Attached files
file | filename |
---|---|
EX-31.2 - EXHIBIT 31.2 - MEDCO HEALTH SOLUTIONS INC | c21804exv31w2.htm |
EX-10.1 - EXHIBIT 10.1 - MEDCO HEALTH SOLUTIONS INC | c21804exv10w1.htm |
EX-32.1 - EXHIBIT 32.1 - MEDCO HEALTH SOLUTIONS INC | c21804exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - MEDCO HEALTH SOLUTIONS INC | c21804exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - MEDCO HEALTH SOLUTIONS INC | c21804exv32w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - MEDCO HEALTH SOLUTIONS INC | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 24, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-31312
MEDCO HEALTH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 22-3461740 | |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
100 Parsons Pond Drive, Franklin Lakes, NJ | 07417-2603 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 201-269-3400
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-Accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of the close of business on October 24, 2011, the registrant had
387,059,463 shares of
common stock, $0.01 par value, issued and outstanding.
MEDCO HEALTH SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTERLY REPORT ON FORM 10-Q
INDEX
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(UNAUDITED)
(In millions, except for share data)
September 24, | December 25, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 161.5 | $ | 853.4 | ||||
Short-term investments |
5.3 | 56.7 | ||||||
Manufacturer accounts receivable, net |
1,859.8 | 1,895.1 | ||||||
Client accounts receivable, net |
2,410.7 | 2,553.1 | ||||||
Inventories, net |
788.1 | 1,013.2 | ||||||
Prepaid expenses and other current assets |
69.7 | 75.8 | ||||||
Deferred tax assets |
266.9 | 238.4 | ||||||
Total current assets |
5,562.0 | 6,685.7 | ||||||
Property and equipment, net |
1,027.1 | 993.6 | ||||||
Goodwill |
6,957.7 | 6,939.5 | ||||||
Intangible assets, net |
2,214.4 | 2,409.8 | ||||||
Other noncurrent assets |
102.4 | 68.7 | ||||||
Total assets |
$ | 15,863.6 | $ | 17,097.3 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Claims and other accounts payable |
$ | 2,960.5 | $ | 3,495.4 | ||||
Client rebates and guarantees payable |
2,201.8 | 2,453.2 | ||||||
Accrued expenses and other current liabilities |
940.0 | 910.2 | ||||||
Short-term debt |
36.4 | 23.6 | ||||||
Current portion of long-term debt |
2,000.0 | | ||||||
Total current liabilities |
8,138.7 | 6,882.4 | ||||||
Long-term debt, net |
3,002.2 | 5,003.6 | ||||||
Deferred tax liabilities |
972.2 | 985.1 | ||||||
Other noncurrent liabilities |
200.1 | 239.4 | ||||||
Total liabilities |
12,313.2 | 13,110.5 | ||||||
Commitments and contingencies (See Note 10) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, par value $0.01 authorized: 10,000,000 shares;
issued and outstanding: 0 |
| | ||||||
Common stock, par value $0.01 authorized: 2,000,000,000 shares;
issued: 672,492,493 shares at September 24, 2011 and 666,836,033
shares at December 25, 2010 |
6.7 | 6.7 | ||||||
Accumulated other comprehensive loss |
(31.6 | ) | (53.5 | ) | ||||
Additional paid-in capital |
8,760.0 | 8,463.0 | ||||||
Retained earnings |
7,668.2 | 6,636.9 | ||||||
16,403.3 | 15,053.1 | |||||||
Treasury stock, at cost: 285,620,728 shares at September 24, 2011 and
256,298,405 shares at December 25, 2010 |
(12,852.9 | ) | (11,066.3 | ) | ||||
Total stockholders equity |
3,550.4 | 3,986.8 | ||||||
Total liabilities and stockholders equity |
$ | 15,863.6 | $ | 17,097.3 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Table of Contents
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(UNAUDITED)
(In millions, except for per share data)
Quarters Ended | Nine Months Ended | |||||||||||||||
September 24, | September 25, | September 24, | September 25, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Product net revenues (Includes retail
co-payments of $2,140 and $2,216 in the third
quarters of 2011
and 2010, and $6,908 and $6,966 in the nine
months of 2011 and 2010) |
$ | 16,602.8 | $ | 16,062.0 | $ | 49,988.7 | $ | 48,309.0 | ||||||||
Service revenues |
378.7 | 257.8 | 1,086.4 | 729.2 | ||||||||||||
Total net revenues |
16,981.5 | 16,319.8 | 51,075.1 | 49,038.2 | ||||||||||||
Cost of operations: |
||||||||||||||||
Cost of product net revenues (Includes retail
co-payments of $2,140 and $2,216 in the third
quarters of 2011 and 2010, and $6,908 and
$6,966 in the nine months of 2011 and 2010) |
15,692.1 | 15,127.2 | 47,367.1 | 45,665.3 | ||||||||||||
Cost of service revenues |
122.3 | 73.1 | 365.3 | 198.9 | ||||||||||||
Total cost of revenues |
15,814.4 | 15,200.3 | 47,732.4 | 45,864.2 | ||||||||||||
Selling, general and administrative expenses |
455.6 | 395.0 | 1,263.0 | 1,121.9 | ||||||||||||
Amortization of intangibles |
73.2 | 71.2 | 219.6 | 212.5 | ||||||||||||
Interest expense |
52.2 | 43.4 | 156.4 | 123.0 | ||||||||||||
Interest (income) and other (income) expense, net |
(2.6 | ) | (2.6 | ) | 1.7 | (10.3 | ) | |||||||||
Total costs and expenses |
16,392.8 | 15,707.3 | 49,373.1 | 47,311.3 | ||||||||||||
Income before provision for income taxes |
588.7 | 612.5 | 1,702.0 | 1,726.9 | ||||||||||||
Provision for income taxes |
233.3 | 241.0 | 670.7 | 678.0 | ||||||||||||
Net income |
$ | 355.4 | $ | 371.5 | $ | 1,031.3 | $ | 1,048.9 | ||||||||
Basic weighted average shares outstanding |
388.0 | 429.9 | 397.0 | 450.2 | ||||||||||||
Basic earnings per share |
$ | 0.92 | $ | 0.86 | $ | 2.60 | $ | 2.33 | ||||||||
Diluted weighted average shares outstanding |
394.9 | 437.1 | 404.7 | 459.3 | ||||||||||||
Diluted earnings per share |
$ | 0.90 | $ | 0.85 | $ | 2.55 | $ | 2.28 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)
(UNAUDITED)
(Shares in thousands; $ in millions, except for per share data)
Shares of | Shares | Accumulated | ||||||||||||||||||||||||||||||
Common | of | $0.01 Par Value | Other | |||||||||||||||||||||||||||||
Stock | Treasury | Common | Comprehensive | Additional | ||||||||||||||||||||||||||||
Issued | Stock | Stock | Income (Loss) | Paid-in Capital | Retained Earnings | Treasury Stock | Total | |||||||||||||||||||||||||
Balances at
December 25, 2010 |
666,836 | 256,298 | $ | 6.7 | $ | (53.5 | ) | $ | 8,463.0 | $ | 6,636.9 | $ | (11,066.3 | ) | $ | 3,986.8 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | 1,031.3 | | 1,031.3 | ||||||||||||||||||||||||
Other comprehensive income
(loss): |
||||||||||||||||||||||||||||||||
Foreign currency
translation gain and
other |
| | | 3.6 | | | | 3.6 | ||||||||||||||||||||||||
Amortization of
unrealized loss on cash
flow hedge, net of tax
of $(1.0) |
| | | 1.7 | | | | 1.7 | ||||||||||||||||||||||||
Defined benefit plans,
net of tax: |
||||||||||||||||||||||||||||||||
Net activity due to
curtailments, net of
tax of $(11.6) |
| | | 17.3 | | | | 17.3 | ||||||||||||||||||||||||
Amortization of prior
service credit included
in net periodic benefit
cost, net of tax of
$0.7 |
| | | (1.1 | ) | | | | (1.1 | ) | ||||||||||||||||||||||
Net gains included in
net periodic benefit
cost, net of tax of
$(0.2) |
| | | 0.4 | | | | 0.4 | ||||||||||||||||||||||||
Other comprehensive income |
| | | 21.9 | | | | 21.9 | ||||||||||||||||||||||||
Total comprehensive income |
| | | 21.9 | | 1,031.3 | | 1,053.2 | ||||||||||||||||||||||||
Stock option activity,
including tax benefit |
4,483 | | | | 241.4 | | | 241.4 | ||||||||||||||||||||||||
Issuance of common stock
under employee stock
purchase plan |
339 | | | | 18.9 | | | 18.9 | ||||||||||||||||||||||||
Restricted stock unit
activity, including tax
benefit |
834 | | | | 36.7 | | | 36.7 | ||||||||||||||||||||||||
Treasury stock acquired |
| 29,323 | | | | | (1,786.6 | ) | (1,786.6 | ) | ||||||||||||||||||||||
Balances at
September 24, 2011 |
672,492 | 285,621 | $ | 6.7 | $ | (31.6 | ) | $ | 8,760.0 | $ | 7,668.2 | $ | (12,852.9 | ) | $ | 3,550.4 | ||||||||||||||||
The accompanying notes are an integral part of this condensed consolidated financial statement.
3
Table of Contents
MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(UNAUDITED)
(In millions)
Nine Months Ended | ||||||||
September 24, | September 25, | |||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,031.3 | $ | 1,048.9 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
154.9 | 135.6 | ||||||
Amortization of intangibles |
219.6 | 212.5 | ||||||
Deferred income taxes |
(97.6 | ) | (87.5 | ) | ||||
Stock-based compensation on employee stock plans |
127.2 | 115.4 | ||||||
Tax benefit on employee stock plans |
79.5 | 68.7 | ||||||
Excess tax benefits from stock-based compensation arrangements |
(39.1 | ) | (36.1 | ) | ||||
Other |
85.8 | 84.2 | ||||||
Net changes in assets and liabilities (net of acquisition effects): |
||||||||
Manufacturer accounts receivable, net |
37.7 | (99.1 | ) | |||||
Client accounts receivable, net |
43.2 | (31.0 | ) | |||||
Income taxes receivable |
1.0 | 194.0 | ||||||
Inventories, net |
225.4 | 286.3 | ||||||
Prepaid expenses and other current assets |
5.0 | (3.8 | ) | |||||
Other noncurrent assets |
(32.8 | ) | (4.0 | ) | ||||
Claims and other accounts payable |
(533.7 | ) | (678.1 | ) | ||||
Client rebates and guarantees payable |
(251.4 | ) | 214.5 | |||||
Accrued expenses and other current and noncurrent liabilities |
30.1 | (55.2 | ) | |||||
Net cash provided by operating activities |
1,086.1 | 1,365.3 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(190.3 | ) | (164.1 | ) | ||||
Purchases of securities and other assets |
(20.3 | ) | (32.3 | ) | ||||
Acquisitions of businesses, net of cash acquired |
(15.1 | ) | (701.1 | ) | ||||
Proceeds from sale of securities and other investments |
51.4 | 18.5 | ||||||
Net cash used by investing activities |
(174.3 | ) | (879.0 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from long-term debt |
10,327.2 | 3,498.7 | ||||||
Repayments on long-term debt |
(10,327.2 | ) | (2,525.0 | ) | ||||
Proceeds from accounts receivable financing facility and other |
1,150.8 | 303.0 | ||||||
Repayments under accounts receivable financing facility |
(1,138.0 | ) | (300.0 | ) | ||||
Debt issuance costs |
(0.3 | ) | (7.8 | ) | ||||
Purchases of treasury stock |
(1,786.6 | ) | (3,161.4 | ) | ||||
Excess tax benefits from stock-based compensation arrangements |
39.1 | 36.1 | ||||||
Net proceeds from employee stock plans |
131.3 | 34.3 | ||||||
Net cash used by financing activities |
(1,603.7 | ) | (2,122.1 | ) | ||||
Net decrease in cash and cash equivalents |
(691.9 | ) | (1,635.8 | ) | ||||
Cash and cash equivalents at beginning of period |
853.4 | 2,528.2 | ||||||
Cash and cash equivalents at end of period |
$ | 161.5 | $ | 892.4 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
MEDCO HEALTH SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 statement 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 third fiscal quarters for 2011 and 2010 each
consisted of 13 weeks and ended on September 24, 2011 and September 25, 2010, respectively.
