2011
and 2010, and $4,768 and $4,750 in the six
months of 2011 and 2010) |
|
$ |
16,724.1 |
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$ |
16,163.3 |
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$ |
33,385.8 |
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$ |
32,247.0 |
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Service revenues |
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349.9 |
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244.2 |
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707.7 |
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471.4 |
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Total net revenues |
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17,074.0 |
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16,407.5 |
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34,093.5 |
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32,718.4 |
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Cost of operations: |
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Cost of product net revenues (Includes retail
co-payments of $2,255 and $2,279 in the second
quarters of 2011 and 2010, and $4,768 and $4,750
in the six months of 2011 and 2010) |
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|
15,846.0 |
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15,284.5 |
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31,674.8 |
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30,538.1 |
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Cost of service revenues |
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122.6 |
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61.3 |
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243.0 |
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125.8 |
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Total cost of revenues |
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|
15,968.6 |
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15,345.8 |
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|
31,917.8 |
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|
30,663.9 |
|
Selling, general and administrative expenses |
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420.3 |
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|
376.4 |
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|
807.4 |
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|
727.0 |
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Amortization of intangibles |
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|
73.3 |
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70.7 |
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|
146.4 |
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|
141.2 |
|
Interest expense |
|
|
52.3 |
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|
38.8 |
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|
104.2 |
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|
79.5 |
|
Interest (income) and other (income) expense, net |
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|
1.9 |
|
|
|
(6.3 |
) |
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|
4.3 |
|
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|
(7.7 |
) |
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Total costs and expenses |
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|
16,516.4 |
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15,825.4 |
|
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32,980.1 |
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31,603.9 |
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Income before provision for income taxes |
|
|
557.6 |
|
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|
582.1 |
|
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|
1,113.4 |
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|
1,114.5 |
|
Provision for income taxes |
|
|
214.8 |
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|
225.2 |
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|
437.5 |
|
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|
437.1 |
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Net income |
|
$ |
342.8 |
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$ |
356.9 |
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|
$ |
675.9 |
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$ |
677.4 |
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Basic weighted average shares outstanding |
|
|
397.6 |
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|
453.0 |
|
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|
401.6 |
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|
460.4 |
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Basic earnings per share |
|
$ |
0.86 |
|
|
$ |
0.79 |
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|
$ |
1.68 |
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$ |
1.47 |
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|
Diluted weighted average shares outstanding |
|
|
405.1 |
|
|
|
462.0 |
|
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|
409.6 |
|
|
|
470.1 |
|
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|
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Diluted earnings per share |
|
$ |
0.85 |
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|
$ |
0.77 |
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|
$ |
1.65 |
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$ |
1.44 |
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)
(Shares in thousands; $ in millions, except for per share data)
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Shares of |
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Shares |
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Accumulated |
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Common |
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of |
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$0.01 Par Value |
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Other |
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Stock |
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Treasury |
|
|
Common |
|
|
Comprehensive |
|
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Additional |
|
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Issued |
|
|
Stock |
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|
Stock |
|
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Income (Loss) |
|
|
Paid-in Capital |
|
|
Retained Earnings |
|
|
Treasury Stock |
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Total |
|
Balances at
December 25, 2010 |
|
|
666,836 |
|
|
|
256,298 |
|
|
|
$6.7 |
|
|
|
$(53.5 |
) |
|
|
$8,463.0 |
|
|
|
$6,636.9 |
|
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|
$(11,066.3 |
) |
|
|
$3,986.8 |
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Comprehensive income: |
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Net income |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
675.9 |
|
|
|
|
|
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|
675.9 |
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|
|
|
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|
|
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|
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Other comprehensive income (loss): |
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|
|
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|
|
|
|
|
|
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|
|
|
|
Foreign currency translation gain and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9 |
|
Amortization of unrealized loss on cash flow hedge, net
of tax of $(0.7) |
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1.1 |
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|
1.1 |
|
Defined benefit plans, net of tax: |
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|
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|
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|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
Net activity due to curtailments, net of tax of $(11.6) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
17.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.3 |
|
Amortization of prior service credit included in net
periodic benefit cost, net of tax of $0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
Net gains included in net periodic benefit cost, net of
tax of $(0.1) |
|
|
|
|
|
|
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|
|
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|
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|
0.2 |
|
|
|
|
|
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|
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|
|
|
|
|
0.2 |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.6 |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.6 |
|
|
|
|
|
|
|
675.9 |
|
|
|
|
|
|
|
703.5 |
|
Stock option activity, including tax benefit |
|
|
3,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162.7 |
|
|
|
|
|
|
|
|
|
|
|
162.7 |
|
Issuance of common stock under employee stock purchase plan |
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
11.7 |
|
Restricted stock unit activity, including tax benefit |
|
|
824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
16.1 |
|
Treasury stock acquired |
|
|
|
|
|
|
23,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,436.6 |
) |
|
|
(1,436.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Balances at
June 25, 2011 |
|
|
670,899 |
|
|
|
279,358 |
|
|
|
$6.7 |
|
|
|
$(25.9 |
) |
|
|
$8,653.5 |
|
|
|
$7,312.8 |
|
|
|
$(12,502.9 |
) |
|
|
$3,444.2 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this condensed consolidated financial statement.
3
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 25, |
|
|
June 26, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
675.9 |
|
|
$ |
677.4 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
102.0 |
|
|
|
89.2 |
|
Amortization of intangibles |
|
|
146.4 |
|
|
|
141.2 |
|
Deferred income taxes |
|
|
(66.8 |
) |
|
|
(91.0 |
) |
Stock-based compensation on employee stock plans |
|
|
83.8 |
|
|
|
77.8 |
|
Tax benefit on employee stock plans |
|
|
62.5 |
|
|
|
63.4 |
|
Excess tax benefits from stock-based compensation arrangements |
|
|
(27.9 |
) |
|
|
(34.1 |
) |
Other |
|
|
40.3 |
|
|
|
49.1 |
|
Net changes in assets and liabilities (net of acquisition effects): |
|
|
|
|
|
|
|
|
Manufacturer accounts receivable, net |
|
|
(14.2 |
) |
|
|
(30.9 |
) |
Client accounts receivable, net |
|
|
5.7 |
|
|
|
(80.3 |
) |
Income taxes receivable |
|
|
(2.0 |
) |
|
|
174.6 |
|
Inventories, net |
|
|
181.1 |
|
|
|
121.8 |
|
Prepaid expenses and other current assets |
|
|
(6.1 |
) |
|
|
(9.9 |
) |
Other noncurrent assets |
|
|
(16.0 |
) |
|
|
(11.2 |
) |
Claims and other accounts payable |
|
|
(110.6 |
) |
|
|
(345.3 |
) |
Client rebates and guarantees payable |
|
|
(192.9 |
) |
|
|
348.0 |
|
Accrued expenses and other current and noncurrent liabilities |
|
|
(220.8 |
) |
|
|
(149.0 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
640.4 |
|
|
|
990.8 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(111.1 |
) |
|
|
(100.4 |
) |
Purchases of securities and other assets |
|
|
(14.1 |
) |
|
|
(23.2 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
(3.4 |
) |
|
|
(33.8 |
) |
Proceeds from sale of securities and other investments |
|
|
48.5 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(80.1 |
) |
|
|
(138.9 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility |
|
|
7,242.2 |
|
|
|
200.0 |
|
Repayments on revolving credit facility |
|
|
(7,242.2 |
) |
|
|
(200.0 |
) |
Proceeds from accounts receivable financing facility and other |
|
|
546.3 |
|
|
|
3.3 |
|
Repayments under accounts receivable financing facility |
|
|
(538.0 |
) |
|
|
|
|
Purchases of treasury stock |
|
|
(1,436.6 |
) |
|
|
(2,257.9 |
) |
Excess tax benefits from stock-based compensation arrangements |
|
|
27.9 |
|
|
|
34.1 |
|
Net proceeds from employee stock plans |
|
|
79.1 |
|
|
|
24.1 |
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(1,321.3 |
) |
|
|
(2,196.4 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(761.0 |
) |
|
|
(1,344.5 |
) |
Cash and cash equivalents at beginning of period |
|
|
853.4 |
|
|
|
2,528.2 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
92.4 |
|
|
$ |
1,183.7 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MEDCO HEALTH SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements 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 second fiscal quarters for 2011 and 2010 each
consisted of 13 weeks and ended on June 25, 2011 and June 26, 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. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD
Presentation of Comprehensive Income
In June 2011, the Financial Accounting Standards Board (FASB) issued an accounting standard
with respect to the presentation of other comprehensive income in financial statements. The main
provisions of the standard provide that an entity that reports other comprehensive income has the
option to present comprehensive income in either a single statement or in a two-statement approach.
A single statement must present the components of net income and total net income, the components
of other comprehensive income and total other comprehensive income, and a total for comprehensive
income. In the two-statement approach, an entity must present the components of net income and
total net income in the first statement, followed by a financial statement that presents the
components of other comprehensive income, a total for other comprehensive income, and a total for
comprehensive income. The Company will be required to adopt this standard retrospectively for interim and annual
reporting periods beginning after December 15, 2011. The Company does not expect the adoption of
this standard in fiscal year 2012 to have a material impact on its consolidated financial
statements.
3. 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):
5
Fair Value Measurements at Reporting Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, |
|
|
|
|
|
|
|
Description |
|
2011 |
|
|
Level 1 |
|
|
Level 2 |
|
Money market mutual funds |
|
$ |
47.0 |
(1) |
|
$ |
47.0 |
|
|
$ |
|
|
Fair value of interest rate swap agreements |
|
|
16.5 |
(2) |
|
|
|
|
|
|
16.5 |
|
|
|
|
(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. |
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 June 25, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2011 |
|
|
December 25, 2010 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount(1) |
|
|
Value |
|
|
Amount(1) |
|
|
Value |
|
7.25% senior notes due 2013 |
|
$ |
498.9 |
|
|
$ |
557.1 |
|
|
$ |
498.7 |
|
|
$ |
567.2 |
|
6.125% senior notes due 2013 |
|
|
299.3 |
|
|
|
322.0 |
|
|
|
299.2 |
|
|
|
327.1 |
|
2.75% senior notes due 2015 |
|
|
499.9 |
|
|
|
511.2 |
|
|
|
499.8 |
|
|
|
496.1 |
|
7.125% senior notes due 2018 |
|
|
1,190.6 |
|
|
|
1,428.5 |
|
|
|
1,190.1 |
|
|
|
1,412.2 |
|
4.125% senior notes due 2020 |
|
|
499.0 |
|
|
|
492.5 |
|
|
|
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.