On July 20, 2011, the Company entered into a definitive Merger Agreement with Express Scripts,
Inc. (Express Scripts) and certain of its subsidiaries providing for the combination of Express
Scripts and Medco under a new holding company, New Express Scripts. As a result of the
transactions contemplated by the Merger Agreement, former Medco shareholders and Express Scripts
shareholders will own stock in New Express Scripts. Subject to the
terms and conditions set forth in the
Merger Agreement, upon the closing of the transaction, each share of Medco common stock will be
converted into the right to receive $28.80 in cash and 0.81 shares of New Express Scripts. Upon
closing of the transaction, Express Scripts shareholders are expected to own approximately 60% of
New Express Scripts and Medcos shareholders are expected to own approximately 40%. The transaction
is expected to close in the first half of 2012. The merger is subject to regulatory clearance and
Express Scripts and Medcos shareholder approvals and other customary closing conditions.
Currently, Express Scripts and Medco are independent companies, and they will continue to be
managed and operated as such until the completion of the pending merger.
The accompanying unaudited interim condensed consolidated financial statements include
pre-tax merger-related expenses of $36.6 million for the third quarter and nine months of 2011 associated
with the pending Express Scripts merger, with $35.6 million in selling, general and administrative
(SG&A) expenses and $1.0 million in total cost of revenues.
The accompanying unaudited interim condensed consolidated financial statements include the
operating results of United BioSource Corporation (UBC) commencing on the September 16, 2010
acquisition date.
Reclassifications. Certain prior period amounts have been reclassified to conform to the
current period 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 ADOPTED AND RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently Adopted Financial Accounting Standard
Testing Goodwill for Impairment
In September 2011, the Financial Accounting Standards Board (FASB) issued an accounting
standard intended to reduce the cost and complexity of the annual goodwill impairment test by
providing entities an option to perform a qualitative assessment to determine whether further
impairment testing is necessary. Under the amendments in this standard, an entity is not required
to calculate the fair value of a reporting unit unless the entity determines that it is more likely
than not that its fair value is less than its carrying amount. The amendments are
effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill
impairment tests performed as of a date before September 15, 2011, if an entitys financial
statements for the most recent annual or interim period have not yet been issued. The Companys
early adoption of this standard in 2011 had no impact on its unaudited interim
condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
5
Table of Contents
The most recent assessment for impairment of goodwill for each of the designated reporting
units was performed as of September 24, 2011. The goodwill was determined not to be impaired and
there have been no significant subsequent changes in events or circumstances. The Company utilized
the income approach methodology, which projects future cash flows discounted to present value based
on certain assumptions about future operating performance. Discount rates were based on the
estimated weighted average cost of capital at the reporting unit level and ranged from 8% to 13%.
In order to validate the reasonableness of the estimated fair values, the Company performed a
reconciliation of the aggregate fair values of all reporting units to market capitalization as of
the valuation date using a reasonable control premium. If the Company determines that the fair
value is less than the book value based on updates to the assumptions, the Company could be
required to record a non-cash impairment charge to the consolidated statement of income, which
could have a material adverse effect on the Companys earnings. The Company periodically reviews
the composition of its reporting units. Reporting units are revised due to changes in reporting
structures and the manner in which the Company operates its business activities.
Recently Issued Accounting Pronouncement
Presentation of Comprehensive Income
In June 2011, the 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):
Fair Value Measurements at Reporting Date
September 24, | ||||||||||||
Description | 2011 | Level 1 | Level 2 | |||||||||
Money market mutual funds |
$ | 80.0 | (1) | $ | 80.0 | $ | | |||||
Fair value of interest rate swap agreements |
14.0 | (2) | | 14.0 |
(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. |
6
Table of Contents
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 September 24,
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):
September 24, 2011 | December 25, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount(1) | Value | Amount(1) | Value | |||||||||||||
7.25% senior notes due 2013 |
$ | 499.0 | $ | 547.5 | $ | 498.7 | $ | 567.2 | ||||||||
6.125% senior notes due 2013 |
299.4 | 318.1 | 299.2 | 327.1 | ||||||||||||
2.75% senior notes due 2015 |
499.9 | 503.8 | 499.8 | 496.1 | ||||||||||||
7.125% senior notes due 2018 |
1,190.9 | 1,451.3 | 1,190.1 | 1,412.2 | ||||||||||||
4.125% senior notes due 2020 |
499.0 | 509.3 | 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.
Medco may redeem all or part of each of the senior notes at any time or from time to time at its
option at specified redemption prices that may include make-whole premiums. See 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 for more information.
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 | Nine Months Ended | |||||||||||||||
September 24, | September 25, | September 24, | September 25, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic weighted average shares outstanding |
388.0 | 429.9 | 397.0 | 450.2 | ||||||||||||
Dilutive common stock equivalents: |
||||||||||||||||
Outstanding stock options and
restricted stock units |
6.9 | 7.2 | 7.7 | 9.1 | ||||||||||||
Diluted weighted average shares outstanding |
394.9 | 437.1 | 404.7 | 459.3 | ||||||||||||
7
Table of Contents
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 both the quarter and nine months ended September 24, 2011, there were
outstanding options to purchase 11.9 million shares of Medco stock, which were not dilutive to the
EPS calculations when applying the treasury stock method. For the quarter and nine months ended
September 25, 2010, there were outstanding options to purchase 10.3 million and 6.1 million shares
of Medco stock, respectively, 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 nine months ended September 24, 2011 compared to the same periods in 2010 primarily result from
the repurchase of approximately 285.5 million shares of stock in connection with the Companys
share repurchase programs since inception in 2005 through the end of the third quarter of 2011,
compared to an equivalent amount of 240.4 million shares repurchased since inception through the
end of the third quarter of 2010. The Company repurchased approximately 6.3 million and 29.3
million shares of stock in the third quarter and nine months of 2011, respectively, compared to
approximately 17.1 million and 54.2 million shares in the third quarter and nine months of 2010,
respectively. See Note 8, Share Repurchase Programs, to the unaudited interim condensed
consolidated financial statements included in this Quarterly Report on Form 10-Q for more
information on the Companys share repurchase programs. 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 September 24, 2011 and December
25, 2010, identified net Specialty Pharmacy accounts receivable, primarily due from payors and
patients, amounted to $506.4 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 September 24, 2011 and December 25, 2010, the CMS
receivable was approximately $241.5 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 September 24, 2011 and December 25, 2010
of $179.7 million and $149.7 million, respectively, includes $98.2 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 9, 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 September 24, 2011 and December 25, 2010 includes
$68.8 million and $38.2 million, respectively, related to the sale of certain diabetes supplies,
which are primarily reimbursed by government agencies and insurance companies. The increase in the
PBM segment allowance for doubtful accounts is reflective of slower account write-off activity than
what has historically been experienced, which is expected to normalize in the fourth quarter of
2011. In addition, the Companys PBM segment allowance for doubtful accounts reflects amounts
associated with member premiums for the Companys Medicare Part D product offerings.
8
Table of Contents
6. DEBT
The Companys debt consists of the following ($ in millions):
September 24, | December 25, | |||||||
2011 | 2010 | |||||||
Short-term debt: |
||||||||
Accounts receivable financing facility |
$ | | $ | | ||||
Other |
36.4 | 23.6 | ||||||
Total short-term debt |
36.4 | 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 |
499.0 | 498.7 | ||||||
6.125% senior notes due 2013, net of unamortized discount |
299.4 | 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 |
1,190.9 | 1,190.1 | ||||||
4.125% senior notes due 2020, net of unamortized discount |
499.0 | 498.9 | ||||||
Fair value of interest rate swap agreements |
14.0 | 16.9 | ||||||
Total long-term debt |
3,002.2 | 5,003.6 | ||||||
Total debt |
$ | 5,038.6 | $ | 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
September 24, 2011.
The Company anticipates refinancing the $2 billion unsecured revolving credit facility before it
matures and repaying the $1 billion senior unsecured term loan at maturity.
There were draw-downs of $10,327.2 million and repayments of $10,327.2 million under the
revolving credit facility during the nine months of 2011. As of September 24, 2011, the Company had
$995.2 million available for borrowing under the revolving credit facility, after giving effect to
prior net draw-downs of $1 billion and $4.8 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.
Accounts Receivable Financing Facility. Through a wholly-owned subsidiary, the Company has a
$600 million, 364-day renewable accounts receivable financing facility that is collateralized by
the Companys pharmaceutical manufacturer rebates accounts receivable. During the nine months of
2011, we drew down $1,138 million and repaid $1,138 million under the facility, which resulted in
no amounts outstanding and $600 million available for borrowing under the facility as of September
24, 2011. The Company pays 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 the Companys credit rating. This facility is renewable
annually at the option of both Medco and the banks and was renewed on July 25, 2011.
9
Table of Contents
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
($0.3) million for the quarters ended September 24, 2011 and September 25, 2010, respectively, and
($30.9) million and ($1.1) million for the nine months ended September 24, 2011 and September 25,
2010, respectively.
In January 2011, the Company amended its postretirement healthcare benefit plan, discontinuing
the benefit for all active nonretirement-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 nonretirement-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
SG&A expenses on the unaudited interim condensed consolidated statement of income for the
nine months ended September 24, 2011.
The net (credit) cost for the Companys pension plans amounted to ($1.3) million and $7.3
million for the quarters ended September 24, 2011 and September 25, 2010, respectively, and ($9.0)
million and $21.9 million for the nine months ended September 24, 2011 and September 25, 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 $9.7 million, pre-tax, recognized in the
first quarter of 2011. The freeze of the defined benefit pension plans coincided with an enhanced
401(k) plan company match.
The pension and other postretirement benefits assets and liabilities recognized at September 24, 2011 and
December 25, 2010 are as follows ($ in millions):
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
September 24, | December 25, | September 24, | December 25, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Other noncurrent assets |
$ | 19.8 | $ | | $ | | $ | | ||||||||
Accrued expenses and other current liabilities |
(0.1 | ) | (0.1 | ) | (0.6 | ) | (0.6 | ) | ||||||||
Other noncurrent liabilities |
(1.2 | ) | (64.1 | ) | (2.6 | ) | (18.0 | ) | ||||||||
Total
pension and other postretirement net assets (liabilities) |
$ | 18.5 | $ | (64.2 | ) | $ | (3.2 | ) | $ | (18.6 | ) | |||||
At December 25, 2010, the accumulated benefit obligation for the defined benefit pension
plans was $200.7 million, and the projected benefit obligation was $253.6 million. The projected
benefit obligation was higher because it included projected future salary increases
through expected retirement. Upon the freeze of the defined benefit pension plans in the first
quarter of 2011, the projected benefit obligation decreased and became consistent with the
accumulated benefit obligation. In addition, the remaining minimum pension funding requirement of
$30.5 million under the Internal Revenue Code for the 2010 plan year was paid in the third
quarter of 2011. These items resulted in a decrease to the related balance sheet liability from
$64.2 million as of December 25, 2010 to a balance sheet net asset of $18.5 million as of September
24, 2011.
At December 25, 2010, the accumulated postretirement benefit obligation for other
postretirement benefits was $18.6 million. As a result of the aforementioned plan curtailment, the
related accumulated postretirement benefit obligation decreased to $3.2 million as of September 24,
2011.
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.
10
Table of Contents
8. SHARE REPURCHASE PROGRAMS
Since 2005, when the Company commenced its first share repurchase program, the Company has
executed share repurchases of 285.5 million shares at a cost of $12.8 billion and at an average
per-share cost of $45.00 through the end of the third fiscal quarter of 2011. 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. During the third quarter of 2011, the Company repurchased 6.3 million
shares at a cost of $350 million with an average per-share cost of $55.89, and during the nine
months of 2011, the Company repurchased 29.3 million shares at a cost of $1,786.6 million with an
average per-share cost of $60.93 under its share repurchase programs.
Pursuant to the Merger Agreement with Express Scripts dated July 20, 2011, the Company is not
permitted to engage in share repurchases without Express Scripts prior written consent until the
consummation of the merger or the termination of the Merger Agreement. Currently, the Company does
not anticipate making additional share repurchases.
9. 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 includes the operating results of UBC,
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.
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):
11
Table of Contents
Quarterly Results:
Quarter Ended September 24, 2011 | Quarter Ended September 25, 2010 | |||||||||||||||||||||||
Specialty | Specialty | |||||||||||||||||||||||
PBM(1) (2) | Pharmacy | Total(1) (2) | PBM(1) | Pharmacy | Total(1) | |||||||||||||||||||
Product net revenues |
$ | 13,261.5 | $ | 3,341.3 | $ | 16,602.8 | $ | 13,209.8 | $ | 2,852.2 | $ | 16,062.0 | ||||||||||||
Service revenues |
360.1 | 18.6 | 378.7 | 232.0 | 25.8 | 257.8 | ||||||||||||||||||
Total net revenues |
13,621.6 | 3,359.9 | 16,981.5 | 13,441.8 | 2,878.0 | 16,319.8 | ||||||||||||||||||
Total cost of revenues |
12,681.3 | 3,133.1 | 15,814.4 | 12,517.9 | 2,682.4 | 15,200.3 | ||||||||||||||||||
Selling, general and administrative expenses |
387.9 | 67.7 | 455.6 | 321.8 | 73.2 | 395.0 | ||||||||||||||||||
Amortization of intangibles |
62.7 | 10.5 | 73.2 | 60.5 | 10.7 | 71.2 | ||||||||||||||||||
Operating income |
$ | 489.7 | $ | 148.6 | $ | 638.3 | $ | 541.6 | $ | 111.7 | $ | 653.3 | ||||||||||||
Reconciling items to income before provision for
income taxes: |
||||||||||||||||||||||||
Interest expense |
52.2 | 43.4 | ||||||||||||||||||||||
Interest (income) and other (income) expense, net |
(2.6 | ) | (2.6 | ) | ||||||||||||||||||||
Income before provision for income taxes |
$ | 588.7 | $ | 612.5 | ||||||||||||||||||||
Capital expenditures |
$ | 74.4 | $ | 4.8 | $ | 79.2 | $ | 60.0 | $ | 3.7 | $ | 63.7 |
Year-to-Date Results:
Nine Months Ended September 24, 2011 | Nine Months Ended September 25, 2010 | |||||||||||||||||||||||
Specialty | Specialty | |||||||||||||||||||||||
PBM(1)(2) | Pharmacy | Total(1) (2) | PBM(1) | Pharmacy | Total(1) | |||||||||||||||||||
Product net revenues |
$ | 40,425.9 | $ | 9,562.8 | $ | 49,988.7 | $ | 40,015.1 | $ | 8,293.9 | $ | 48,309.0 | ||||||||||||
Service revenues |
1,029.2 | 57.2 | 1,086.4 | 653.9 | 75.3 | 729.2 | ||||||||||||||||||
Total net revenues |
41,455.1 | 9,620.0 | 51,075.1 | 40,669.0 | 8,369.2 | 49,038.2 | ||||||||||||||||||
Total cost of revenues |
38,752.6 | 8,979.8 | 47,732.4 | 38,077.7 | 7,786.5 | 45,864.2 | ||||||||||||||||||
Selling, general and administrative expenses |
1,056.3 | 206.7 | 1,263.0 | 899.5 | 222.4 | 1,121.9 | ||||||||||||||||||
Amortization of intangibles |
188.1 | 31.5 | 219.6 | 180.4 | 32.1 | 212.5 | ||||||||||||||||||
Operating income |
$ | 1,458.1 | $ | 402.0 | $ | 1,860.1 | $ | 1,511.4 | $ | 328.2 | $ | 1,839.6 | ||||||||||||
Reconciling items to income before provision for
income taxes: |
||||||||||||||||||||||||
Interest expense |
156.4 | 123.0 | ||||||||||||||||||||||
Interest (income) and other (income) expense, net |
1.7 | (10.3 | ) | |||||||||||||||||||||
Income before provision for income taxes |
$ | 1,702.0 | $ | 1,726.9 | ||||||||||||||||||||
Capital expenditures |
$ | 175.8 | $ | 14.5 | $ | 190.3 | $ | 145.1 | $ | 19.0 | $ | 164.1 |
Identifiable Assets:
As of September 24, 2011 | As of December 25, 2010 | |||||||||||||||||||||||
Specialty | Specialty | |||||||||||||||||||||||
PBM | Pharmacy | Total | PBM | Pharmacy | Total | |||||||||||||||||||
Total identifiable assets |
$ | 12,346.5 | $ | 3,517.1 | $ | 15,863.6 | $ | 13,360.3 | $ | 3,737.0 | $ | 17,097.3 |
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Includes pre-tax merger-related expenses of $36.6 million for the third quarter and nine months of 2011 associated with the pending Express Scripts merger, with $35.6 million in selling, general and administrative expenses and $1.0 million in total cost of revenues. |
Geographic Information. The Companys net revenues from its foreign operations
represented less than 1% of the Companys consolidated net revenues for the quarters and nine
months ended September 24, 2011 and September 25, 2010. All other revenues are earned in the United
States.
12
Table of Contents
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In the ordinary course of business, the Company is involved in litigation, claims, government
inquiries, investigations, charges and proceedings, including, but not limited to, those relating
to regulatory, commercial, employment, employee benefits and securities matters. The significant
matters are described below.
There is uncertainty regarding the possible course and outcome of the proceedings discussed
below. Although it is not feasible to predict or determine the final outcome of any proceedings
with certainty, the Company believes there is no litigation pending against the Company that could
have, individually or in the aggregate, a material adverse effect on the Companys business,
financial condition, liquidity and operating results. However, there can be no assurances that an
adverse outcome in any of the proceedings described below will not result in material fines,
penalties and damages, changes to the Companys business practices, loss of (or litigation with)
clients or a material adverse effect on the Companys business, financial condition, liquidity and
operating results. It is also possible that future results of operations for any particular
quarterly or annual period could be materially adversely affected by the ultimate resolution of one
or more of these matters, or changes in the Companys assumptions or its strategies related to
these proceedings. The Company continues to believe that its business practices comply in all
material respects with applicable laws and regulations and is vigorously defending itself in the
actions described below. The Company believes that most of the claims made in these proceedings
would not likely be covered by insurance.
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.
13
Table of Contents
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
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.
In September 2011, the Company settled both of these matters for a de minimus amount.
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.
14
Table of Contents
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.
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 and the Company is subject to government audits and recoupment demands.
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.
Twenty-two lawsuits have been filed since the announcement of the merger on July 21, 2011
described in Note 1, Basis of Presentation, to the accompanying unaudited interim condensed
consolidated financial statements that name as defendants the Company, the Companys Board of
Directors, and Express Scripts. The purported class action complaints allege, among other things,
a breach of fiduciary duty in connection with the approval of the pending Merger Agreement between
the Company and Express Scripts.
Purchase Commitments
As of September 24, 2011, the Company has contractual commitments to purchase inventory from
certain biopharmaceutical manufacturers 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 $82.8 million through 2012. The contracts with fixed
amounts plus a variable component include firm commitments of $22.5 million for 2011, with
additional commitments through 2012 that are subject to price increases or variable quantities
based on patient usage. The Company also has purchase commitments for diabetes supplies of $37.1
million, technology-related agreements of $28.4 million and advertising commitments of $0.7
million.
15
Table of Contents
Insurance
The Company maintains insurance coverage with deductibles and self-insurance that management
considers adequate for its needs under current circumstances, including commercial professional
liability coverage of $85 million per individual claim. Such coverage reflects market conditions
(including cost and availability) existing at the time coverage is written. In addition to the
Companys commercial professional liability insurance policies, the Company has a retained
liability component requiring certain self-insurance reserves to cover potential claims. The
Company currently processes any claims included in self-insured retention levels through a captive
insurance company. The Companys PBM operations, including, for example, the dispensing of
prescription drugs by its mail-order pharmacies, may subject the Company to litigation and
liability for damages. Historically, the Company has not had any professional liability claims that
have exceeded its insurance coverage amount, and any claims have not been material. The Company
believes that its insurance coverage protection for these types of claims is adequate. However, the
Company might not be able to maintain its professional and general liability insurance coverage in
the future, and insurance coverage might not be available on acceptable terms or adequate to cover
any or all potential professional liability claims. A successful professional liability claim in
excess of the Companys insurance coverage, or one for which an exclusion from coverage applies,
could have a material adverse effect on the Companys financial condition and results of
operations.
11.
UNITEDHEALTH GROUP INCORPORATED
On July 21, 2011, the Company announced that its pharmacy benefit services agreement with
UnitedHealth Group Incorporated (UnitedHealth Group) would not be renewed. For both the third
quarter and nine 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 third quarters and nine months of 2011 and 2010. The pending
expiration of the UnitedHealth Group contract does not
impact goodwill or intangible asset carrying amounts, or the expected useful lives of the intangible assets.
None of the Companys other clients individually represented more than 10% of the net revenues in
the third quarter and nine months of 2011 or 2010.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and
uncertainties that may cause results to differ materially from those set forth in the statements.
No forward-looking statement can be guaranteed, and actual results may differ materially from those
projected. We undertake no obligation to publicly update any forward-looking statement, whether as
a result of new information, future events or otherwise. Forward-looking statements are not
historical facts, but rather are based on current expectations, estimates, assumptions and
projections about the business and future financial results of the pharmacy benefit management
(PBM) and specialty pharmacy industries, and other legal, regulatory and economic developments.
We use words such as anticipates, believes, plans, expects, projects,
future, intends, may, will, should, could, estimates, predicts, potential,
continue and similar expressions to identify these forward-looking statements. Our actual results
could differ materially from the results contemplated by these forward-looking statements due to a
number of factors, including those set forth below.