6
4. |
|
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 |
|
|
Six Months Ended |
|
|
|
June 25, 2011 |
|
|
June 26, 2010 |
|
|
June 25, 2011 |
|
|
June 26, 2010 |
|
Basic weighted average shares outstanding |
|
|
397.6 |
|
|
|
453.0 |
|
|
|
401.6 |
|
|
|
460.4 |
|
Dilutive common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options and
restricted stock units |
|
|
7.5 |
|
|
|
9.0 |
|
|
|
8.0 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
405.1 |
|
|
|
462.0 |
|
|
|
409.6 |
|
|
|
470.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 quarter and six months ended June 25, 2011, there were outstanding
options to purchase 12.0 million and 11.9 million shares of Medco stock, respectively, which were
not dilutive to the EPS calculations when applying the treasury stock method. For both the quarter
and six months ended June 26, 2010, there were outstanding options to purchase 6.0 million shares
of Medco stock, which were not dilutive to the EPS calculations. For all periods presented, the
outstanding options which were not dilutive to the EPS calculations when applying the treasury
stock method primarily reflect 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 and six
months ended June 25, 2011 compared to the same periods in 2010 primarily result from the
repurchase of approximately 279.3 million shares of stock in connection with the Companys share
repurchase programs since inception in 2005 through the end of the second quarter of 2011, compared
to an equivalent amount of 223.3 million shares repurchased since inception through the end of the
second quarter of 2010. The Company repurchased approximately 9.6 million and 23.1 million shares
of stock in the second quarter and six months of 2011, respectively, compared to approximately 17.6
million and 37.1 million shares in the second quarter and six months of 2010, respectively. In
accordance with the FASBs earnings per share standard, weighted average treasury shares are not
considered part of the basic or diluted shares outstanding.
5. ACCOUNTS RECEIVABLE
The Company separately reports accounts receivable due from manufacturers and accounts
receivable due from clients. Client accounts receivable, net, is presented net of allowance for
doubtful accounts and includes 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 June 25, 2011 and December 25,
2010, identified net Specialty Pharmacy accounts receivable, primarily due from payors and
patients, amounted to $526.4 million and $524.5 million, respectively. The Companys client
accounts receivable also includes 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 June 25, 2011 and December 25, 2010, the CMS receivable
was approximately $222.8 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 June 25, 2011 and December 25, 2010 of
$175.8 million and $149.7 million, respectively, includes $104.1 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 8, 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
PBM segment allowance for doubtful accounts as of June 25, 2011 and December 25, 2010 includes
$59.6 million and $38.2 million, respectively, related to the sale of certain diabetes supplies, which are
primarily reimbursed by government agencies and insurance companies. In addition, the
Companys PBM segment allowance for doubtful accounts reflects amounts associated with member
premiums for the Companys Medicare Part D product offerings.
7
6. DEBT
|
|
The Companys debt consists of the following ($ in millions): |
|
|
|
|
|
|
|
|
|
|
|
June 25, |
|
|
December 25, |
|
|
|
2011 |
|
|
2010 |
|
Short-term debt: |
|
|
|
|
|
|
|
|
Accounts receivable financing facility |
|
$ |
|
|
|
$ |
|
|
Other |
|
|
31.9 |
|
|
|
23.6 |
|
|
|
|
|
|
|
|
Total short-term debt |
|
|
31.9 |
|
|
|
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
2,000.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
Senior unsecured revolving credit facility |
|
|
|
|
|
|
1,000.0 |
|
Senior unsecured term loan |
|
|
|
|
|
|
1,000.0 |
|
7.25% senior notes due 2013, net of unamortized discount |
|
|
498.9 |
|
|
|
498.7 |
|
6.125% senior notes due 2013, net of unamortized discount |
|
|
299.3 |
|
|
|
299.2 |
|
2.75% senior notes due 2015, net of unamortized discount |
|
|
499.9 |
|
|
|
499.8 |
|
7.125% senior notes due 2018, net of unamortized discount |
|
|
1,190.6 |
|
|
|
1,190.1 |
|
4.125% senior notes due 2020, net of unamortized discount |
|
|
499.0 |
|
|
|
498.9 |
|
Fair value of interest rate swap agreements |
|
|
16.5 |
|
|
|
16.9 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
3,004.2 |
|
|
|
5,003.6 |
|
|
|
|
|
|
|
|
Total debt |
|
$ |
5,036.1 |
|
|
$ |
5,027.2 |
|
|
|
|
|
|
|
|
A complete description of the Companys debt may be found in Note 8, Debt, to the
audited consolidated financial statements included in Part II, Item 8 of the Companys Annual
Report on Form 10-K for the fiscal year ended December 25, 2010. The following provides recent
updates:
Five-Year Credit Facilities. On April 30, 2007, the Company entered into a senior unsecured
credit agreement, which is available for general working capital requirements. The facility
consists of a $1 billion, 5-year senior unsecured term loan and a $2 billion, 5-year senior
unsecured revolving credit facility. The facility matures on April 30, 2012, and therefore the
Company has classified all outstanding balances related to the facility, representing $1.0 billion under the revolving
credit facility and the $1.0 billion senior unsecured term loan, as current portion of
long-term debt on the unaudited interim condensed consolidated balance sheet as of June 25, 2011.
The Company anticipates refinancing the senior unsecured credit
facility before it matures.
There were draw-downs of $7,242.2 million and repayments of $7,242.2 million
under the revolving credit facility during the six months of 2011. As of June 25, 2011, the Company
had $992.5 million available for borrowing under the 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, the outstanding balance under the revolving credit facility was $1.0 billion and the Company had $993.5 million available for borrowing under the facility, after giving effect
to prior net draw-downs of $1 billion and $6.5 million in issued letters of credit.
7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company maintains an unfunded postretirement healthcare benefit plan for a limited number
of retirees. The net (credit) for these postretirement benefits amounted to ($0.1) million and
($0.4) million for the quarters ended June 25, 2011 and June 26, 2010, respectively, and ($30.8)
million and ($0.8) million for the six months ended June 25, 2011 and June 26, 2010, respectively.
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
six months ended June 25, 2011.
8
The net cost (credit) for the Companys pension plans amounted to $2.1 million and $7.1
million for the quarters ended June 25, 2011 and June 26, 2010, respectively, and ($7.7) million
and $14.6 million for the six months ended June 25, 2011 and June 26, 2010, respectively.
In January 2011, the Company amended its defined benefit pension plans, freezing the benefit
for all participants effective in the first quarter of 2011. After
the plan freeze, participants do not accrue any
benefits under the plans, and new hires are not eligible to participate
in the defined benefit pension plans. However, account balances continue to be credited with
interest until paid out. The plan freeze resulted in a gain of $9.7 million, pre-tax, recognized in
the first quarter of 2011. The freeze of the defined benefit pension plans coincided with an
enhanced 401(k) plan company match. Additionally, payments for pension benefits for the years 2011
to 2020 are estimated to be $157.0 million, a decrease of $92.1 million from the $249.1 million
reported in Note 9, Pension and Other Postretirement Benefits, 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. This decrease in estimated payments is primarily due to
the impact of the plan freeze.
8. 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, including
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., which primarily provides mail-order pharmacy services in Germany. 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.
9
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):
Quarterly Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 25, 2011 |
|
|
Quarter Ended June 26, 2010 |
|
|
|
|
|
|
|
Specialty |
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
|
|
Quarterly Results: |
|
PBM |
|
|
Pharmacy |
|
|
Total |
|
|
PBM |
|
|
Pharmacy |
|
|
Total |
|
|
Product net revenues |
|
$ |
13,559.3 |
|
|
$ |
3,164.8 |
|
|
$ |
16,724.1 |
|
|
$ |
13,374.8 |
|
|
$ |
2,788.5 |
|
|
$ |
16,163.3 |
|
Service revenues |
|
|
329.2 |
|
|
|
20.7 |
|
|
|
349.9 |
|
|
|
217.8 |
|
|
|
26.4 |
|
|
|
244.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
13,888.5 |
|
|
|
3,185.5 |
|
|
|
17,074.0 |
|
|
|
13,592.6 |
|
|
|
2,814.9 |
|
|
|
16,407.5 |
|
Total cost of revenues |
|
|
12,995.1 |
|
|
|
2,973.5 |
|
|
|
15,968.6 |
|
|
|
12,728.9 |
|
|
|
2,616.9 |
|
|
|
15,345.8 |
|
Selling, general and administrative expenses |
|
|
351.6 |
|
|
|
68.7 |
|
|
|
420.3 |
|
|
|
299.0 |
|
|
|
77.4 |
|
|
|
376.4 |
|
Amortization of intangibles |
|
|
62.8 |
|
|
|
10.5 |
|
|
|
73.3 |
|
|
|
60.0 |
|
|
|
10.7 |
|
|
|
70.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
479.0 |
|
|
$ |
132.8 |
|
|
$ |
611.8 |
|
|
$ |
504.7 |
|
|
$ |
109.9 |
|
|
$ |
614.6 |
|
Reconciling items to income before provision for
income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
52.3 |
|
|
|
|
|
|
|
|
|
|
|
38.8 |
|
Interest (income) and other (income) expense, net |
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
(6.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
$ |
557.6 |
|
|
|
|
|
|
|
|
|
|
$ |
582.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
61.3 |
|
|
$ |
5.3 |
|
|
$ |
66.6 |
|
|
$ |
47.9 |
|
|
$ |
9.9 |
|
|
$ |
57.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 25, 2011 |
|
|
Six Months Ended June 26, 2010 |
|
|
|
|
|
|
|
Specialty |
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
|
|
Year-to-Date Results: |
|
PBM |
|
|
Pharmacy |
|
|
Total |
|
|
PBM |
|
|
Pharmacy |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net revenues |
|
$ |
27,164.3 |
|
|
$ |
6,221.5 |
|
|
$ |
33,385.8 |
|
|
$ |
26,805.2 |
|
|
$ |
5,441.8 |
|
|
$ |
32,247.0 |
|
Service revenues |
|
|
669.2 |
|
|
|
38.5 |
|
|
|
707.7 |
|
|
|
422.0 |
|
|
|
49.4 |
|
|
|
471.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
27,833.5 |
|
|
|
6,260.0 |
|
|
|
34,093.5 |
|
|
|
27,227.2 |
|
|
|
5,491.2 |
|
|
|
32,718.4 |
|
Total cost of revenues |
|
|
26,071.3 |
|
|
|
5,846.5 |
|
|
|
31,917.8 |
|
|
|
25,559.8 |
|
|
|
5,104.1 |
|
|
|
30,663.9 |
|
Selling, general and administrative expenses |
|
|
668.3 |
|
|
|
139.1 |
|
|
|
807.4 |
|
|
|
577.8 |
|
|
|
149.2 |
|
|
|
727.0 |
|
Amortization of intangibles |
|
|
125.4 |
|
|
|
21.0 |
|
|
|
146.4 |
|
|
|
119.8 |
|
|
|
21.4 |
|
|
|
141.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
968.5 |
|
|
$ |
253.4 |
|
|
$ |
1,221.9 |
|
|
$ |
969.8 |
|
|
$ |
216.5 |
|
|
$ |
1,186.3 |
|
Reconciling items to income before provision for
income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
104.2 |
|
|
|
|
|
|
|
|
|
|
|
79.5 |
|
Interest (income) and other (income) expense, net |
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
$ |
1,113.4 |
|
|
|
|
|
|
|
|
|
|
$ |
1,114.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
101.4 |
|
|
$ |
9.7 |
|
|
$ |
111.1 |
|
|
$ |
85.1 |
|
|
$ |
15.3 |
|
|
$ |
100.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 25, 2011 |
|
|
As of December 25, 2010 |
|
|
|
|
|
|
|
Specialty |
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
|
|
Identifiable Assets: |
|
PBM |
|
|
Pharmacy |
|
|
Total |
|
|
PBM |
|
|
Pharmacy |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets |
|
$ |
12,421.3 |
|
|
$ |
3,569.5 |
|
|
$ |
15,990.8 |
|
|
$ |
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 and six months
ended June 25, 2011 and June 26, 2010. All other revenues are earned in the United States.