| Competition in the PBM, specialty pharmacy and broader healthcare industry is intense and could impair our ability to attract and retain clients; | ||
| Failure to retain key clients and their members, either as a result of economic conditions, increased competition or other factors, could result in significantly decreased revenues, harm to our reputation and decreased profitability; | ||
| Government efforts to reduce healthcare costs and alter healthcare financing practices could lead to a decreased demand for our services or to reduced profitability; |
16
Table of Contents
| Failure in continued execution of our retiree strategy, including the potential loss of Medicare Part D-eligible members, could adversely impact our business and financial results; | ||
| If we or our suppliers fail to comply with complex and evolving laws and regulations domestically and internationally, we could suffer penalties, be required to pay substantial damages and/or make significant changes to our operations; | ||
| If we do not continue to earn and retain purchase discounts, rebates and service fees from manufacturers at current levels, our gross margins may decline; | ||
| From time to time we engage in transactions to acquire other companies or businesses and if we are unable to effectively integrate acquired businesses into ours, our operating results may be adversely affected. Even if we are successful, the integration of these businesses has required, and will likely continue to require, significant resources and management attention; | ||
| New legislative or regulatory initiatives that restrict or prohibit the PBM industrys ability to use patient identifiable information could limit our ability to use information critical to the operation of our business; | ||
| Our Specialty Pharmacy business is dependent on our relationships with a limited number of suppliers and our clinical research services are dependent on our relationships with a limited number of clients. As such, the loss of one or more of these relationships, or limitations on our ability to provide services to these suppliers or clients, could significantly impact our ability to sustain and/or improve our financial performance; | ||
| Our ability to grow our Specialty Pharmacy business could be limited if we do not expand our existing base of drugs or if we lose patients; | ||
| Our Specialty Pharmacy business, certain revenues from diabetes testing supplies and our Medicare Part D offerings expose us to increased billing, cash application and credit risks. Additionally, current economic conditions may expose us to increased credit risk; | ||
| Changes in reimbursement, including reimbursement for durable medical equipment, could negatively affect our revenues and profits; | ||
| Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, if the safety risk profiles of drugs increase or if drugs are withdrawn from the market, including as a result of manufacturing issues, or if prescription drugs transition to over-the-counter products; | ||
| Demand for our clinical research services depends on the willingness of companies in the pharmaceutical and biotechnology industries to continue to outsource clinical development and on our reputation for independent, high-quality scientific research and evidence development; | ||
| PBMs could be subject to claims under ERISA if they are found to be a fiduciary of a health benefit plan governed by ERISA; | ||
| Pending litigation could adversely impact our business practices and have a material adverse effect on our business, financial condition, liquidity and operating results; | ||
| Changes in industry pricing benchmarks could adversely affect our financial performance; | ||
| We are subject to a corporate integrity agreement and noncompliance may impede our ability to conduct business with the federal government; |
17
Table of Contents
| The terms and covenants relating to our existing indebtedness could adversely impact our financial performance and liquidity; | ||
| We may be subject to liability claims for damages and other expenses not covered by insurance; | ||
| The success of our business depends on maintaining a well-secured pharmacy operation and technology infrastructure. Additionally, significant disruptions to our infrastructure or any of our facilities due to failure to execute security measures or failure to execute business continuity plans in the event of an epidemic or pandemic or some other catastrophic event could adversely impact our business; | ||
| Business process and technology infrastructure improvements associated with our agile enterprise initiative may not be successfully or timely implemented or may fail to operate as designed and intended, causing the Companys performance to suffer; | ||
| We may be required to record a material non-cash charge to income if our recorded intangible assets or goodwill are impaired, or if we shorten intangible asset useful lives; | ||
| We are subject to certain risks associated with our international operations; | ||
| 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 | ||
| 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 merger contemplated by the Merger Agreement or may be required to accept conditions that could reduce the anticipated benefits of the merger as a condition to obtaining regulatory approvals; the length of time necessary to consummate the pending merger may be longer than anticipated; a condition to closing of the merger 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 merger; the merger may involve unexpected costs; the businesses may suffer as a result of uncertainty surrounding the pending merger 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 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 subsidiary,
United BioSource Corporation (UBC).
18
Table of Contents
Our business model requires collaboration with payors, retail pharmacies, physicians,
pharmaceutical manufacturers, CMS for Medicare, and, particularly in Specialty Pharmacy,
collaboration with other third-party payors such as health insurers, and state Medicaid agencies.
Our programs and services help control the cost and enhance the quality of prescription drug
benefits. We accomplish this by providing PBM services through our national networks of retail
pharmacies and our own mail-order pharmacies, as well as through Accredo Health Group, which we
believe is the nations largest specialty pharmacy based on reported revenues. We also provide a
suite of diabetes care supplies and services under our Liberty brand.
The complicated environment in which we operate presents us with opportunities, challenges and
risks. Our clients and members are paramount to our success; the retention of existing clients and
members and winning of new clients and members poses the greatest opportunity to us and the loss
thereof represents an ongoing risk. The preservation of our relationships with pharmaceutical
manufacturers, biopharmaceutical manufacturers and retail pharmacies is very important to the
execution of our business strategies. Our future success will be largely dependent on our ability
to 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 shareholders. We believe there is a close correlation between strong ROIC and long-term
shareholder value and as such, we include ROIC as a component of our annual performance bonus grid.
Our financial performance benefits from the diversity of our client base and our
clinically-driven business model, which we believe provides better outcomes at lower costs for our
clients. We actively monitor the status of our accounts receivable and have mechanisms in place to
minimize the potential for incurring material accounts receivable credit risk. To date, we have
not experienced any significant deterioration in our client or manufacturer rebates accounts
receivable.
On July 20, 2011, we entered into a definitive Merger Agreement with Express Scripts and
certain of its subsidiaries providing for the combination of Express Scripts and Medco under a new
holding company, New Express Scripts. Subject to the terms and conditions set forth in the Merger Agreement,
upon the closing of the transaction, each share of Medco common stock will be converted into the
right to receive $28.80 in cash and 0.81 shares of New Express Scripts. Upon closing of the
transaction, Express Scripts shareholders are expected to own approximately 60% of the combined
company and Medcos shareholders are expected to own approximately 40%. The transaction is expected
to close in the first half of 2012. The merger is subject to regulatory clearance and Express
Scripts and Medcos shareholder approvals and other customary closing conditions. Currently,
Express Scripts and Medco are independent companies, and they will continue to be managed and
operated as such until the completion of the pending merger.
Our third fiscal quarters for 2011 and 2010 each consisted of 13 weeks and ended on September
24, 2011 and September 25, 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.
19
Table of Contents
Recent Acquisition
In September 2010, we extended our core capabilities in data analytics and research with the
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.
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 Nine Months Ended September 24, 2011
Our diluted earnings per share were $0.90 for the third quarter and $2.55 for the nine months
of 2011, and include expenses associated with the pending merger with Express Scripts. The
merger-related expenses, which include banker fees, legal fees and employee retention expenses,
amount to $36.6 million pre-tax for the third quarter and nine months of 2011, with $35.6 million
included in selling, general and administrative (SG&A) expenses and $1.0 million included in cost
of product net revenues. Excluding these merger-related expenses, our diluted earnings per share
increased 12.9% to $0.96 for the third quarter of 2011, and 14.0% to $2.60 for the nine months of
2011. Excluding all intangible amortization and the merger-related expenses, our diluted earnings
per share increased 12.6% to $1.07 for the third quarter of 2011, and 14.5% to $2.93 for the nine
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, partially
offset by the effect of client renewal pricing and increased SG&A expenses. The increase for the
nine months also reflects a first-quarter 2011 benefit associated with changes to the employee
postretirement healthcare benefit plan of $30.6 million included in gross margin and SG&A expenses,
partially offset by 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 nine months ended September 24, 2011, we generated cash flow from
operations of $1,086.1 million and had cash and cash equivalents of $161.5 million on our
consolidated balance sheet at September 24, 2011.
The diluted weighted average shares outstanding were 394.9 million for the third quarter and
404.7 million for the nine months of 2011 compared to 437.1 million for the third quarter and 459.3
million for the nine months of 2010, representing decreases of 9.7% and 11.9%, respectively,
resulting primarily from our share repurchase programs.
Our total net revenues increased 4.1% to $16,981.5 million for the third quarter, and
increased 4.2% to $51,075.1 million for the nine months of 2011. Product net revenues increased
3.4% to $16,602.8 million for the third quarter, and 3.5% to $49,988.7 million for the nine months
of 2011, which reflects higher prices charged by brand-name pharmaceutical manufacturers, as well
as higher prescription volume for the nine months, partially offset by a greater representation of
lower-priced generic drugs and higher client price discounts. Additionally, our service revenues
increased 46.9% to $378.7 million for the third quarter and 49.0% to $1,086.4 million for the nine
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 increased formulary
management fees and higher claims processing administrative fees.
20
Table of Contents
The total adjusted prescription volume, which adjusts mail-order prescription volume for the
difference in days supply between mail order and retail, decreased 0.7% to 233.6 million for the
third quarter reflecting lower retail volumes, partially offset by higher mail-order volumes.
Total adjusted prescription volume increased 0.7% to 717.6 million for the nine months of 2011
reflecting higher retail and mail-order volumes. The increases in mail-order prescription volume
for the third quarter and nine months of 2011 are driven by increases in generic volumes, as
brand-name volumes were lower than in the third quarter and nine months of 2010. The adjusted
mail-order penetration rate was 34.8% for the third quarter and 34.3% for the nine months of 2011,
compared to 34.5% for the third quarter and 34.2% for the nine months of 2010.
Our overall generic dispensing rate increased to 73.8% for the third quarter and 73.4% for the
nine months of 2011, from 71.6% for the third quarter and 70.6% for the nine months of 2010,
reflecting the impact of the introduction of new generic products in and subsequent to the third
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 $700 million and $2,700 million for the third quarter and nine months
of 2011, respectively.
Our overall gross margin percentages were 6.9% for the third quarter and 6.5% for the nine
months of 2011, consistent with the third quarter and nine 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, offset by the effect of client renewal pricing. Also
contributing for the nine 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, offset by the aforementioned second-quarter 2010 settlement award of
approximately $27 million.
SG&A expenses were $455.6 million for the third quarter of 2011 and $1,263.0 million for the
nine months of 2011 including merger-related costs of $35.6 million. Excluding the merger related
costs, SG&A expenses of $420.0 million for the third quarter of 2011 increased by $25.0 million, or
6.3%, from the third quarter of 2010. SG&A expenses of $1,227.4 million for the nine months of 2011
increased by $105.5 million, or 9.4%, from the nine months of 2010. These increases primarily
reflect UBC SG&A expenses and higher stock-based compensation expenses. Also contributing for the
nine months of 2011 are higher professional fees and technology-related expenses associated with
strategic initiatives, partially offset 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 and the merger-related expenses, SG&A expenses increased by 1.7% and 3.7% from the third
quarter and nine months of 2010, respectively, reflecting efficiencies across the company.
Amortization of intangible assets of $73.2 million for the third quarter and $219.6 million
for the nine months of 2011 increased $2.0 million and $7.1 million from the third quarter and nine
months of 2010, respectively, primarily reflecting higher intangible amortization from the
acquisition of UBC, partially offset by lower intangible amortization from scheduled accelerated
amortization of certain customer relationships in the prior periods.
Interest expense of $52.2 million for the third quarter and $156.4 million for the nine months
of 2011 increased $8.8 million and $33.4 million from the third quarter and nine 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 ($2.6) million of income for the third
quarter of 2011 was consistent with the third quarter of 2010. Interest (income) and other (income)
expense, net, of $1.7 million of expense for the nine months of 2011 decreased $12.0 million from
($10.3) million of income for the nine months of 2010. The decrease in interest (income) and other
(income) expense, net, for the nine months primarily reflects losses in the start-up period for
certain of our joint ventures and a foreign currency gain that was recognized in 2010, as well as
decreased interest income.
Our effective tax rate (defined as the percentage relationship of provision for income taxes
to income before provision for income taxes) was 39.6% for the third quarter and 39.4% for the nine
months of 2011, compared to 39.3% for the third quarter and nine months of 2010.
21
Table of Contents
Key Financial Statement Components
Consolidated Statements of Income
Our net revenues are comprised primarily of product net revenues and are derived principally
from the sale of prescription drugs through our networks of contractually affiliated retail
pharmacies and through our mail-order pharmacies, and are recorded net of certain discounts,
rebates and guarantees payable to clients and members. The majority of our product net revenues are
derived on a fee-for-service basis. Our Specialty Pharmacy product net revenues represent revenues
from the sale of primarily biopharmaceutical drugs and are reported at the net amount billed to
third-party payors and patients.
In addition, our product net revenues include premiums associated with our Medicare Part D
Prescription Drug Plan risk-based product offerings. These products involve prescription dispensing
for beneficiaries enrolled in the CMS-sponsored Medicare Part D prescription drug benefit. Our two
insurance company subsidiaries have been operating under contracts with CMS since 2006, and
currently offer several Medicare PDP options. The products involve underwriting the benefit,
charging enrollees applicable premiums, providing covered prescription drugs and administering the
benefit as filed with CMS. We provide two Medicare drug benefit plan options for beneficiaries,
including a standard Part D benefit plan as mandated by statute, and a benefit plan with enhanced
coverage that exceeds the standard Part D benefit plan, available for an additional premium. We
also offer numerous customized benefit plan designs to employer group retiree plans under the
Medicare Part D prescription drug benefit.
The PDP premiums are determined based on our annual bid and related contractual arrangements
with CMS. The PDP premiums are primarily comprised of amounts received from CMS as part of a direct
subsidy and an additional subsidy from CMS for low-income member premiums, as well as premium
payments received from members. These premiums are recognized ratably to product net revenues over
the period in which members are entitled to receive benefits. Premiums received in advance of the
applicable benefit period are deferred and recorded in accrued expenses and other current
liabilities on the consolidated balance sheets. There is a possibility that the annual costs of
drugs may be higher or lower than premium revenues. As a result, CMS provides a risk corridor
adjustment for the standard drug benefit that compares our actual annual drug costs incurred to the
targeted premiums in our CMS-approved bid. Based on specific collars in the risk corridor, we will
receive from CMS additional premium amounts or be required to refund to CMS previously received
premium amounts. We calculate the risk corridor adjustment on a quarterly basis based on drug cost
experience to date and record an adjustment to product net revenues with a corresponding account
receivable from or payable to CMS reflected on the consolidated balance sheets.
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
2011, premium revenues for our PDP products, which exclude member cost share, were $157 million for
the third quarter, or less than 1% of total net revenues, and $557 million for the nine months, or
1% of total net revenues. In the third quarter and nine months of 2010, premium revenues for our
PDP products, which exclude member cost share, were $173 million and $536 million, respectively, or
1% of total net revenues.
22
Table of Contents
Our agreements with CMS, as well as applicable Medicare Part D regulations and federal and
state laws, require us to, among other obligations: (i) comply with certain disclosure, filing,
record-keeping and marketing rules; (ii) operate quality assurance, drug utilization management and
medication therapy management programs; (iii) support e-prescribing initiatives; (iv) implement
grievance, appeals and formulary exception processes; (v) comply with payment protocols, which
include the return of overpayments to CMS and, in certain circumstances, coordination with state
pharmacy assistance programs; (vi) use approved networks and formularies, and provide access to
such networks to any willing pharmacy; (vii) provide emergency out-of-network coverage; and
(viii) implement a comprehensive Medicare and Fraud, Waste and Abuse compliance program. We have
various contractual and regulatory compliance requirements associated with participating in the
Medicare Part D benefit. Similar to our requirements with other clients, our policies and practices
associated with executing our PDP are subject to audit. If material contractual or regulatory
non-compliance was to be identified, monetary penalties and/or applicable sanctions, including
suspension of enrollment and marketing or debarment from participation in Medicare programs, may be
imposed. Additionally, each calendar year, payment will vary based on the annual
benchmark that applies as a result of Medicare Part D plan bids for the applicable year, as well as
for changes in the CMS methodology for calculating risk adjustment factors.
Service revenues consist principally of administrative fees and clinical program fees earned
from clients, sales of prescription services to pharmaceutical manufacturers, performance-oriented
fees paid by Specialty Pharmacy manufacturers, revenues from data analytics and research associated
with UBC, and other non-product-related revenues.
Cost of revenues is comprised primarily of cost of product net revenues and is principally
attributable to the dispensing of prescription drugs. Cost of product net revenues for
prescriptions dispensed through our networks of retail pharmacies is comprised of the contractual
cost of drugs dispensed by, and professional fees paid to, retail pharmacies in the networks,
including the associated member co-payments. Our cost of product net revenues relating to drugs
dispensed by our mail-order pharmacies consists primarily of the cost of inventory dispensed and
our costs incurred to process and dispense the prescriptions, including the associated fixed asset
depreciation. The operating costs of our call center pharmacies are also included in cost of
product net revenues. In addition, cost of product net revenues includes a credit for rebates
earned from brand-name pharmaceutical manufacturers whose drugs are included in our formularies.
These rebates generally take the form of formulary rebates, which are earned based on the volume of
a specific drug dispensed, or market share rebates, which are earned based on the achievement of
contractually specified market share levels.
Our cost of product net revenues also includes the cost of drugs dispensed by our mail-order
pharmacies or retail network for members covered under our Medicare PDP product offerings and are
recorded at cost as incurred. We receive a catastrophic reinsurance subsidy from CMS for
approximately 80% of costs incurred by individual members in excess of the individual annual
out-of-pocket maximum of $4,550 for both coverage years 2011 and 2010. The subsidy is reflected as
an offsetting credit in cost of product net revenues to the extent that catastrophic costs are
incurred. Catastrophic reinsurance subsidy amounts received in advance are deferred and recorded in
accrued expenses and other current liabilities on the consolidated balance sheets. If there are
catastrophic reinsurance subsidies due from CMS, the amount is accrued and recorded in client
accounts receivable, net, on the consolidated balance sheets. After the end of the contract year
and based on actual annual drug costs incurred, catastrophic reinsurance amounts are reconciled
with CMS and the corresponding receivable or payable is settled. Cost of service revenues consists
principally of labor and operating costs for delivery of services provided, as well as costs
associated with member communication materials.
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.
23
Table of Contents
Interest (income) and other (income) expense, net, includes interest income generated by cash
and cash equivalent investments, and short-term and long-term investments in marketable securities,
as well as other (income) expense from the effect of foreign currency translation and our joint
venture activity.
For further details, see our critical accounting policies included in Use of Estimates and
Critical Accounting Policies and Estimates and Note 2, Summary of Significant Accounting
Policies, to our audited consolidated financial statements included in Part II, Items 7 and 8,
respectively, of our Annual Report on Form 10-K for the fiscal year ended December 25, 2010.
Consolidated Balance Sheets
Our primary assets include cash and cash equivalents, short-term and long-term investments,
manufacturer accounts receivable, client accounts receivable, inventories, fixed assets, deferred
tax assets, goodwill and intangible assets. Cash and cash equivalents reflect the accumulation of
net positive cash flows from our operations, investing and financing activities, and primarily
include time deposits with banks or other financial institutions, and money market mutual funds.
Our short-term and long-term investments include U.S. government securities that are held to
satisfy statutory capital requirements for our insurance subsidiaries.
Manufacturer accounts receivable balances primarily include amounts due from brand-name
pharmaceutical manufacturers for earned rebates and other prescription services. Client accounts
receivable represent amounts due from clients, other payors and patients for prescriptions
dispensed from retail pharmacies in our networks or from our mail-order pharmacies, including fees
due to us, net of allowances for doubtful accounts, as well as contractual allowances and any
applicable rebates and guarantees payable when these payables are settled on a net basis in the
form of an invoice credit. In cases where rebates and guarantees are settled with the client on a
net basis, and the rebates and guarantees payable are greater than the corresponding client
accounts receivable balances, the net liability is reclassified to client rebates and guarantees
payable. When these payables are settled in the form of a check or wire, they are recorded on a
gross basis and the entire liability is reflected in client rebates and guarantees payable. Our
client accounts receivable also includes receivables from CMS for our Medicare PDP product
offerings and premiums from members. Additionally, we have receivables from Medicare and Medicaid
for a portion of our Specialty Pharmacy business, and related to the sale of certain diabetes
supplies.
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.
We anticipate refinancing our $2 billion unsecured revolving credit facility before it matures and repaying the $1 billion senior unsecured term loan at maturity.
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.
24
Table of Contents
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.
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 nine months of 2010, our operating cash flows reflected a benefit of $194.0 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 proceeds from employee stock plans, the
benefits of realized tax deductions in excess of tax benefits on compensation expense and
historically, share repurchases.
25
Table of Contents
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 third
quarter and nine 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 $2,800 million and $8,500 million, or
17%, of our net revenues, respectively. For the third quarter and nine months of 2010, our ten
largest clients based on revenue accounted for approximately 48% and 47% of our net revenues,
respectively, including UnitedHealth Group, which represented approximately $2,700 million and
$8,200 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 third quarters and
nine months of 2011 and 2010. None of our other clients individually represented more than 10% of
our net revenues in the third quarter and nine 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.
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
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 9,
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.
26
Table of Contents
Consolidated Results of Operations
The following table presents selected consolidated comparative results of operations and
volume performance ($ and volumes in millions):
Quarter | Quarter | Nine Months | Nine Months | |||||||||||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||
September 24, | September 25, | September 24, | September 25, | |||||||||||||||||||||||||||||
2011(1) (2) | Variance | 2010(1) | 2011(1) (2) | Variance | 2010(1) | |||||||||||||||||||||||||||
Net Revenues |
||||||||||||||||||||||||||||||||
Retail product(3) |
$ | 10,095.2 | $ | 194.6 | 2.0 | % | $ | 9,900.6 | $ | 30,643.8 | $ | 692.4 | 2.3 | % | $ | 29,951.4 | ||||||||||||||||
Mail-order product |
6,507.6 | 346.2 | 5.6 | % | 6,161.4 | 19,344.9 | 987.3 | 5.4 | % | 18,357.6 | ||||||||||||||||||||||
Total product(3) |
$ | 16,602.8 | $ | 540.8 | 3.4 | % | $ | 16,062.0 | $ | 49,988.7 | $ | 1,679.7 | 3.5 | % | $ | 48,309.0 | ||||||||||||||||
Client and other service |
249.0 | 40.8 | 19.6 | % | 208.2 | 704.5 | 104.6 | 17.4 | % | 599.9 | ||||||||||||||||||||||
Manufacturer service |
129.7 | 80.1 | N/M | * | 49.6 | 381.9 | 252.6 | N/M | * | 129.3 | ||||||||||||||||||||||
Total service |
$ | 378.7 | $ | 120.9 | 46.9 | % | $ | 257.8 | $ | 1,086.4 | $ | 357.2 | 49.0 | % | $ | 729.2 | ||||||||||||||||
Total net revenues(3) |
$ | 16,981.5 | $ | 661.7 | 4.1 | % | $ | 16,319.8 | $ | 51,075.1 | $ | 2,036.9 | 4.2 | % | $ | 49,038.2 | ||||||||||||||||
Cost of Revenues |
||||||||||||||||||||||||||||||||
Product(3) |
$ | 15,692.1 | $ | 564.9 | 3.7 | % | $ | 15,127.2 | $ | 47,367.1 | $ | 1,701.8 | 3.7 | % | $ | 45,665.3 | ||||||||||||||||
Service |
122.3 | 49.2 | 67.3 | % | 73.1 | 365.3 | 166.4 | 83.7 | % | 198.9 | ||||||||||||||||||||||
Total cost of revenues(3) |
$ | 15,814.4 | $ | 614.1 | 4.0 | % | $ | 15,200.3 | $ | 47,732.4 | $ | 1,868.2 | 4.1 | % | $ | 45,864.2 | ||||||||||||||||
Gross Margin(4) |
||||||||||||||||||||||||||||||||
Product |
$ | 910.7 | $ | (24.1 | ) | (2.6 | )% | $ | 934.8 | $ | 2,621.6 | $ | (22.1 | ) | (0.8 | )% | $ | 2,643.7 | ||||||||||||||
Product gross margin percentage |
5.5 | % | (0.3 | )% | 5.8 | % | 5.2 | % | (0.3 | )% | 5.5 | % | ||||||||||||||||||||
Service |
$ | 256.4 | $ | 71.7 | 38.8 | % | $ | 184.7 | $ | 721.1 | $ | 190.8 | 36.0 | % | $ | 530.3 | ||||||||||||||||
Service gross margin percentage |
67.7 | % | (3.9 | )% | 71.6 | % | 66.4 | % | (6.3 | )% | 72.7 | % | ||||||||||||||||||||
Total gross margin |
$ | 1,167.1 | $ | 47.6 | 4.3 | % | $ | 1,119.5 | $ | 3,342.7 | $ | 168.7 | 5.3 | % | $ | 3,174.0 | ||||||||||||||||
Gross margin percentage |
6.9 | % | | 6.9 | % | 6.5 | % | | 6.5 | % | ||||||||||||||||||||||
Volume Information |
||||||||||||||||||||||||||||||||
Generic mail-order prescriptions |
17.7 | 0.6 | 3.5 | % | 17.1 | 53.2 | 3.1 | 6.2 | % | 50.1 | ||||||||||||||||||||||
Brand mail-order prescriptions |
9.7 | (0.5 | ) | (4.9 | )% | 10.2 | 29.5 | (2.4 | ) | (7.5 | )% | 31.9 | ||||||||||||||||||||
Total mail-order prescriptions |
27.4 | 0.1 | 0.4 | % | 27.3 | 82.7 | 0.7 | 0.9 | % | 82.0 | ||||||||||||||||||||||
Retail prescriptions |
152.2 | (1.8 | ) | (1.2 | )% | 154.0 | 471.6 | 2.8 | 0.6 | % | 468.8 | |||||||||||||||||||||
Total prescriptions |
179.6 | (1.7 | ) | (0.9 | )% | 181.3 | 554.3 | 3.5 | 0.6 | % | 550.8 | |||||||||||||||||||||
Adjusted prescriptions(5) |
233.6 | (1.6 | ) | (0.7 | )% | 235.2 | 717.6 | 4.9 | 0.7 | % | 712.7 | |||||||||||||||||||||
Adjusted mail-order
penetration(6) |
34.8 | % | 0.3 | % | 34.5 | % | 34.3 | % | 0.1 | % | 34.2 | % | ||||||||||||||||||||
Generic Dispensing Rate Information |
||||||||||||||||||||||||||||||||
Retail generic dispensing rate |
75.4 | % | 2.3 | % | 73.1 | % | 75.0 | % | 2.7 | % | 72.3 | % | ||||||||||||||||||||
Mail-order generic dispensing rate |
64.8 | % | 2.0 | % | 62.8 | % | 64.3 | % | 3.2 | % | 61.1 | % | ||||||||||||||||||||
Overall generic dispensing rate |
73.8 | % | 2.2 | % | 71.6 | % | 73.4 | % | 2.8 | % | 70.6 | % |
* | Not meaningful | |
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Includes pre-tax merger-related expenses of $1.0 million in cost of product revenues for the third quarter and nine months of 2011 associated with the pending Express Scripts merger. | |
(3) | Includes retail co-payments of $2,140 million and $2,216 million for the third quarters of 2011 and 2010, and $6,908 million and $6,966 million for the nine months of 2011 and 2010. | |
(4) | Represents total net revenues minus total cost of revenues. | |
(5) | 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. | |
(6) | Represents the percentage of adjusted mail-order prescriptions to total adjusted prescriptions. |
27
Table of Contents
Net Revenues
Retail. The increases in retail net revenues of $195 million for the third quarter and $692
million for the nine months of 2011 reflect net price increases of $314 million for the quarter and
$515 million for the nine months driven by higher prices charged by brand-name pharmaceutical
manufacturers, partially offset by higher client price discounts. Also contributing to the retail
net revenue variances were a net volume decrease of $119 million for the third quarter
reflecting lower utilization, and an increase of $177 million for the nine months reflecting
new business, partially offset by lower utilization. The aforementioned net price variances include
the offsetting effect of approximately $505 million for the third quarter and $1,785 million for
the nine months from a greater representation of lower-priced generic drugs in 2011.