9. 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.
10
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.
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 in which the government has declined to
intervene, relates to PolyMedica Corporation, a subsidiary of the Company
acquired in the fourth quarter of 2007. 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.
In
July 2011, Medco received a subpoena duces tecum from the United
States Department of Justice, District of Delaware,
requesting information from Medco concerning its arrangements with Astra Zeneca concerning four
Astra Zeneca drugs. The Company is cooperating with the inquiry. The Company is not able to predict with certainty the timing or outcome of this matter.
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. In June 2011, the Court issued its opinion dismissing several of the plaintiffs fiduciary
claims while letting others survive pending further discovery. Plaintiff, United Food and
Commercial Workers Local Union No. 1529 and Employers Health and Welfare Plan Trust, subsequently
filed a motion with the Court asking it to reconsider its dismissal of one of the fiduciary claims.
11
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.
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.
12
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.
Several lawsuits have been filed since the announcement of the merger described below in Note
10, Subsequent Events, that name as defendants the Company, the Companys Board of Directors, and
Express Scripts, Inc. (Express Scripts). The purported class action complaints allege, among
other things, a breach of fiduciary duty in connection with the approval of the proposed merger
agreement between the Company and Express Scripts.
Purchase Commitments
As of June 25, 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 $153.4 million for 2011. The contracts with fixed amounts
plus a variable component include firm commitments of $40.4 million for 2011 and $4.0 million for
2012, 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 $16.9 million, technology-related agreements of $34.3 million and advertising
commitments of $0.5 million.
10. SUBSEQUENT EVENTS
Pending transactions under the Merger Agreement with Express Scripts, Inc.
On July 20, 2011, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with Express Scripts, a Delaware corporation, Aristotle Holding, Inc., a Delaware
corporation, and wholly-owned subsidiary of Express Scripts (New Parent Company), Aristotle Merger
Sub, Inc., a Delaware corporation and wholly-owned subsidiary of New Parent Company, and Plato
Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of New Parent Company. The
Merger Agreement provides that, upon the terms and subject to the conditions set forth therein,
Aristotle Merger Sub, Inc. will merge with and into Express Scripts (the Express Scripts Merger),
with Express Scripts as the surviving corporation, and (immediately thereafter) Plato Merger Sub,
Inc. will merge with and into the Company (the Medco Merger and, collectively with the Express
Scripts Merger, the Mergers), with the Company as the surviving corporation. As a result of the
Mergers, both the Company and Express Scripts will become wholly-owned subsidiaries of New Parent
Company.
At the effective time of the Express Scripts Merger, each share of Express Scripts common
stock will be converted into one share of New Parent Companys common stock. At the effective time
of the Medco Merger, each share of the Companys common stock will be converted into the right to
receive (i) $28.80 in cash and (ii) 0.81 shares of New Parent Company common stock.
Consummation of the Mergers is subject to customary conditions, including the expiration or
termination of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements
Act of 1976. The Merger Agreement contemplates that the parties will take certain specified actions
which may be necessary to obtain regulatory clearance.
Consummation of the Mergers is also subject to other customary conditions, including (i)
approval of the Merger Agreement by Medcos stockholders and Express Scripts stockholders, (ii)
the approval for listing of the New Parent Companys common stock on the Nasdaq Stock Market, (iii)
the absence of any order prohibiting or restraining the Mergers, (iv) the effectiveness under the
Securities Act of 1933 of a registration statement covering the shares of New Parent Company common
stock, (v) the receipt of certain regulatory consents, (vi) subject to certain exceptions, the
accuracy of the Companys and Express Scripts representations and warranties in the Merger
Agreement, (vii) performance by the Company and Express Scripts of their respective obligations in
the Merger Agreement, (viii) the absence of certain governmental appeals, and (ix) the delivery of
customary opinions from counsel to the Company and Express Scripts to the effect that the Mergers
will qualify as a tax-free exchange for federal income tax purposes.
UnitedHealth Group Incorporated
The Company also announced on July 21, 2011 that its pharmacy benefit services agreement with
UnitedHealth Group Incorporated (UnitedHealth Group) would not be renewed. For both the second
quarter and six months of 2011 and 2010, UnitedHealth Group, the Companys largest client,
represented 17%, of the Companys net revenues. The UnitedHealth Group contract expires on December
31, 2012. 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 the Companys overall
profitability, the mail-order volume associated with this account represented less than 10% of the
Companys overall mail-order volume for both the second quarters and six months of 2011 and 2010.
None of the Companys other clients individually represented more than 10% of the net revenues in
the second quarter and six months of 2011 or 2010.
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Item 2. |
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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.
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Competition in the PBM, specialty pharmacy and broader healthcare
industry is intense and could impair our ability to attract and retain
clients; |
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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; |
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Government efforts to reduce healthcare costs and alter healthcare
financing practices could lead to a decreased demand for our services
or to reduced profitability; |
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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; |
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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; |
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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; |
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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; |
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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; |
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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; |
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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; |
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Changes in reimbursement, including reimbursement for durable medical
equipment, could negatively affect our revenues and profits; |
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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; |
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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; |
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PBMs could be subject to claims under ERISA if they are found to be a
fiduciary of a health benefit plan governed by ERISA; |
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Pending litigation could adversely impact our business practices and
have a material adverse effect on our business, financial condition,
liquidity and operating results; |
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Changes in industry pricing benchmarks could adversely affect our financial performance; |
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We are subject to a corporate integrity agreement and noncompliance
may impede our ability to conduct business with the federal
government; |
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The terms and covenants relating to our existing indebtedness could
adversely impact our financial performance and liquidity; |
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We may be subject to liability claims for damages and other expenses not covered by insurance; |
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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; |
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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; |
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We are subject to certain risks associated with our international operations; |
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Anti-takeover provisions of the Delaware General Corporation Law, 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; and |
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As described elsewhere in this Quarterly Report on Form 10-Q, we have entered into a
Merger Agreement with Express Scripts, Inc. ("Express Scripts"). Express Scripts and the Company may be unable to
obtain stockholder or regulatory approvals required for the Mergers contemplated by the
Merger Agreement or may be required to accept conditions that could reduce the anticipated
benefits of the Mergers as a condition to obtaining regulatory approvals; the length of
time necessary to consummate the proposed Mergers may be longer than anticipated; a
condition to closing of the Mergers may not be satisfied; problems may arise in
successfully integrating the businesses of Express Scripts and the Company; Express
Scripts may be unable to realize the synergies expected from the Mergers; the Mergers may
involve unexpected costs; the businesses may suffer as a result of uncertainty surrounding
the proposed Mergers and the industry may be subject to future risks that are described
in Securities and Exchange Commission (SEC) reports filed by Express Scripts and the
Company. |
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 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.
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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 profitably 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 clinical research
business capabilities through UBC, our personalized medicine services and our international
services.
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 stockholders. 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.
On July 20, 2011, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Express Scripts, a
Delaware corporation, Aristotle Holding, Inc., a Delaware corporation and wholly-owned subsidiary of Express Scripts
(New Parent Company), Aristotle Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of New Parent
Company, and Plato Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of New Parent Company. The
Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Aristotle Merger Sub,
Inc. will merge with and into Express Scripts (the Express Scripts Merger), with Express Scripts as the surviving
corporation, and (immediately thereafter) Plato Merger Sub, Inc. will merge with and into Medco (the Medco Merger
and, collectively with the Express Scripts Merger, the Mergers), with Medco as the surviving corporation. As a result
of the Mergers, both Medco and Express Scripts will become wholly-owned subsidiaries of New Parent Company.
At the effective time of the Express Scripts Merger, each share of Express Scripts common stock will be converted
into one share of New Parent Companys common stock. At the effective time of the Medco Merger, each share of Medcos
common stock will be converted into the right to receive (i) $28.80 in cash and (ii) 0.81 shares of New Parent Company
common stock.
Our second fiscal quarters for 2011 and 2010 each consisted of 13 weeks and ended on June 25,
2011 and June 26, 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.
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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; diluted earnings per share, excluding all intangible amortization;
Specialty Pharmacy segment revenue and operating income; Earnings Before Interest and Other
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.
Financial Performance Summary for the Quarter and Six Months Ended June 25, 2011
Our diluted earnings per share increased 10.4% to $0.85 for the second quarter of 2011,
compared to $0.77 per share for the second quarter of 2010. Our diluted earnings per share
increased 14.6% to $1.65 for the six months of 2011 compared to $1.44 per share for the six months
of 2010. Excluding all intangible amortization, our diluted earnings per share increased 10.3% to
$0.96 for the second quarter of 2011, and 14.8% to $1.86 for the six months of 2011. These earnings
per share increases primarily reflect higher generic dispensing rates and mail-order generic
volumes, a decrease in the diluted weighted average shares outstanding, increased service margin,
and growth in the Specialty Pharmacy business, as well as a first-quarter 2011 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 for the six months of 2011.
These are partially offset by the effect of client renewal pricing, increased SG&A expenses, and a
second-quarter 2010 benefit of approximately $27 million associated with our receipt of a
settlement award in a class action antitrust lawsuit brought by direct purchasers of a brand-name
medication. For the six months ended June 25, 2011, we generated cash flow from operations of
$640.4 million and had cash and cash equivalents of $92.4 million on our consolidated balance sheet
at June 25, 2011.
The diluted weighted average shares outstanding were 405.1 million for the second quarter and
409.6 million for the six months of 2011 compared to 462.0 million for the second quarter and 470.1
million for the six months of 2010, representing decreases of 12.3% and 12.9%, respectively,
resulting primarily from our share repurchase programs.
Our total net revenues increased 4.1% to $17,074.0 million for the second quarter, and
increased 4.2% to $34,093.5 million for the six months of 2011. Product net revenues increased 3.5%
to $16,724.1 million for the second quarter, and 3.5% to $33,385.8 million for the six months of
2011, which reflects higher retail and mail-order prescription volume, 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 43.3% to $349.9 million for the second quarter and 50.1% to $707.7 million for the six
months 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 claims
processing administrative fees and increased formulary management fees.
The total adjusted prescription volume, which adjusts mail-order prescription volume for the
difference in days supply between mail order and retail, increased 0.5% to 239.7 million for the
second quarter and 1.3% to 484.0 million for the six months of 2011, reflecting higher retail and
mail-order volumes. The increases in mail-order prescription volume for the second quarter and six
months of 2011 are driven by increases in generic volumes, as brand-name volumes were lower than in
the second quarter and six months of 2010. The adjusted mail-order penetration rate was 34.3% for
the second quarter and 34.0% for the six months of 2011, compared to 34.3% for the second quarter
and 34.1% for the six months of 2010.
Our overall generic dispensing rate increased to 73.4% for the second quarter and 73.2% for
the six months of 2011, from 70.6% for the second quarter and 70.1% for the six months of 2010,
reflecting the impact of the introduction of new generic products in and subsequent to the second
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 $900 million and $2,000 million for the second quarter
and six months of 2011, respectively.