Mail-Order. The increases in mail-order net revenues of $346 million for the third quarter and
$987 million for the nine months of 2011 primarily reflect net price increases of $355 million for
the third quarter and $844 million for the nine months driven by higher prices charged by
brand-name pharmaceutical manufacturers, partially offset by higher client price discounts. Also
contributing to the mail-order net revenue increase for the nine months is a net volume increase of
$143 million driven by higher generic volumes. The volumes of lower-priced generic drugs were
higher than 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. The
aforementioned net price variances include the offsetting effect of approximately $195 million for
the third quarter and $915 million for the nine months from a greater representation of
lower-priced generic drugs in 2011.
Our overall generic dispensing rate increased to 73.8% for the third quarter and 73.4% for the
nine months of 2011, compared to 71.6% for the third quarter and 70.6% for the nine months of 2010.
Mail-order and retail generic dispensing rates increased to 64.8% and 75.4%, respectively, for the
third quarter of 2011, compared to 62.8% and 73.1%, respectively, for the third quarter of 2010.
For the nine months of 2011, mail-order and retail generic dispensing rates increased to 64.3% and
75.0%, respectively, compared to 61.1% and 72.3% for 2010, respectively. These increases reflect
the impact of the introduction of new generic products in and subsequent to the third 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 $120.9 million in the third quarter and $357.2 million for the nine
months of 2011, reflecting higher manufacturer service revenues of $80.1 million and $252.6
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 $40.8 million and $104.6 million, respectively, primarily driven by increased formulary
management fees and higher claims processing administrative fees.
Gross Margin
Our overall gross margin increased to $1,167.1 million or 6.9% for the third quarter and
$3,342.7 million or 6.5% for the nine months of 2011, from $1,119.5 million or 6.9% for the third
quarter and $3,174.0 million or 6.5% for the nine months of 2010. Our product gross margin was
$910.7 million or 5.5% for the third quarter and $2,621.6 million or 5.2% for the nine months of
2011, compared to $934.8 million or 5.8% for the third quarter and $2,643.7 million or 5.5% for the
nine months of 2010. The 2011 product gross margin for the third quarter and nine months includes
merger-related expenses of $1.0 million. Product gross margin reflects increased generic dispensing
rates and mail-order generic volumes, as well as business efficiencies, offset by the effect of
client renewal pricing. Also contributing for the nine 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, offset by the aforementioned second-quarter 2010 settlement award
of approximately $27 million. Our overall gross margin also benefited from a higher mix of higher
margin service revenues. Service gross margin of $256.4 million for the third quarter and $721.1
million for the nine months of 2011 increased $71.7 million and $190.8 million, respectively,
compared to $184.7 million for the third quarter and $530.3 million for the nine months of 2010.
The service gross margin dollar increases reflect the aforementioned increases in service revenues
of $120.9 million for the third quarter and $357.2 million for the nine months of 2011, partially
offset by increases in cost of service revenues of $49.2 million and $166.4 million, respectively,
which primarily result from UBC. Service gross margin percentage was 67.7% for the third quarter
and 66.4% for the nine months of 2011, compared to 71.6% for the third quarter and 72.7% for the
nine months of 2010, with the decreases reflecting the UBC mix driven
largely by the increased UBC revenue.
28
Table of Contents
Rebates from brand-name pharmaceutical manufacturers, which are reflected as a reduction of
cost of product net revenues, totaled $1,528 million for the third quarter of 2011 and $1,447
million for the third quarter of 2010, with formulary rebates representing 85.9% and 85.7% of total
rebates, respectively. Rebates were $4,514 million for the nine
months of 2011 and $4,328 million for the nine months of 2010, with formulary rebates
representing 86.2% and 84.9% 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 $198 million, or 13.0%, of total rebates in
the third quarter of 2011, and $185 million, or 12.8%, in the third quarter of 2010. For the nine
months, we retained approximately $554 million, or 12.3%, of total rebates in 2011, and $532
million, or 12.3%, 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.
The following table presents additional selected consolidated comparative results of
operations (in millions, except for per share data):
Quarter | Quarter | Nine Months | Nine Months | |||||||||||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||
September 24, | September 25, | September 24, | September 25, | |||||||||||||||||||||||||||||
2011(1) (2) | Variance | 2010(1) | 2011(1) (2) | Variance | 2010(1) | |||||||||||||||||||||||||||
Gross margin(3) |
$ | 1,167.1 | $ | 47.6 | 4.3 | % | $ | 1,119.5 | $ | 3,342.7 | $ | 168.7 | 5.3 | % | $ | 3,174.0 | ||||||||||||||||
Selling, general and
administrative expenses |
455.6 | 60.6 | 15.3 | % | 395.0 | 1,263.0 | 141.1 | 12.6 | % | 1,121.9 | ||||||||||||||||||||||
Amortization of intangibles |
73.2 | 2.0 | 2.8 | % | 71.2 | 219.6 | 7.1 | 3.3 | % | 212.5 | ||||||||||||||||||||||
Interest expense |
52.2 | 8.8 | 20.3 | % | 43.4 | 156.4 | 33.4 | 27.2 | % | 123.0 | ||||||||||||||||||||||
Interest (income) and other
(income) expense, net |
(2.6 | ) | | N/M | * | (2.6 | ) | 1.7 | 12.0 | N/M | * | (10.3 | ) | |||||||||||||||||||
Income before provision for
income taxes |
588.7 | (23.8 | ) | (3.9 | )% | 612.5 | 1,702.0 | (24.9 | ) | (1.4 | )% | 1,726.9 | ||||||||||||||||||||
Provision for income taxes |
233.3 | (7.7 | ) | (3.2 | )% | 241.0 | 670.7 | (7.3 | ) | (1.1 | )% | 678.0 | ||||||||||||||||||||
Net income |
$ | 355.4 | $ | (16.1 | ) | (4.3 | )% | $ | 371.5 | $ | 1,031.3 | $ | (17.6 | ) | (1.7 | )% | $ | 1,048.9 | ||||||||||||||
Diluted weighted average shares
outstanding |
394.9 | (42.2 | ) | (9.7 | )% | 437.1 | 404.7 | (54.6 | ) | (11.9 | )% | 459.3 | ||||||||||||||||||||
Diluted earnings per share |
$ | 0.90 | $ | 0.05 | 5.9 | % | $ | 0.85 | $ | 2.55 | $ | 0.27 | 11.8 | % | $ | 2.28 | ||||||||||||||||
* | Not meaningful | |
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Includes pre-tax merger-related expenses of $36.6 million for the third quarter and nine months of 2011 associated with the pending Express Scripts merger, with $35.6 million in SG&A expenses and $1.0 million in gross margin. Merger-related expenses are $22 million after tax. | |
(3) | Represents total net revenues minus total cost of revenues. |
Selling, General and Administrative Expenses
SG&A expenses were $455.6 million for the third quarter of 2011 and $1,263.0 million for the
nine months of 2011 including merger-related costs of $35.6 million. The merger-related expenses
primarily include banker fees, legal fees and employee retention expenses. Excluding the merger
related costs, SG&A expenses of $420.0 million for the third quarter of 2011 increased by $25.0
million, or 6.3%, from the third quarter of 2010. SG&A expenses of $1,227.4 million for the nine
months of 2011 increased by $105.5 million, or 9.4%, from the nine months of 2010. These increases
primarily reflect UBC SG&A expenses and higher stock-based compensation expenses. Also contributing
for the nine months of 2011 are higher professional fees and technology-related expenses associated
with strategic initiatives, partially offset 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 and the merger-related expenses, SG&A expenses increased by 1.7% and 3.7%
from the third quarter and nine months of 2010, respectively, reflecting efficiencies across the
company.
Amortization of Intangibles
Amortization of intangible assets of $73.2 million for the third quarter and $219.6 million
for the nine months of 2011 increased $2.0 million and $7.1 million from the third quarter and nine
months of 2010, respectively, primarily
reflecting higher intangible amortization from the acquisition of UBC, partially offset by
lower intangible amortization from scheduled accelerated amortization of certain customer
relationships in the prior periods.
29
Table of Contents
Interest Expense
Interest expense of $52.2 million for the third quarter and $156.4 million for the nine months
of 2011 increased $8.8 million and $33.4 million from the third quarter and nine 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 3.3% for the third
quarter and 3.5% for the nine months of 2011, compared to approximately 3.7% for the third quarter
and 3.9% for the nine 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 ($2.6) million of income for the third
quarter of 2011 was consistent with the third quarter of 2010. Interest (income) and other (income)
expense, net, of $1.7 million of expense for the nine months of 2011 decreased $12.0 million from
($10.3) million of income for the nine months of 2010. The decrease in interest (income) and other
(income) expense, net, for the nine months primarily reflects losses in the start-up period for
certain of our joint ventures and a foreign currency gain that was recognized in 2010, as well as
decreased 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 39.6% for the third quarter and 39.4% for the nine
months of 2011, compared to 39.3% for the third quarter and nine months of 2010.
Net Income and Earnings per Share
Net income as a percentage of net revenues was 2.1% for the third quarter and 2.0% for the
nine months of 2011. Excluding merger-related expenses, net income as a percentage of net revenues
was 2.2% for the third quarter and 2.1% for the nine months of 2011, compared to 2.3% for the third
quarter and 2.1% for the nine months of 2010, reflecting the aforementioned factors.
Diluted earnings per share were $0.90 for the third quarter and $2.55 for the nine months of
2011 including the aforementioned merger-related expenses. Excluding merger-related expenses, our
diluted earnings per share increased 12.9% to $0.96 for the third quarter of 2011, and 14.0% to
$2.60 for the nine months of 2011. Excluding all intangible amortization and the merger-related
expenses, our diluted earnings per share increased 12.6% to $1.07 for the third quarter of 2011,
and 14.5% to $2.93 for the nine months of 2011. The diluted earnings per share increases reflect
the aforementioned consolidated results of operations trending factors, as well as lower diluted
weighted average shares outstanding.
The diluted weighted average shares outstanding were 394.9 million for the third quarter and
404.7 million for the nine months of 2011 compared to 437.1 million for the third quarter and 459.3
million for the nine months of 2010, representing decreases of 9.7% and 11.9%, respectively. The
decreases primarily result from the repurchase of approximately 285.5 million shares of stock in
connection with our share repurchase programs since inception in 2005 through the end of the third
quarter of 2011, compared to an equivalent amount of 240.4 million shares repurchased since
inception through the end of the third quarter of 2010. We repurchased approximately 6.3 million
and 29.3 million shares of stock in the third quarter and nine months of 2011, respectively,
compared to approximately 17.1 million and 54.2 million shares in the third quarter and nine months
of 2010, respectively.
30
Table of Contents
Segment Results of Operations
PBM Segment
The PBM segment primarily involves sales of traditional prescription drugs and supplies,
including diabetes testing supplies and related products to our clients and members or patients,
either through our networks of contractually affiliated retail pharmacies or our mail-order
pharmacies. The following table presents selected PBM segment comparative results of operations ($
in millions):
Quarter | Quarter | Nine Months | Nine Months | |||||||||||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||
September 24, | September 25, | September 24, | September 25, | |||||||||||||||||||||||||||||
2011(1) (2) | Variance | 2010(1) | 2011(1 ) (2) | Variance | 2010(1) | |||||||||||||||||||||||||||
Product net revenues |
$ | 13,261.5 | $ | 51.7 | 0.4 | % | $ | 13,209.8 | $ | 40,425.9 | $ | 410.8 | 1.0 | % | $ | 40,015.1 | ||||||||||||||||
Service revenues |
360.1 | 128.1 | 55.2 | % | 232.0 | 1,029.2 | 375.3 | 57.4 | % | 653.9 | ||||||||||||||||||||||
Total net revenues |
13,621.6 | 179.8 | 1.3 | % | 13,441.8 | 41,455.1 | 786.1 | 1.9 | % | 40,669.0 | ||||||||||||||||||||||
Total cost of revenues |
12,681.3 | 163.4 | 1.3 | % | 12,517.9 | 38,752.6 | 674.9 | 1.8 | % | 38,077.7 | ||||||||||||||||||||||
Total gross margin(3) |
$ | 940.3 | $ | 16.4 | 1.8 | % | $ | 923.9 | $ | 2,702.5 | $ | 111.2 | 4.3 | % | $ | 2,591.3 | ||||||||||||||||
Gross margin percentage |
6.9 | % | | 6.9 | % | 6.5 | % | 0.1 | % | 6.4 | % | |||||||||||||||||||||
Selling, general and
administrative expenses |
387.9 | 66.1 | 20.5 | % | 321.8 | 1,056.3 | 156.8 | 17.4 | % | 899.5 | ||||||||||||||||||||||
Amortization of intangibles |
62.7 | 2.2 | 3.6 | % | 60.5 | 188.1 | 7.7 | 4.3 | % | 180.4 | ||||||||||||||||||||||
Operating income |
$ | 489.7 | $ | (51.9 | ) | (9.6 | )% | $ | 541.6 | $ | 1,458.1 | $ | (53.3 | ) | (3.5 | )% | $ | 1,511.4 | ||||||||||||||
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Includes pre-tax merger-related expenses of $36.6 million for the third quarter and nine months of 2011 associated with the pending Express Scripts merger, with $35.6 million in SG&A expenses and $1.0 million in total cost of revenues. | |
(3) | Represents total net revenues minus total cost of revenues. |
PBM total net revenues of $13,621.6 million for the third quarter and $41,455.1 million
for the nine months of 2011 increased $179.8 million and $786.1 million, respectively, compared to
the revenues of $13,441.8 million for the third quarter and $40,669.0 million for the nine months
of 2010. The increases primarily reflect higher mail-order generic 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 retail volumes for the nine months and increased service revenues
primarily driven by the contributions from UBC, which was acquired in September 2010.
Gross margin was 6.9% of net revenues for the third quarter and 6.5% for the nine months of
2011, compared to 6.9% for the third quarter and 6.4% for the nine 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 nine months, the margin component of the
aforementioned first-quarter 2011 benefit associated with the postretirement healthcare benefit
plan. The gross margin percentage increases were offset by the effect of client renewal
pricing, and for the nine months, the aforementioned second-quarter 2010 settlement award. The 2011
gross margin for the third quarter and nine months includes merger-related expenses of $1.0
million.
SG&A expenses were $387.9 million for the third quarter and $1,056.3 million for the nine
months of 2011, and include the aforementioned merger-related expenses of $35.6 million. Excluding
merger-related expenses, SG&A expenses were $352.3 million for the third quarter and $1,020.7
million for the nine months of 2011, and increased from 2010 by $30.5 million and $121.2 million,
respectively. These increases primarily reflect UBC SG&A expenses and higher stock-based
compensation expenses. Also contributing for the nine months of 2011 are higher professional fees
and technology-related expenses associated with strategic initiatives, partially offset 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 and the merger-related expenses, SG&A
expenses increased by $11.9 million and $56.6 million over the third quarter and nine months of
2010, respectively.
31
Table of Contents
Amortization of intangible assets was $62.7 million for the third quarter and $188.1 million
for the nine months of 2011, compared to $60.5 million for the third quarter and $180.4 million for
the nine months of 2010. The increases primarily reflect higher intangible amortization from the
acquisition of UBC, partially offset by lower intangible amortization from scheduled accelerated
amortization of certain customer relationships in the prior periods.
Operating income was $489.7 million for the third quarter and $1,458.1 million for the nine
months of 2011, compared with $541.6 million for the third quarter and $1,511.4 million for the
nine months of 2010, with the changes reflecting the aforementioned factors.
For additional information on the PBM segment, see Note 9, Segment and Geographic Data, to
the unaudited interim condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
Specialty Pharmacy Segment
The Specialty Pharmacy segment includes the sale of specialty pharmacy products and services
for the treatment of chronic and complex (potentially life-threatening) diseases. The following
table presents selected Specialty Pharmacy segment comparative results of operations ($ in
millions):
Quarter | Quarter | Nine Months | Nine Months | |||||||||||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||
September 24, | September 25, | September 24, | September 25, | |||||||||||||||||||||||||||||
2011 | Variance | 2010 | 2011 | Variance | 2010 | |||||||||||||||||||||||||||
Product net revenues |
$ | 3,341.3 | $ | 489.1 | 17.1 | % | $ | 2,852.2 | $ | 9,562.8 | $ | 1,268.9 | 15.3 | % | $ | 8,293.9 | ||||||||||||||||
Service revenues |
18.6 | (7.2 | ) | (27.9 | )% | 25.8 | 57.2 | (18.1 | ) | (24.0 | )% | 75.3 | ||||||||||||||||||||
Total net revenues |
3,359.9 | 481.9 | 16.7 | % | 2,878.0 | 9,620.0 | 1,250.8 | 14.9 | % | 8,369.2 | ||||||||||||||||||||||
Total cost of revenues |
3,133.1 | 450.7 | 16.8 | % | 2,682.4 | 8,979.8 | 1,193.3 | 15.3 | % | 7,786.5 | ||||||||||||||||||||||
Total gross margin(1) |
$ | 226.8 | $ | 31.2 | 16.0 | % | $ | 195.6 | $ | 640.2 | $ | 57.5 | 9.9 | % | $ | 582.7 | ||||||||||||||||
Gross margin percentage |
6.8 | % | | 6.8 | % | 6.7 | % | (0.3 | )% | 7.0 | % | |||||||||||||||||||||
Selling, general and
administrative expenses |
67.7 | (5.5 | ) | (7.5 | )% | 73.2 | 206.7 | (15.7 | ) | (7.1 | )% | 222.4 | ||||||||||||||||||||
Amortization of intangibles |
10.5 | (0.2 | ) | (1.9 | )% | 10.7 | 31.5 | (0.6 | ) | (1.9 | )% | 32.1 | ||||||||||||||||||||
Operating income |
$ | 148.6 | $ | 36.9 | 33.0 | % | $ | 111.7 | $ | 402.0 | $ | 73.8 | 22.5 | % | $ | 328.2 | ||||||||||||||||
(1) | Represents total net revenues minus total cost of revenues. |
Specialty Pharmacy total net revenues of $3,359.9 million for the third quarter and
$9,620.0 million for the nine months of 2011 increased $481.9 million and $1,250.8 million,
respectively, compared to revenues of $2,878.0 million for the third quarter and $8,369.2 million
for the nine 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 6.8% of net revenues for the third quarter of 2011, consistent with the
third quarter of 2010. Gross margins were 6.7% of net revenues for the nine months of 2011,
compared to 7.0% for the nine months of 2010, primarily reflecting product and channel mix effects
experienced in 2011 as compared to 2010.
SG&A expenses of $67.7 million for the third quarter of 2011 decreased $5.5 million compared
to $73.2 million for the third quarter of 2010. SG&A expenses of $206.7 million for the nine months
of 2011 decreased $15.7 million compared to $222.4 million for the nine months of 2010. These
decreases primarily reflect lower employee labor and related expenses. Amortization of
intangible assets was $10.5 million for the third quarter and $31.5 million for the nine months of
2011, compared to $10.7 million for the third quarter and $32.1 million for the nine months of
2010.
Operating income of $148.6 million for the third quarter and $402.0 million for the nine
months of 2011 increased $36.9 million, or 33.0%, and $73.8 million, or 22.5%, from the third
quarter and nine months of 2010, respectively, reflecting the aforementioned factors.
32
Table of Contents
For additional information on the Specialty Pharmacy segment, see Note 9, Segment and
Geographic Data, to the unaudited interim condensed consolidated financial statements included in
Part I, Item 1 of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
Cash Flows
The following table presents selected data from our unaudited interim condensed consolidated
statements of cash flows ($ in millions):
Nine Months | Nine Months | |||||||||||
Ended | Ended | |||||||||||
September 24, | September 25, | |||||||||||
2011(1) | Variance | 2010(1) | ||||||||||
Net cash provided by operating activities |
$ | 1,086.1 | $ | (279.2 | ) | $ | 1,365.3 | |||||
Net cash used by investing activities |
(174.3 | ) | 704.7 | (879.0 | ) | |||||||
Net cash used by financing activities |
(1,603.7 | ) | 518.4 | (2,122.1 | ) | |||||||
Net decrease in cash and cash equivalents |
(691.9 | ) | 943.9 | (1,635.8 | ) | |||||||
Cash and cash equivalents at beginning of period |
853.4 | (1,674.8 | ) | 2,528.2 | ||||||||
Cash and cash equivalents at end of period |
$ | 161.5 | $ | (730.9 | ) | $ | 892.4 | |||||
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. |
Operating Activities. Net cash provided by operating activities of $1,086.1 million for
the first nine months of 2011 primarily reflects net income of $1,031.3 million, with non-cash
adjustments for depreciation, amortization and stock-based compensation of $501.7 million. In
addition, there were net cash inflows of $225.4 million from a decrease in inventories, net,
primarily due to additional initiatives to decrease inventory days on hand, net cash
inflows of $43.2 million from a decrease in client accounts receivable, as well as net cash inflows
of $37.7 million from a decrease in manufacturer accounts receivable, net, reflecting initiatives
to improve working capital management. These increases were partially offset by net cash outflows
of $533.7 million from a decrease in claims and other accounts payable primarily due to the timing
of our payment cycles, and net cash outflows of $251.4 million from a decrease in client rebates
and guarantees payable, due to the timing of payments. The $279.2 million decrease in net cash
provided by operating activities for the first nine months of 2011 compared to the first nine
months of 2010 is primarily due to decreased cash flows of $465.9 million from client rebates and
guarantees payable due to the timing of payments, and decreased cash flows of $193.0 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
$144.4 million from claims and other accounts payable reflecting lower retail pharmacy claims,
increased cash flows from manufacturer accounts receivable, net, of $136.8 million reflecting the
aforementioned initiatives, and increased cash flows from client accounts receivable, net, of $74.2
million.