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Our overall gross margin percentages were 6.5% for the second quarter and 6.4% for the six
months of 2011, compared to 6.5% for the second quarter and 6.3% for the six months of 2010,
primarily reflecting increased generic dispensing rates and mail-order generic volumes, and a
higher mix of higher margin service revenues. Also contributing for the six months of 2011 is the
margin component of the aforementioned first-quarter 2011 benefit associated with the
postretirement healthcare benefit plan of $22.6 million. The gross margin percentage increases were
partially offset by the effect of client renewal pricing and the aforementioned second-quarter 2010
settlement award of approximately $27 million, as well as a lower Specialty Pharmacy gross margin
percentage due to product and channel mix.
SG&A expenses of $420.3 million for the second quarter of 2011 increased by $43.9 million, or
11.7%, from the second quarter of 2010. SG&A expenses of $807.4 million for the six months of 2011
increased by $80.4 million, or 11.1%, from the six months of 2010. These increases primarily
reflect UBC SG&A expenses, higher professional fees and technology-related expenses associated with
strategic initiatives, as well as higher stock-based compensation expenses, partially offset for
the six months of 2011 by the SG&A component of the aforementioned first-quarter 2011 benefit
associated with the postretirement healthcare benefit plan of $8.0 million. Excluding UBC, SG&A
expenses increased by 5.7% and 4.7% from the second quarter and six months of 2010, respectively.
Amortization of intangible assets of $73.3 million for the second quarter and $146.4 million
for the six months of 2011 increased $2.6 million and $5.2 million from the second quarter and six
months of 2010, respectively, 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 periods.
Interest expense of $52.3 million for the second quarter and $104.2 million for the six months
of 2011 increased $13.5 million and $24.7 million from the second quarter and six months of 2010,
respectively, primarily reflecting higher expense as a result of increased borrowings of $1 billion
from our September 2010 senior notes issuance associated with the acquisition of UBC.
Interest (income) and other (income) expense, net, of $1.9 million of expense for the second
quarter of 2011 decreased $8.2 million from ($6.3) million of income for the second quarter of
2010. Interest (income) and other (income) expense, net, of $4.3 million of expense for the six
months of 2011 decreased $12.0 million from ($7.7) million of income for the six months of 2010.
These decreases in interest (income) and other (income) expense, net, primarily reflect losses in the
start-up period for certain of our joint ventures and a foreign currency
gain that was recognized in 2010, partially offset by increased interest income.
Our effective tax rate (defined as the percentage relationship of provision for income taxes
to income before provision for income taxes) was 38.5% for the second quarter and 39.3% for the six
months of 2011, compared to 38.7% for the second quarter and 39.2% for the six months 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.
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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.
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. In 2011, non-low-income members receive a cost share benefit
under the coverage gap discount program with pharmaceutical manufacturers. The coverage gap cost
share program covers 50% of the member co-payment in the coverage gap for participating brand-name
drugs. 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, pharmaceutical manufacturers 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. In the
second quarter and six months of 2011, premium revenues for our PDP products, which exclude member
cost share, were $188 million and $401 million, respectively, or 1% of total net revenues. In the
second quarter and six months of 2010, premium revenues for our PDP products, which exclude member
cost share, were $181 million and $363 million, respectively, or 1% of total net revenues.
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.
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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.
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 facility, 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 in 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.
20
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.
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 the assets, liabilities and
results of operations of Europa Apotheek Venlo B.V. (Europe Apotheek), 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.
21
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 six months of 2010, our operating cash flows reflected a benefit of $174.6 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.
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 second
quarter and six months 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 $2,900 million and $5,700 million, or
17%, of our net revenues, respectively. For the second quarter and six months of 2010, our ten
largest clients based on revenue accounted for approximately 47% of our net revenues, including
UnitedHealth Group, which represented approximately $2,700 million and $5,500 million, or 17%, of
our net revenues, respectively. 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 second quarters and six months of 2011 and 2010.
None of our other clients individually represented more than 10% of our net
revenues in the second quarter and six months of 2011 or 2010.
On July 21, 2011, we announced that our pharmacy benefit services agreement with UnitedHealth
Group would not be renewed. The UnitedHealth Group contract expires on December 31, 2012.
22
Segment Discussion
We have two reportable segments, PBM and Specialty Pharmacy. The PBM segment primarily
involves sales of traditional prescription drugs and supplies, including 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. 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 8,
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.
23
Consolidated Results of Operations
The following table presents selected consolidated comparative results of operations and
volume performance ($ and volumes in millions):
|
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|
|
|
|
|
|
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Quarter |
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|
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|
|
Quarter |
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|
Six Months |
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|
|
|
|
|
|
Six Months |
|
|
|
Ended |
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|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
June 25, |
|
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|
|
|
|
|
|
|
|
June 26, |
|
|
June 25, |
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
|
2011(1) |
|
|
Variance |
|
|
2010 |
|
|
2011(1) |
|
|
Variance |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail product(2) |
|
$ |
10,250.8 |
|
|
$ |
235.6 |
|
|
|
2.4 |
% |
|
$ |
10,015.2 |
|
|
$ |
20,548.5 |
|
|
$ |
497.7 |
|
|
|
2.5 |
% |
|
$ |
20,050.8 |
|
Mail-order product |
|
|
6,473.3 |
|
|
|
325.2 |
|
|
|
5.3 |
% |
|
|
6,148.1 |
|
|
|
12,837.3 |
|
|
|
641.1 |
|
|
|
5.3 |
% |
|
|
12,196.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product(2) |
|
$ |
16,724.1 |
|
|
$ |
560.8 |
|
|
|
3.5 |
% |
|
$ |
16,163.3 |
|
|
$ |
33,385.8 |
|
|
$ |
1,138.8 |
|
|
|
3.5 |
% |
|
$ |
32,247.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client and other service |
|
|
221.1 |
|
|
|
18.2 |
|
|
|
9.0 |
% |
|
|
202.9 |
|
|
|
455.4 |
|
|
|
63.7 |
|
|
|
16.3 |
% |
|
|
391.7 |
|
Manufacturer service |
|
|
128.8 |
|
|
|
87.5 |
|
|
|
N/M |
* |
|
|
41.3 |
|
|
|
252.3 |
|
|
|
172.6 |
|
|
|
N/M |
* |
|
|
79.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service |
|
$ |
349.9 |
|
|
$ |
105.7 |
|
|
|
43.3 |
% |
|
$ |
244.2 |
|
|
$ |
707.7 |
|
|
$ |
236.3 |
|
|
|
50.1 |
% |
|
$ |
471.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues(2) |
|
$ |
17,074.0 |
|
|
$ |
666.5 |
|
|
|
4.1 |
% |
|
$ |
16,407.5 |
|
|
$ |
34,093.5 |
|
|
$ |
1,375.1 |
|
|
|
4.2 |
% |
|
$ |
32,718.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product(2) |
|
$ |
15,846.0 |
|
|
$ |
561.5 |
|
|
|
3.7 |
% |
|
$ |
15,284.5 |
|
|
$ |
31,674.8 |
|
|
$ |
1,136.7 |
|
|
|
3.7 |
% |
|
$ |
30,538.1 |
|
Service |
|
|
122.6 |
|
|
|
61.3 |
|
|
|
100.0 |
% |
|
|
61.3 |
|
|
|
243.0 |
|
|
|
117.2 |
|
|
|
93.2 |
% |
|
|
125.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues(2) |
|
$ |
15,968.6 |
|
|
$ |
622.8 |
|
|
|
4.1 |
% |
|
$ |
15,345.8 |
|
|
$ |
31,917.8 |
|
|
$ |
1,253.9 |
|
|
|
4.1 |
% |
|
$ |
30,663.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
878.1 |
|
|
$ |
(0.7 |
) |
|
|
(0.1 |
)% |
|
$ |
878.8 |
|
|
$ |
1,711.0 |
|
|
$ |
2.1 |
|
|
|
0.1 |
% |
|
$ |
1,708.9 |
|
Product gross margin percentage |
|
|
5.3 |
% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
5.4 |
% |
|
|
5.1 |
% |
|
|
(0.2 |
)% |
|
|
|
|
|
|
5.3 |
% |
Service |
|
$ |
227.3 |
|
|
$ |
44.4 |
|
|
|
24.3 |
% |
|
$ |
182.9 |
|
|
$ |
464.7 |
|
|
$ |
119.1 |
|
|
|
34.5 |
% |
|
$ |
345.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross margin percentage |
|
|
65.0 |
% |
|
|
(9.9 |
)% |
|
|
|
|
|
|
74.9 |
% |
|
|
65.7 |
% |
|
|
(7.6 |
)% |
|
|
|
|
|
|
73.3 |
% |
Total gross margin |
|
$ |
1,105.4 |
|
|
$ |
43.7 |
|
|
|
4.1 |
% |
|
$ |
1,061.7 |
|
|
$ |
2,175.7 |
|
|
$ |
121.2 |
|
|
|
5.9 |
% |
|
$ |
2,054.5 |
|
Gross margin percentage |
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
6.5 |
% |
|
|
6.4 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generic mail-order prescriptions |
|
|
17.8 |
|
|
|
1.0 |
|
|
|
6.0 |
% |
|
|
16.8 |
|
|
|
35.4 |
|
|
|
2.4 |
|
|
|
7.3 |
% |
|
|
33.0 |
|
Brand mail-order prescriptions |
|
|
9.9 |
|
|
|
(0.8 |
) |
|
|
(7.5 |
)% |
|
|
10.7 |
|
|
|
19.9 |
|
|
|
(1.8 |
) |
|
|
(8.3 |
)% |
|
|
21.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mail-order prescriptions |
|
|
27.7 |
|
|
|
0.2 |
|
|
|
0.7 |
% |
|
|
27.5 |
|
|
|
55.3 |
|
|
|
0.6 |
|
|
|
1.1 |
% |
|
|
54.7 |
|
Retail prescriptions |
|
|
157.4 |
|
|
|
0.7 |
|
|
|
0.4 |
% |
|
|
156.7 |
|
|
|
319.4 |
|
|
|
4.6 |
|
|
|
1.5 |
% |
|
|
314.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prescriptions |
|
|
185.1 |
|
|
|
0.9 |
|
|
|
0.5 |
% |
|
|
184.2 |
|
|
|
374.7 |
|
|
|
5.2 |
|
|
|
1.4 |
% |
|
|
369.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted prescriptions(4) |
|
|
239.7 |
|
|
|
1.3 |
|
|
|
0.5 |
% |
|
|
238.4 |
|
|
|
484.0 |
|
|
|
6.4 |
|
|
|
1.3 |
% |
|
|
477.6 |
|
Adjusted mail-order
penetration(5) |
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
|
|
34.3 |
% |
|
|
34.0 |
% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
34.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generic Dispensing Rate Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail generic dispensing rate |
|
|
75.0 |
% |
|
|
2.7 |
% |
|
|
|
|
|
|
72.3 |
% |
|
|
74.8 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
71.8 |
% |
Mail-order generic dispensing rate |
|
|
64.3 |
% |
|
|
3.1 |
% |
|
|
|
|
|
|
61.2 |
% |
|
|
64.1 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
60.3 |
% |
Overall generic dispensing rate |
|
|
73.4 |
% |
|
|
2.8 |
% |
|
|
|
|
|
|
70.6 |
% |
|
|
73.2 |
% |
|
|
3.1 |
% |
|
|
|
|
|
|
70.1 |
% |
|
|
|
* |
|
Not meaningful |
|
(1) |
|
Includes UBCs operating results commencing on the September 16, 2010 acquisition date. |
|
(2) |
|
Includes retail co-payments of $2,255 million and $2,279 million for the second quarters of
2011 and 2010, and $4,768 million and $4,750 million for the six months of 2011 and 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. |
24
Net Revenues
Retail. The increases in retail net revenues of $236 million for the second quarter and $498
million for the six months of 2011 reflect net volume increases of $47 million and $295 million,
respectively, primarily from new business, partially offset by lower utilization. Also contributing
to the higher retail net revenues were net price increases of $189 million for the second quarter
and $203 million for the six months of 2011 driven by higher prices charged by brand-name
pharmaceutical manufacturers, partially offset by higher client price discounts. The aforementioned
net price variances include the offsetting effect of approximately $595 million for the second
quarter and $1,280 million for
the six months from a greater representation of lower-priced generic drugs in 2011.
Mail-Order. The increases in mail-order net revenues of $325 million for the second quarter
and $641 million for the six months of 2011 reflect net volume increases of $42 million and $151
million, respectively, driven by higher generic volumes. The volumes of lower-priced generic drugs
were higher than the second quarter and six months 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
increases are net price increases of $283 million for the second quarter and $490 million for the
six months of 2011 driven by higher prices charged by brand-name pharmaceutical manufacturers,
partially offset by higher client price discounts. The aforementioned net price variances include
the offsetting effect of approximately $305 million for the second quarter and $720 million for the
six months from a greater representation of lower-priced generic drugs in 2011.
Our overall generic dispensing rate increased to 73.4% for the second quarter and 73.2% for
the six months of 2011, compared to 70.6% for the second quarter and 70.1% for the six months of
2010. Mail-order and retail generic dispensing rates increased to 64.3% and 75.0%, respectively,
for the second quarter of 2011, compared to 61.2% and 72.3%, respectively, for the second quarter
of 2010. For the six months of 2011, mail-order and retail generic dispensing rates increased to
64.1% and 74.8%, respectively, compared to 60.3% and 71.8% for 2010, respectively. These increases
reflect the impact of the introduction of new generic products in and subsequent to the second
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 $105.7 million in the second quarter and $236.3 million for the six
months of 2011, reflecting higher manufacturer service revenues of $87.5 million and $172.6 million,
respectively, 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
$18.2 million and $63.7 million, respectively, primarily driven by higher claims processing
administrative fees and increased formulary management fees.
Gross Margin
Our overall gross margin increased to $1,105.4 million or 6.5% for the second quarter and
$2,175.7 million or 6.4% for the six months of 2011, from $1,061.7 million or 6.5% for the second
quarter and $2,054.5 million or 6.3% for the six months of 2010. Our product gross margin was
$878.1 million or 5.3% for the second quarter and $1,711.0 million or 5.1% for the six months of
2011, compared to $878.8 million or 5.4% for the second quarter and $1,708.9 million or 5.3% for
the six months of 2010. Product gross margin reflects increased generic dispensing rates and
mail-order generic volumes, as well as business efficiencies, and for the six months, the margin
component of the aforementioned first-quarter 2011 benefit associated with the postretirement
healthcare benefit plan of $22.6 million, offset by the effect of client renewal pricing and the
aforementioned second-quarter 2010 settlement award of approximately $27 million. The lower product
gross margin percentage also reflects a lower Specialty Pharmacy gross margin percentage due to
product and channel mix. Our overall gross margin also benefited from a higher mix of higher
margin service revenues. Service gross margin of $227.3 million for the second quarter and $464.7
million for the six months of 2011 increased $44.4 million and $119.1 million, respectively,
compared to $182.9 million for the second quarter and $345.6 million for the six months of 2010.
The service gross margin dollar increases reflect the aforementioned increases in service revenues
of $105.7 million for the second quarter and $236.3 million
for the six months of 2011, partially offset by
increases in cost of service revenues of $61.3 million and $117.2 million, respectively, which
primarily result from UBC. Service gross margin percentage was 65.0% for the second quarter and
65.7% for the six months of 2011, compared to 74.9% for the second quarter and 73.3% for the six
months of 2010, with the decreases reflecting the UBC mix.
Rebates from brand-name pharmaceutical manufacturers, which are reflected as a reduction of
cost of product net revenues, totaled $1,484 million for the second quarter of 2011 and $1,429
million for the second quarter of 2010, with formulary rebates representing 86.8% and 85.5% of
total rebates, respectively. Rebates were $2,986 million for the six months of 2011 and $2,881
million for the six months of 2010, with formulary rebates representing 86.3% and 84.5% of total
rebates, respectively. The overall increases in rebates reflect 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. We
retained approximately $181 million, or 12.2%, of total rebates in the
second quarter of 2011, and $170 million, or 11.9%, in the second quarter of 2010. For the six
months, we retained approximately $356 million, or 11.9%, of total rebates in 2011, and $346
million, or 12.0%, in 2010. The changes in the retained rebate percentages are reflective of client
mix and the associated client preferences regarding the rebate sharing aspects of their overall
contract pricing structure.
25
The following table presents additional selected consolidated comparative results of
operations (in millions, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Six Months |
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
June 25, |
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
June 25, |
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
|
2011(1) |
|
|
Variance |
|
|
2010 |
|
|
2011(1) |
|
|
Variance |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin(2) |
|
$ |
1,105.4 |
|
|
$ |
43.7 |
|
|
|
4.1 |
% |
|
$ |
1,061.7 |
|
|
$ |
2,175.7 |
|
|
$ |
121.2 |
|
|
|
5.9 |
% |
|
$ |
2,054.5 |
|
Selling, general and
administrative expenses |
|
|
420.3 |
|
|
|
43.9 |
|
|
|
11.7 |
% |
|
|
376.4 |
|
|
|
807.4 |
|
|
|
80.4 |
|
|
|
11.1 |
% |
|
|
727.0 |
|
Amortization of intangibles |
|
|
73.3 |
|
|
|
2.6 |
|
|
|
3.7 |
% |
|
|
70.7 |
|
|
|
146.4 |
|
|
|
5.2 |
|
|
|
3.7 |
% |
|
|
141.2 |
|
Interest expense |
|
|
52.3 |
|
|
|
13.5 |
|
|
|
34.8 |
% |
|
|
38.8 |
|
|
|
104.2 |
|
|
|
24.7 |
|
|
|
31.1 |
% |
|
|
79.5 |
|
Interest (income) and other
(income) expense, net |
|
|
1.9 |
|
|
|
8.2 |
|
|
|
N/M |
* |
|
|
(6.3 |
) |
|
|
4.3 |
|
|
|
12.0 |
|
|
|
N/M |
* |
|
|
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
557.6 |
|
|
|
(24.5 |
) |
|
|
(4.2 |
)% |
|
|
582.1 |
|
|
|
1,113.4 |
|
|
|
(1.1 |
) |
|
|
(0.1 |
)% |
|
|
1,114.5 |
|
Provision for income taxes |
|
|
214.8 |
|
|
|
(10.4 |
) |
|
|
(4.6 |
)% |
|
|
225.2 |
|
|
|
437.5 |
|
|
|
0.4 |
|
|
|
0.1 |
% |
|
|
437.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
342.8 |
|
|
$ |
(14.1 |
) |
|
|
(4.0 |
)% |
|
$ |
356.9 |
|
|
$ |
675.9 |
|
|
$ |
(1.5 |
) |
|
|
(0.2 |
)% |
|
$ |
677.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
outstanding |
|
|
405.1 |
|
|
|
(56.9 |
) |
|
|
(12.3 |
)% |
|
|
462.0 |
|
|
|
409.6 |
|
|
|
(60.5 |
) |
|
|
(12.9 |
)% |
|
|
470.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.85 |
|
|
$ |
0.08 |
|
|
|
10.4 |
% |
|
$ |
0.77 |
|
|
$ |
1.65 |
|
|
$ |
0.21 |
|
|
|
14.6 |
% |
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for the amortization of
intangible assets(3) |
|
$ |
0.11 |
|
|
$ |
0.01 |
|
|
|
10.0 |
% |
|
$ |
0.10 |
|
|
$ |
0.21 |
|
|
$ |
0.03 |
|
|
|
16.7 |
% |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share, excluding
all intangible amortization |
|
$ |
0.96 |
|
|
$ |
0.09 |
|
|
|
10.3 |
% |
|
$ |
0.87 |
|
|
$ |
1.86 |
|
|
$ |
0.24 |
|
|
|
14.8 |
% |
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 $420.3 million for the second quarter of 2011 increased by $43.9 million, or
11.7%, from the second quarter of 2010. SG&A expenses of $807.4 million for the six months of 2011
increased by $80.4 million, or 11.1%, from the six months of 2010. These increases primarily
reflect UBC SG&A expenses, higher professional fees and technology-related expenses associated with
strategic initiatives, as well as higher stock-based compensation expenses, partially offset for
the six months by the SG&A component of the aforementioned first-quarter 2011 benefit associated
with the postretirement healthcare benefit plan of $8.0 million. Excluding UBC, SG&A expenses
increased by 5.7% and 4.7% from the second quarter and six months of 2010, respectively.
Amortization of Intangibles
Amortization of intangible assets of $73.3 million for the second quarter and $146.4 million
for the six months of 2011 increased $2.6 million and $5.2 million from the second quarter and six
months of 2010, respectively, 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 periods.
26
Interest Expense
Interest expense of $52.3 million for the second quarter and $104.2 million for the six months
of 2011 increased $13.5 million and $24.7 million from the second quarter and six months of 2010,
respectively, primarily reflecting higher expense as a result of increased borrowings of $1 billion
from our September 2010 senior notes issuance associated with the acquisition of UBC.
The weighted average interest rate on our indebtedness was approximately 3.5% for the second
quarter and 3.6% for the six months of 2011, compared to approximately 4.0% for the second quarter
and six months 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.
Interest (Income) and Other (Income) Expense, Net
Interest (income) and other (income) expense, net, of $1.9 million of expense for the second
quarter of 2011 decreased $8.2 million from ($6.3) million of income for the second quarter of
2010. Interest (income) and other (income) expense, net, of $4.3 million of expense for the six
months of 2011 decreased $12.0 million from ($7.7) million of income for the six months of 2010.
These decreases in interest (income) and other (income) expense, net, primarily reflect losses in the
start-up period for certain of our joint ventures
and a foreign currency gain that was recognized in 2010, partially offset by increased interest income.
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 38.5% for the second quarter and 39.3% for the six
months of 2011, compared to 38.7% for the second quarter and 39.2% for the six months of 2010.
The slightly lower effective tax rate for the second quarter reflects recognized tax credits.
Net Income and Earnings per Share
Net income as a percentage of net revenues was 2.0% for the second quarter and six months of
2011, compared to 2.2% for the second quarter and 2.1% for the six months of 2010, reflecting the
aforementioned factors.
Diluted earnings per share increased 10.4% to $0.85 in the second quarter of 2011, from $0.77
in the second quarter of 2010. For the six months, diluted earnings per share increased 14.6% to
$1.65 in 2011, from $1.44 in 2010. Excluding all intangible amortization, our diluted earnings per
share increased 10.3% to $0.96 for the second quarter, and 14.8% to $1.86 for the six months of
2011, compared to $0.87 per share in the second quarter and $1.62 per share for the six months of
2010. The diluted earnings per share increases reflect the aforementioned consolidated results of
operations trending factors, as well as lower diluted weighted average shares outstanding.
The diluted weighted average shares outstanding were 405.1 million for the second quarter and
409.6 million for the six months of 2011, compared to 462.0 million for the second quarter and
470.1 million for the six months of 2010, representing decreases of 12.3% and 12.9%, respectively.
The decreases primarily result from the repurchase of approximately 279.3 million shares of stock
in connection with our share repurchase programs since inception in 2005 through the end of the second quarter
of 2011, compared to an equivalent amount of 223.3 million shares repurchased since inception
through the end of the second quarter of 2010. We repurchased approximately 9.6 million and 23.1
million shares of stock in the second quarter and six months of 2011, respectively, compared to approximately
17.6 million and 37.1 million in the second quarter and six months of 2010, respectively.
27
Segment Results of Operations
PBM Segment
The PBM segment primarily involves sales of traditional prescription drugs and supplies,
including diabetes testing supplies and related products to our clients and members or patients,
either through our networks of contractually affiliated retail pharmacies or our mail-order
pharmacies. The following table presents selected PBM segment comparative results of operations ($
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Six Months |
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
June 25, |
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
June 25, |
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
|
2011(1) |
|
|
Variance |
|
|
2010 |
|
|
2011(1) |
|
|
Variance |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net revenues |
|
$ |
13,559.3 |
|
|
$ |
184.5 |
|
|
|
1.4 |
% |
|
$ |
13,374.8 |
|
|
$ |
27,164.3 |
|
|
$ |
359.1 |
|
|
|
1.3 |
% |
|
$ |
26,805.2 |
|
Service revenues |
|
|
329.2 |
|
|
|
111.4 |
|
|
|
51.1 |
% |
|
|
217.8 |
|
|
|
669.2 |
|
|
|
247.2 |
|
|
|
58.6 |
% |
|
|
422.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
13,888.5 |
|
|
|
295.9 |
|
|
|
2.2 |
% |
|
|
13,592.6 |
|
|
|
27,833.5 |
|
|
|
606.3 |
|
|
|
2.2 |
% |
|
|
27,227.2 |
|
Total cost of revenues |
|
|
12,995.1 |
|
|
|
266.2 |
|
|
|
2.1 |
% |
|
|
12,728.9 |
|
|
|
26,071.3 |
|
|
|
511.5 |
|
|
|
2.0 |
% |
|
|
25,559.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin(2) |
|
$ |
893.4 |
|
|
$ |
29.7 |
|
|
|
3.4 |
% |
|
$ |
863.7 |
|
|
$ |
1,762.2 |
|
|
$ |
94.8 |
|
|
|
5.7 |
% |
|
$ |
1,667.4 |
|
Gross margin percentage |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
6.4 |
% |
|
|
6.3 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
351.6 |
|
|
|
52.6 |
|
|
|
17.6 |
% |
|
|
299.0 |
|
|
|
668.3 |
|
|
|
90.5 |
|
|
|
15.7 |
% |
|
|
577.8 |
|
Amortization of intangibles |
|
|
62.8 |
|
|
|
2.8 |
|
|
|
4.7 |
% |
|
|
60.0 |
|
|
|
125.4 |
|
|
|
5.6 |
|
|
|
4.7 |
% |
|
|
119.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
479.0 |
|
|
$ |
(25.7 |
) |
|
|
(5.1 |
)% |
|
$ |
504.7 |
|
|
$ |
968.5 |
|
|
$ |
(1.3 |
) |
|
|
(0.1 |
)% |
|
$ |
969.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes UBCs operating results commencing on the September 16, 2010 acquisition date. |
|
(2) |
|
Represents total net revenues minus total cost of revenues. |
PBM total net revenues of $13,888.5 million for the second quarter and $27,833.5 million
for the six months of 2011 increased $295.9 million and $606.3 million, respectively, compared to
the revenues of $13,592.6 million for the second quarter and $27,227.2 million for the six months
of 2010. The increases primarily reflect higher mail-order generic and retail volume, 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. Also contributing
to the total net revenue increases are higher service revenues primarily driven by the
contributions from UBC, which was acquired in September 2010.
Gross margin was 6.4% of net revenues for the second quarter and 6.3% for the six months of
2011, compared to 6.4% for the second quarter and 6.1% for the six months 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, for the six months, the margin component of the
aforementioned first-quarter 2011 benefit associated with the postretirement healthcare benefit
plan. The gross margin percentage increases were partially offset by the effect of client renewal
pricing, as well as the aforementioned second-quarter 2010 settlement award.
SG&A expenses were $351.6 million for the second quarter and $668.3 million for the six months
of 2011, and increased from 2010 by $52.6 million and $90.5 million, respectively. The increases
primarily reflect UBC SG&A expenses, higher professional fees and technology-related expenses
associated with strategic initiatives, as well as higher stock-based compensation expenses,
partially offset for the six months by the SG&A component of the aforementioned first-quarter 2011
benefit associated with the postretirement healthcare benefit plan. Excluding UBC, SG&A expenses
increased by $30.0 million and $44.5 million over the second quarter and six months of 2010,
respectively.
Amortization of intangible assets was $62.8 million for the second quarter and $125.4 million
for the six months of 2011, compared to $60.0 million for the second quarter and $119.8 million for
the six months of 2010. The increases primarily reflect 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 periods.
Operating income was $479.0 million for the second quarter and $968.5 million for the six
months of 2011, compared with $504.7 million for the second quarter and $969.8 million for the six
months of 2010, with the changes reflecting the aforementioned factors.
For additional information on the PBM segment, see Note 8, Segment and Geographic Data, to
the unaudited interim condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
28
Specialty Pharmacy Segment
The Specialty Pharmacy segment includes the sale of specialty pharmacy products and services
for the treatment of chronic and complex (potentially life-threatening) diseases. The following
table presents selected Specialty Pharmacy segment comparative results of operations ($ in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Six Months |
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
June 25, |
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
June 25, |
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
|
2011 |
|
|
Variance |
|
|
2010 |
|
|
2011 |
|
|
Variance |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net revenues |
|
$ |
3,164.8 |
|
|
$ |
376.3 |
|
|
|
13.5 |
% |
|
$ |
2,788.5 |
|
|
$ |
6,221.5 |
|
|
$ |
779.7 |
|
|
|
14.3 |
% |
|
$ |
5,441.8 |
|
Service revenues |
|
|
20.7 |
|
|
|
(5.7 |
) |
|
|
(21.6 |
)% |
|
|
26.4 |
|
|
|
38.5 |
|
|
|
(10.9 |
) |
|
|
(22.1 |
)% |
|
|
49.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
3,185.5 |
|
|
|
370.6 |
|
|
|
13.2 |
% |
|
|
2,814.9 |
|
|
|
6,260.0 |
|
|
|
768.8 |
|
|
|
14.0 |
% |
|
|
5,491.2 |
|
Total cost of revenues |
|
|
2,973.5 |
|
|
|
356.6 |
|
|
|
13.6 |
% |
|
|
2,616.9 |
|
|
|
5,846.5 |
|
|
|
742.4 |
|
|
|
14.5 |
% |
|
|
5,104.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin(1) |
|
$ |
212.0 |
|
|
$ |
14.0 |
|
|
|
7.1 |
% |
|
$ |
198.0 |
|
|
$ |
413.5 |
|
|
$ |
26.4 |
|
|
|
6.8 |
% |
|
$ |
387.1 |
|
Gross margin percentage |
|
|
6.7 |
% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
7.0 |
% |
|
|
6.6 |
% |
|
|
(0.4 |
)% |
|
|
|
|
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
68.7 |
|
|
|
(8.7 |
) |
|
|
(11.2 |
)% |
|
|
77.4 |
|
|
|
139.1 |
|
|
|
(10.1 |
) |
|
|
(6.8 |
)% |
|
|
149.2 |
|
Amortization of intangibles |
|
|
10.5 |
|
|
|
(0.2 |
) |
|
|
(1.9 |
)% |
|
|
10.7 |
|
|
|
21.0 |
|
|
|
(0.4 |
) |
|
|
(1.9 |
)% |
|
|
21.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
132.8 |
|
|
$ |
22.9 |
|
|
|
20.8 |
% |
|
$ |
109.9 |
|
|
$ |
253.4 |
|
|
$ |
36.9 |
|
|
|
17.0 |
% |
|
$ |
216.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents total net revenues minus total cost of revenues. |
Specialty Pharmacy total net revenues of $3,185.5 million for the second quarter and
$6,260.0 for the six months of 2011 increased $370.6 million and $768.8 million, respectively,
compared to revenues of $2,814.9 million for the second quarter and $5,491.2 million for the six
months of 2010, primarily reflecting growth in prescription volumes, increases in manufacturer
brand pricing, broader utilization of specialty products, and the impact of recently introduced
drugs.
Gross margins were 6.7% of net revenues for the second quarter and 6.6% for the six months of
2011, compared to 7.0% for the second quarter and six months of 2010, primarily reflecting product
and channel mix effects experienced in 2011 as compared to 2010.
SG&A expenses of $68.7 million for the second quarter of 2011 decreased $8.7 million compared
to $77.4 million for the second quarter of 2010. SG&A expenses of $139.1 million for the six months
of 2011 decreased $10.1 million compared to $149.2 million for the six months of 2010. These
decreases primarily reflect lower employee and technology-related expenses, partially
offset by higher professional fees. Amortization of intangible assets was $10.5 million for the
second quarter and $21.0 million for the six months of 2011, compared to $10.7 million for the
second quarter and $21.4 million for the six months of 2010.
Operating income of $132.8 million for the second quarter and $253.4 million for the six
months of 2011 increased $22.9 million, or 20.8%, and $36.9 million, or 17.0%, from the second
quarter and six months of 2010, respectively, reflecting the aforementioned factors.
For additional information on the Specialty Pharmacy segment, see Note 8, Segment and
Geographic Data, to the unaudited interim condensed consolidated financial statements included in
Part I, Item 1 of this Quarterly Report on Form 10-Q.
29
Liquidity and Capital Resources
Cash Flows
The following table presents selected data from our unaudited interim condensed consolidated
statements of cash flows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 25, 2011(1) |
|
|
Variance |
|
|
June 26, 2010 |
|
Net cash provided by operating activities |
|
$ |
640.4 |
|
|
$ |
(350.4 |
) |
|
$ |
990.8 |
|
Net cash used by investing activities |
|
|
(80.1 |
) |
|
|
58.8 |
|
|
|
(138.9 |
) |
Net cash used by financing activities |
|
|
(1,321.3 |
) |
|
|
875.1 |
|
|
|
(2,196.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(761.0 |
) |
|
|
583.5 |
|
|
|
(1,344.5 |
) |
Cash and cash equivalents at beginning of period |
|
|
853.4 |
|
|
|
(1,674.8 |
) |
|
|
2,528.2 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
92.4 |
|
|
$ |
(1,091.3 |
) |
|
$ |
1,183.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes UBCs operating results commencing on the September 16, 2010 acquisition date. |
Operating Activities. Net cash provided by operating activities of $640.4 million for the
first six months of 2011 primarily reflects net income of $675.9 million, with non-cash adjustments
for depreciation, amortization and stock-based compensation of $332.2 million. In addition, there
were net cash inflows of $181.1 million from a decrease in inventories, net, primarily due to
additional initiatives to decrease inventory days on hand. These increases were partially offset by
net cash outflows of $110.6 million and $192.9 million from decreases in claims and other accounts
payable and client rebates and guarantees payable, respectively, due to the timing of payments, as
well as net cash outflows of $220.8 million from a decrease in accrued expenses and other current
and noncurrent liabilities, primarily due to the timing of income tax payments. The $350.4 million
decrease in net cash provided by operating activities for the first six months of 2011 compared to
the first six months of 2010 is primarily due to decreased cash flows of $540.9 million from client
rebates and guarantees payable due to the timing of payments, and decreased cash flows of $176.6
million from the collection of income taxes receivable, primarily from the IRS, in the first
quarter of 2010 for the 2003 through 2005 tax years. These decreases were partially offset by
increased cash flows of $234.7 million from claims and other accounts payable due to timing of
payments associated with our retail pharmacy claims, and increased cash flows from client accounts
receivable, net, and inventories, net of $86.0 million and $59.3 million, respectively.
Investing Activities. The net cash used by investing activities of $80.1 million for the first
six months of 2011 is primarily attributable to capital expenditures of $111.1 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 $48.5 million. The $58.8 million decrease in net cash used by investing activities for the first
six months of 2011 compared to the first six months of 2010 is primarily due to cash paid of $33.8
million, net of cash acquired, in the first six months of 2010, primarily reflecting our
acquisition of DNA Direct, and a $30.0 million increase in proceeds from the sale of securities and
other investments.
Financing Activities. The net cash used by financing activities of $1,321.3 million for the
first six months of 2011 primarily results from $1,436.6 million in share repurchases, partially
offset by net proceeds from employee stock plans of $79.1 million and excess tax benefits from
stock-based compensation arrangements of $27.9 million. The decrease in net cash used by financing
activities of $875.1 million for the first six months of 2011 compared to the first six months of
2010 primarily results from lower share repurchases of $821.3 million.
Total cash and short-term investments as of June 25, 2011 were $100.6 million, including $92.4
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 $809.5
million in cash and short-term investments for the six months 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.
It is anticipated that cash balances will increase during the remainder of 2011 as a result of cash inflows from operating
activities.
30
Share Repurchase Programs
Since 2005, when we commenced our first share repurchase program, we have executed share
repurchases of 279.3 million shares at a cost of $12.5 billion and at an average per-share cost of
$44.76 through the end of the second fiscal quarter of 2011. 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. During the second quarter of 2011, we repurchased
9.6 million shares at a cost of $600 million with an average per-share cost of $62.44, and during the six months of 2011, we repurchased
23.1 million shares at a cost of $1,436.6 million with an average per-share cost of $62.33 under our share repurchase programs.
Pursuant
to Merger Agreement with Express Scripts, we are not permitted to engage in share repurchases without Express Scripts prior written consent until the consummation
of the Mergers or the termination of the Merger Agreement. Currently, we do not
anticipate making additional share repurchases.
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
On July 20, 2011, we entered into an Agreement and Plan of Merger (the Merger Agreement)
with Express Scripts, a Delaware corporation, Aristotle Holding, Inc., a
Delaware corporation and wholly-owned subsidiary of Express Scripts (New Parent Company),
Aristotle Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of New Parent
Company, and Plato Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of New
Parent Company. The Merger Agreement provides that, upon the terms and subject to the conditions
set forth therein, Aristotle Merger Sub, Inc. will merge with and into Express Scripts (the
Express Scripts Merger), with Express Scripts as the surviving corporation, and (immediately thereafter) Plato Merger Sub, Inc. will merge with and
into Medco (the Medco Merger and, collectively with the Express Scripts Merger, the Mergers),
with Medco as the surviving corporation. As a result of the Mergers, both Medco and Express Scripts
will become wholly-owned subsidiaries of New Parent Company.
At the effective time of the Express Scripts Merger, each share of Express Scripts common
stock will be converted into one share of New Parent Companys common stock. At the effective time
of the Medco Merger, each share of Medcos common stock will be converted into the right to receive
(i) $28.80 in cash and (ii) 0.81 shares of New Parent Company common stock.
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. The senior unsecured credit facility matures on April 30, 2012 and therefore we
have classified all outstanding balances related to the facility as current portion of long-term
debt on the unaudited interim condensed consolidated balance sheet as of June 25, 2011. We
anticipate refinancing our senior unsecured credit facility before it matures. Additionally, it is
anticipated that cash balances will increase during the remainder of 2011 as a result of cash
inflows from operations, which are expected to be approximately $2 billion for fiscal year 2011.
At June 25, 2011, we had additional committed borrowing capacity under our revolving credit
facility of $992.5 million, borrowing capacity under our 364-day accounts receivable financing
facility of $600 million, and uncommitted borrowing capacity under our credit lines of $350
million. Our accounts receivable financing facility is renewable annually in July at the option of
both Medco and the banks and we renewed it on July 25, 2011. Our ability to incur indebtedness is
limited by the terms of the Merger Agreement, which generally provides that, without Express
Scripts prior written consent, we may not incur new indebtedness in excess of $300 million over
our existing credit facilities and lines of credit, but that we may refinance such existing credit
facilities and other lines of credit on substantially the same terms and principal amounts as we
currently maintain.
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.
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.
Pursuant to Merger Agreement with Express Scripts, we are not permitted to pay dividends or
engage in share repurchases without Express Scripts prior written consent until the consummation
of the Mergers or the termination of the Merger Agreement. Currently, we do not
anticipate making additional share repurchases.
Financing Facilities
Five-Year Credit Facilities
We have a senior unsecured bank credit facility consisting of a $1 billion, 5-year senior
unsecured term loan and a $2 billion, 5-year senior unsecured revolving credit facility. The
facility matures on April 30, 2012, and therefore we have classified all outstanding balances
related to the facility, representing $1.0 billion under the revolving credit facility and the $1.0 billion senior unsecured term loan,
as current portion of long-term debt on the unaudited interim condensed
consolidated balance sheet as of June 25, 2011.
We anticipate refinancing our senior unsecured credit facility before
it matures.
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.
31
There were draw-downs of $7,242.2 million and repayments of $7,242.2 million
under the revolving credit facility during the six months of 2011. As of June 25, 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, the outstanding balance under the revolving credit facility was $1.0 billion and we
had $993.5 million available for borrowing under the facility, after
giving effect to prior net draw-downs of $1 billion and $6.5 million in issued letters of credit.
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 six months of 2011, we drew down $538 million and repaid $538
million under the facility, which resulted in no amounts outstanding and $600 million available for
borrowing under the facility as of June 25, 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 and we
renewed it on July 25, 2011. Additionally, we had short-term debt of $31.9 million and $23.6 million outstanding as of
June 25, 2011 and December 25, 2010, respectively, under a short-term revolving credit facility.
Credit Lines
We
currently have access to four uncommitted credit lines that we utilize from time to time to meet
daily working capital needs and to take advantage of lower interest rates. Borrowings under these
arrangements cannot exceed $450 million in total. These credit lines are supplemental, typically
utilized for overnight borrowings, and not considered replacements of our committed credit
facilities. There were no amounts outstanding under our credit lines as of June 25, 2011 and
December 25, 2010.
Interest Rates
The weighted average interest rate on our indebtedness was approximately 3.5% for the second
quarter and 3.6% for the six months of 2011, compared to approximately 4.0% for the second quarter
and six months 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.
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
June 25, 2011 and December 25, 2010 was $14.8 million and $15.9 million, net of tax, respectively.
32
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 $16.5 million and $16.9 million as of June 25, 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 June 25, 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.
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.
33
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 |
|
|
Six Months Ended |
|
|
|
June 25, |
|
|
June 26, |
|
|
June 25, |
|
|
June 26, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income |
|
$ |
342.8 |
|
|
$ |
356.9 |
|
|
$ |
675.9 |
|
|
$ |
677.4 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
52.3 |
|
|
|
38.8 |
|
|
|
104.2 |
|
|
|
79.5 |
|
Interest (income) and other (income) expense, net |
|
|
1.9 |
|
|
|
(6.3 |
) |
|
|
4.3 |
|
|
|
(7.7 |
) |
Provision for income taxes |
|
|
214.8 |
|
|
|
225.2 |
|
|
|
437.5 |
|
|
|
437.1 |
|
Depreciation expense |
|
|
51.0 |
|
|
|
44.9 |
|
|
|
102.0 |
|
|
|
89.2 |
|
Amortization expense |
|
|
73.3 |
|
|
|
70.7 |
|
|
|
146.4 |
|
|
|
141.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
736.1 |
|
|
$ |
730.2 |
|
|
$ |
1,470.3 |
|
|
$ |
1,416.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted prescriptions(1) |
|
|
239.7 |
|
|
|
238.4 |
|
|
|
484.0 |
|
|
|
477.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA per adjusted prescription |
|
$ |
3.07 |
|
|
$ |
3.06 |
|
|
$ |
3.04 |
|
|
$ |
2.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 second quarter of 2011 compared to the second quarter of 2010, EBITDA increased
by 0.8%, compared to a decrease in net income of 4.0%, and an increase in EBITDA per adjusted
prescription of 0.3%. For the six months of 2011 compared to the six months of 2010, EBITDA
increased 3.8%, compared to a decrease in net income of 0.2%, and an increase in EBITDA per
adjusted prescription of 2.4%. The higher rates of increase for EBITDA compared with net income
primarily reflect the aforementioned higher interest, depreciation and intangible amortization
expenses. The lower rates of increase for EBITDA per adjusted prescription compared to EBITDA
reflect 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 |
|
|
Six Months Ended |
|
|
|
June 25, |
|
|
June 26, |
|
|
June 25, |
|
|
June 26, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Diluted earnings per share |
|
$ |
0.85 |
|
|
$ |
0.77 |
|
|
$ |
1.65 |
|
|
$ |
1.44 |
|
Adjustment for the amortization of intangible assets(1) |
|
|
0.11 |
|
|
|
0.10 |
|
|
|
0.21 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share, excluding all intangible amortization |
|
$ |
0.96 |
|
|
$ |
0.87 |
|
|
$ |
1.86 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This adjustment represents the per-share effect of all intangible amortization. |
34
Commitments and Contractual Obligations
The following table presents our commitments and contractual obligations as of June 25, 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, including current portion(1) |
|
$ |
5,000.0 |
|
|
$ |
|
|
|
$ |
2,800.0 |
|
|
$ |
500.0 |
|
|
$ |
1,700.0 |
|
Interest payments on long-term debt obligations(2) |
|
|
941.2 |
|
|
|
94.2 |
|
|
|
325.4 |
|
|
|
235.7 |
|
|
|
285.9 |
|
Operating lease obligations(3) |
|
|
220.3 |
|
|
|
35.8 |
|
|
|
100.9 |
|
|
|
51.7 |
|
|
|
31.9 |
|
Prescription drug purchase commitments(4) |
|
|
197.8 |
|
|
|
193.8 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
Other(5) |
|
|
102.7 |
|
|
|
29.5 |
|
|
|
61.6 |
|
|
|
11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,462.0 |
|
|
$ |
353.3 |
|
|
$ |
3,291.9 |
|
|
$ |
799.0 |
|
|
$ |
2,017.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt obligations exclude $12.3 million in total
unamortized discounts on our senior notes, and the fair
value of interest rate swap agreements of $16.5 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 June 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 $153.4 million for
2011. The contracts with fixed amounts plus a variable
component include firm commitments of $40.4 million for
2011 and $4.0 million for 2012, 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
$16.9 million, technology-related agreements of $34.3
million and advertising commitments of $0.5 million.
Additionally, $51.0 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 June 25, 2011. |
We have a remaining minimum pension funding requirement of $30.5 million under the
Internal Revenue Code (IRC) during 2011 for the 2010 plan year, which we expect to pay in the
third quarter of 2011.
As of June 25, 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 June 25, 2011, we had total gross liabilities for income tax contingencies of $133.9
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 17% of the income tax contingencies are anticipated to settle over
the next twelve months.
For additional information regarding operating lease obligations, long-term debt, and information on deferred income taxes, see Notes 6, 8, 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. For additional
information regarding pension and other postretirement obligations, see Note 9, Pension and Other
Postretirement Benefits, 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, as well as
Note 7, Pension and Other Postretirement Benefits, to our unaudited interim condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
35
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.
Recently Issued Financial Accounting Pronouncement
Presentation of Comprehensive Income
In June 2011, the Financial Accounting Standards Board (FASB) issued an accounting standard
with respect to the presentation of other comprehensive income in financial statements. The main
provisions of the standard provide that an entity that reports other comprehensive income has the
option to present comprehensive income in either a single statement or in a two-statement approach.
A single statement must present the components of net income and total net income, the components
of other comprehensive income and total other comprehensive income, and a total for comprehensive
income. In the two-statement approach, an entity must present the components of net income and
total net income in the first statement, followed by a financial statement that presents the
components of other comprehensive income, a total for other comprehensive income, and a total for
comprehensive income. We will be required to adopt this standard retrospectively for interim and annual reporting
periods beginning after December 15, 2011. We do not expect the adoption of this standard in fiscal
year 2012 to have a material impact on our consolidated financial statements.
|
|
|
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 June 25, 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
ventures, we are subject to foreign currency translation risk.
|
|
|
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.
36
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 9, 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:
Government Proceedings and Requests for Information. In July 2011,
Medco received a subpoena duces tecum from the United States
Department of Justice, District of Delaware, requesting information from Medco concerning its
arrangements with Astra Zeneca concerning four Astra Zeneca drugs.
The Company is cooperating with the inquiry. The Company is not able to predict with certainty the timing or outcome of this matter.
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.
In June 2011, the Court issued its opinion dismissing several of the plaintiffs fiduciary claims
while letting others survive pending further discovery. Plaintiff, United Food and Commercial
Workers Local Union No. 1529 and Employers Health and Welfare Plan Trust, subsequently filed a
motion with the Court asking it to reconsider its dismissal of one of the fiduciary claims.
Other
Matters. Several lawsuits have been filed since the announcement of the merger described in Note
10, Subsequent Events, to the unaudited interim condensed
consolidated financial statements including Part I, Item 1 of the
Quarterly Report on Form 10-Q that name as defendants the Company, the Companys Board of Directors, and
Express Scripts, Inc. (Express Scripts). The purported class action complaints allege, among
other things, a breach of fiduciary duty in connection with the approval of the proposed merger
agreement between the Company and Express Scripts.
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. Except as noted below, there have been no material changes with regard to the
risk factors disclosed in such report.
As described elsewhere in this Quarterly Report on Form 10-Q, we have entered into a Merger
Agreement with Express Scripts. Express Scripts and the Company may be unable to obtain stockholder
or regulatory approvals required for the Mergers contemplated by the Merger Agreement or may be
required to accept conditions that could reduce the anticipated benefits of the Mergers as a
condition to obtaining regulatory approvals; the length of time necessary to consummate the
proposed Mergers may be longer than anticipated; a condition to closing of the Mergers may not be
satisfied; problems may arise in successfully integrating the businesses of Express Scripts and the
Company; Express Scripts may be unable to realize the synergies expected from the Mergers; the
Mergers may involve unexpected costs; the businesses may suffer as a result of uncertainty
surrounding the proposed Mergers and the industry may be subject to future risks that are
described in Securities and Exchange Commission (SEC) reports filed by Express Scripts and the
Company.
On July 21, 2011, we announced that we had entered into the Merger Agreement with Express
Scripts. Our ability to complete the proposed Mergers is subject to risks and uncertainties,
including, but not limited to, the risk that Express Scripts and the Company may be unable to
obtain stockholder or regulatory approvals required for the Mergers contemplated by the Merger
Agreement or may be required to accept conditions that could reduce the anticipated benefits of the
Mergers as a condition to obtaining regulatory approvals; the risk that the length of time
necessary to consummate the proposed Mergers may be longer than anticipated; and the risk that a
condition to closing of the Mergers may not be satisfied. In addition, problems may arise in
successfully integrating the businesses of Express Scripts and the Company. For example: Express
Scripts may be unable to realize the synergies expected from the Mergers, the Mergers may involve
unexpected costs, the businesses may suffer as a result of uncertainty surrounding the proposed
Mergers and the industry may be subject to future risks that are described in SEC reports filed by
Express Scripts and the Company.
Completion of the Mergers requires certain regulatory and shareholder approvals. Current
employees may experience uncertainty about their post-merger roles with Express Scripts. This may
materially adversely affect the ability of the Company to attract and retain key management, sales,
marketing, technical and other personnel. In addition, key employees may depart because of issues
relating to the uncertainty and difficulty of integration or a desire not to remain with Express
Scripts following the merger. Accordingly, no assurance can be given that we will be able to
attract or retain key employees to the same extent as we have in the past. Further, diversion of
attention from ongoing operations on the part of management and employees could adversely affect
our customers, suppliers and other parties with whom we have relationships. While the Mergers are
pending, customers and strategic partners may delay or defer decisions to use the Companys
services, which could adversely affect our revenues and earnings, as well as the market price of
our common shares.
In addition, customers may experience uncertainty about their Medco services, including
integration, pricing, and customer service, after the closing of the merger. This may materially
adversely affect the ability of the Company to gain new customers and retain existing customers.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
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).
37
The following is a summary of the Companys share repurchase activity for the three months
ended June 25, 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 March 26, 2011 |
|
|
|
|
|
|
|
|
|
|
6,414,684 |
|
|
$ |
2,600,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27 to April 23, 2011 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
2,600,052 |
|
April 24 to May 21, 2011 |
|
|
5,186,465 |
|
|
$ |
62.66 |
|
|
|
5,186,465 |
|
|
$ |
2,275,058 |
|
May 22 to June 25, 2011 |
|
|
4,422,254 |
|
|
$ |
62.19 |
|
|
|
4,422,254 |
|
|
$ |
2,000,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter 2011 totals |
|
|
9,608,719 |
|
|
$ |
62.44 |
|
|
|
9,608,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All information set forth in the table above relates to the Companys 2011 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 June 25, 2011. The average per-share cost for
repurchases under the 2011 Program from inception through June 25, 2011 was $62.41. |
Pursuant
to Merger Agreement with Express Scripts, the Company is not permitted to engage in share repurchases without Express Scripts prior written consent until the consummation
of the Mergers or the termination of the Merger Agreement. Currently,
the Company does not anticipate making additional share repurchases.
|
|
|
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 $63.41 stock price, the
closing price of our stock on the date of the 2011 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.
38
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.
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 July 1, 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 |
|
|
|
207,008 |
|
|
|
427,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
209,223 |
|
|
|
265,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
173,837 |
|
|
|
430,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Karin V. Princivalle
Senior Vice President, Human Resources |
|
|
16,380 |
|
|
Option exercise of 16,380 shares shall occur when stock reaches a specific price. |
|
|
95,370 |
|
|
|
27,498 |
|
|
|
148,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Sheehy
President, Accredo Health Group |
|
|
29,751 |
|
|
Option exercise of an aggregate of 29,751 shares shall occur in various tranches when stock reaches a specific price. |
|
|
0 |
|
|
|
22,898 |
|
|
|
65,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy C. Wentworth
Group President, Employer/Key Accounts |
|
|
121,275 |
|
|
Option exercise of an aggregate of 121,275 shares shall occur in various tranches when stock reaches specific prices. |
|
|
8,720 |
|
|
|
90,144 |
|
|
|
329,101 |
|
39
|
|
|
(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 July 1, 2011. |
|
(2) |
|
This column reflects the number of shares remaining to be sold as of July 1,
2011. |
|
(3) |
|
This column reflects the number of shares sold under the plan through July 1,
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 July 1, 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 July 1, 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 July 1, 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 July 1, 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 July 1, 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 occur if stock reaches a specific price. |
|
|
0 |
|
|
|
58,900 |
|
|
|
66,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blenda J. Wilson
Director |
|
|
3,500 |
|
|
Option exercise of 3,500 shall occur if stock reaches a specific price. |
|
|
7,250 |
|
|
|
65,550 |
|
|
|
73,150 |
|
|
|
|
(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
July 1, 2011. |
|
(2) |
|
This column reflects the number of shares remaining to be sold as of July 1,
2011. |
|
(3) |
|
This column reflects the number of shares sold under the plan through July 1,
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 July 1, 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 July 1, 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 July 1, 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
July 1, 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 stockholders 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.
40
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.
|
|
|
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
2.1 |
|
|
Agreement
and Plan of Merger, dated July 20, 2011, by and among Express
Scripts, Inc., Medco Health Solutions, Inc., Aristotle Holding, Inc.,
Aristotle Merger Sub Inc. and Plato Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to
the Registrants Current Report on Form 8-K
filed July 22, 2011).
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Certificate of
Incorporation of Medco Health Solutions,
Inc., amended as of May 24, 2011
(incorporated by reference to Exhibit 3.1 to
the Registrants Current Report on Form 8-K
filed May 26, 2011).
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Bylaws of Medco Health
Solutions, Inc., amended as of May 24, 2011
(incorporated by reference to Exhibit 3.2 to
the Registrants Current Report on Form 8-K
filed May 26, 2011).
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
10.1 |
|
|
Amendment to the Employment Agreement with
David B. Snow, Jr. dated May 24, 2011
(incorporated by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K
filed May 26, 2011).
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
10.2 |
|
|
Medco Health Solutions, Inc. 2002 Stock
Incentive Plan, as amended and restated as of
May 24, 2011 (incorporated by reference to
Exhibit 10.2 to the Registrants Current
Report on Form 8-K filed May 26, 2011).
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
10.3 |
|
|
Medco Health Solutions, Inc. 2006
Change in Control Executive Severance Plan, as amended.
|
|
Filed with this document. |
|
|
|
|
|
|
|
|
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. |
41
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: July 25, 2011 |
By: |
/s/ David B. Snow, Jr.
|
|
|
|
Name: |
David B. Snow, Jr. |
|
|
|
Title: |
Chairman and
Chief Executive Officer |
|
|
|
|
Date: July 25, 2011 |
By: |
/s/ Richard J. Rubino
|
|
|
|
Name: |
Richard J. Rubino |
|
|
|
Title: |
Senior Vice President, Finance and
Chief Financial Officer |
|
42