Investing Activities. The net cash used by investing activities of $174.3 million for the
first nine months of 2011 is primarily attributable to capital expenditures of $190.3 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. In addition, there were purchases of securities and other assets of $20.3 million and
acquisitions of businesses, net of cash acquired, of $15.1 million. These cash outflows were
partially offset by proceeds from the sale of securities and other investments of $51.4 million.
The $704.7 million decrease in net cash used by investing activities for the first nine months of
2011 compared to the first nine months of 2010 is primarily due to a $686.0 million decrease in acquisitions of businesses, net
of cash acquired, primarily resulting from the acquisition of UBC in September 2010, and a
$32.9 million increase in proceeds from the sale of securities and other investments. These
reductions in cash outflows were partially offset by a $26.2 million increase in capital expenditures.
Financing Activities. The net cash used by financing activities of $1,603.7 million for the
first nine months of 2011 primarily results from $1,786.6 million in share repurchases, partially
offset by net proceeds from employee stock plans of $131.3 million and excess tax benefits from
stock-based compensation arrangements of $39.1 million. The decrease in net cash used by financing
activities of $518.4 million for the first nine months of 2011 compared to the first nine
months of 2010 primarily results from lower share repurchases of $1,374.8 million and higher
net proceeds from employee stock plans of $97.0 million, partially offset by lower net proceeds
from long-term debt of $973.7 million reflecting our underwritten public offering in September
2010.
33
Table of Contents
Total cash and short-term investments as of September 24, 2011 were $166.8 million, including
$161.5 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 $743.3 million in cash and short-term investments for the nine 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.
Share Repurchase Programs
Since 2005, when we commenced our first share repurchase program, we have executed share
repurchases of 285.5 million shares at a cost of $12.8 billion and at an average per-share cost of
$45.00 through the end of the third 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 third quarter of 2011, we repurchased 6.3 million shares at a cost of $350 million with an
average per-share cost of $55.89, and during the nine months of 2011, we repurchased 29.3 million
shares at a cost of $1,786.6 million with an average per-share cost of $60.93 under our share
repurchase programs.
Pursuant to the 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 merger 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 a definitive Merger Agreement with Express Scripts and
certain of its subsidiaries providing for the combination of Express Scripts and Medco under a new
holding company, New Express Scripts. Subject to the terms and conditions set forth in the Merger Agreement,
upon the closing of the transaction, each share of Medco common stock will be converted into the
right to receive $28.80 in cash and 0.81 shares of New Express Scripts. Upon closing of the
transaction, Express Scripts shareholders are expected to own approximately 60% of the combined
company and Medcos shareholders are expected to own approximately 40%. The transaction is expected
to close in the first half of 2012. The merger is subject to regulatory clearance and Express
Scripts and Medcos shareholder approvals and other customary closing conditions. Currently,
Express Scripts and Medco are independent companies, and they will continue to be managed and
operated as such until the completion of the pending merger.
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 September 24, 2011. We
anticipate refinancing our $2 billion unsecured revolving credit facility before it matures and
repaying the $1 billion senior unsecured term loan at maturity. 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 September
24, 2011, we had additional committed borrowing capacity under our revolving credit facility of
$995.2 million, borrowing capacity under our 364-day accounts receivable financing facility of $600
million, and uncommitted borrowing capacity under our credit lines of $450 million. Our accounts
receivable financing facility is renewable annually in July at the option of both Medco and the
banks and was renewed 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.
34
Table of Contents
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 consists of 53 weeks.
Pursuant to the 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 merger 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 September 24, 2011.
We anticipate refinancing our $2 billion unsecured revolving credit facility before it matures and repaying the $1 billion senior unsecured term loan at maturity.
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.
There were draw-downs of $10,327.2 million and repayments of $10,327.2 million under the
revolving credit facility during the nine months of 2011. As of September 24, 2011, we had $995.2
million available for borrowing under our revolving credit facility, after giving effect to prior
net draw-downs of $1 billion and $4.8 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 nine months of 2011, we drew down $1,138 million and repaid $1,138
million under the facility, which resulted in no amounts outstanding and $600 million available for
borrowing under the facility as of September 24, 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 was renewed on
July 25, 2011. Additionally, we had short-term debt of $36.4 million and $23.6 million outstanding
as of September 24, 2011 and December 25, 2010, respectively, under a short-term revolving credit
facility.
35
Table of Contents
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 September 24,
2011 and December 25, 2010.
Interest Rates
The weighted average interest rate on our indebtedness was approximately 3.3% for the third
quarter and 3.5% for the nine months of 2011, compared to approximately 3.7% for the third quarter
and 3.9% for the nine 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
September 24, 2011 and December 25, 2010 was $14.2 million and $15.9 million, net of tax,
respectively.
In 2004, we entered into five interest rate swap agreements on $200 million of the $500
million in 7.25% senior notes due in 2013. These swap agreements were entered into as an effective
hedge to (i) convert a portion of the senior note fixed rate debt into floating rate debt; (ii)
maintain a capital structure containing appropriate amounts of fixed and floating rate debt; and
(iii) lower the interest expense on these notes in the near term. The fair value of our obligation
under our interest rate swap agreements, represented net receivables of $14.0 million and $16.9
million as of September 24, 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 September 24, 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.
36
Table of Contents
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. Additionally, we have calculated
the 2011 EBITDA excluding the pre-tax merger-related expenses associated with the pending Express
Scripts merger, as the expenses are not considered an indicator of ongoing company performance.
EBITDA per adjusted prescription is calculated by dividing EBITDA by the adjusted prescription
volume for the period. This measure is used as an indicator of EBITDA performance on a per-unit
basis, providing insight into the cash-generating ability of each prescription. EBITDA, and as a
result, EBITDA per adjusted prescription, are affected by the changes in prescription volumes
between retail and mail order, the relative representation of brand-name, generic and specialty
pharmacy drugs, as well as the level of efficiency in the business. Adjusted prescription volume
equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions.
These mail-order prescriptions are multiplied by three to adjust for the fact that they include
approximately three times the amount of product days supplied compared with retail prescriptions.
The following table reconciles our reported net income to EBITDA and presents EBITDA per
adjusted prescription for each of the respective periods (in millions, except for EBITDA per
adjusted prescription data):
Quarters Ended | Nine Months Ended | |||||||||||||||
September 24, | September 25, | September 24, | September 25, | |||||||||||||
2011(1) | 2010(1) | 2011(1) | 2010(1) | |||||||||||||
Net income |
$ | 355.4 | $ | 371.5 | $ | 1,031.3 | $ | 1,048.9 | ||||||||
Add: |
||||||||||||||||
Interest expense |
52.2 | 43.4 | 156.4 | 123.0 | ||||||||||||
Interest (income) and other (income) expense, net |
(2.6 | ) | (2.6 | ) | 1.7 | (10.3 | ) | |||||||||
Provision for income taxes |
233.3 | 241.0 | 670.7 | 678.0 | ||||||||||||
Depreciation expense |
52.8 | 46.5 | 154.9 | 135.6 | ||||||||||||
Amortization expense |
73.2 | 71.2 | 219.6 | 212.5 | ||||||||||||
EBITDA |
$ | 764.3 | $ | 771.0 | $ | 2,234.6 | $ | 2,187.7 | ||||||||
Adjustment for 2011 merger-related expenses(2) |
36.6 | | 36.6 | | ||||||||||||
EBITDA, excluding 2011 merger-related expenses |
$ | 800.9 | $ | 771.0 | $ | 2,271.2 | 2,187.7 | |||||||||
Adjusted prescriptions(3) |
233.6 | 235.2 | 717.6 | 712.7 | ||||||||||||
EBITDA per adjusted prescription |
$ | 3.27 | $ | 3.28 | $ | 3.11 | $ | 3.07 | ||||||||
EBITDA per adjusted prescription, excluding 2011 merger-related
expenses |
$ | 3.43 | $ | 3.28 | $ | 3.16 | $ | 3.07 | ||||||||
(1) | Includes UBCs operating results commencing on the September 16, 2010 acquisition date. | |
(2) | Represents pre-tax merger-related expenses associated with the pending Express Scripts merger. | |
(3) | 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. |
37
Table of Contents
EBITDA and EBITDA per adjusted prescription were $764.3 million and $3.27, respectively,
for the third quarter of 2011, and $2,234.6 million and $3.11, respectively, for the nine months of
2011 including the aforementioned merger-related expenses. For the third quarter of 2011 compared
to the third quarter of 2010 excluding merger-related expenses, EBITDA increased by 3.9%, compared
to an increase in net income of 1.6%, and an increase in EBITDA per adjusted prescription of 4.6%.
For the nine months of 2011 compared to the nine months of 2010 excluding merger-related expenses,
EBITDA increased 3.8%, compared to an increase in net income of 0.4%, and an increase in EBITDA per
adjusted prescription of 2.9%. The higher rates of increase for EBITDA compared with net income
primarily reflect the aforementioned higher interest, depreciation and intangible amortization
expenses. The higher rate of increase for EBITDA per adjusted prescription compared to EBITDA for
the third quarter of 2011 reflects lower retail volumes, which are generally less profitable than
mail-order, and higher generic dispensing rates, partially offset by
client renewal pricing. The
lower rate of increase for EBITDA per adjusted prescription compared
to EBITDA for the nine months of 2011
reflects higher retail volumes and client renewal pricing, partially offset by higher generic
dispensing rates.
Diluted EPS, Excluding All Intangible Amortization
and Merger-Related Expenses
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. Additionally, we have
calculated the 2011 diluted EPS excluding the merger-related expenses associated with the pending
Express Scripts merger, as the expenses are not considered an indicator of ongoing company
performance. The following table reconciles our reported diluted earnings per share to diluted
earnings per share, excluding all intangible amortization and the
merger-related expenses associated with the pending Express Scripts
merger, for the respective periods:
Quarters Ended | Nine Months Ended | |||||||||||||||
September 24, | September 25, | September 24, | September 25, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Diluted earnings per share |
$ | 0.90 | $ | 0.85 | $ | 2.55 | $ | 2.28 | ||||||||
Adjustment for merger-related expenses(1) |
0.06 | | 0.05 | | ||||||||||||
Diluted earnings per share, excluding merger-related expenses |
$ | 0.96 | $ | 0.85 | $ | 2.60 | $ | 2.28 | ||||||||
Adjustment for the amortization of intangible assets(2) |
0.11 | 0.10 | 0.33 | 0.28 | ||||||||||||
Diluted earnings per share, excluding all intangible amortization
and merger-related expenses |
$ | 1.07 | $ | 0.95 | $ | 2.93 | $ | 2.56 | ||||||||
(1) | This adjustment represents the per-share effect of pre-tax merger-related expenses of $36.6 million, or $22 million after tax, for the third quarter and nine months of 2011 associated with the pending Express Scripts merger. | |
(2) | This adjustment represents the per-share effect of all intangible amortization. |
Commitments and Contractual Obligations
The following table presents our commitments and contractual obligations as of September 24,
2011, as well as our long-term debt obligations ($ 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) |
894.5 | 47.2 | 325.7 | 235.7 | 285.9 | |||||||||||||||
Operating lease obligations(3) |
202.3 | 17.2 | 101.4 | 51.9 | 31.8 | |||||||||||||||
Prescription drug purchase commitments(4) |
105.3 | 100.5 | 4.8 | | | |||||||||||||||
Other(5) |
116.1 | 15.1 | 84.5 | 16.5 | | |||||||||||||||
Total |
$ | 6,318.2 | $ | 180.0 | $ | 3,316.4 | $ | 804.1 | $ | 2,017.7 | ||||||||||
(1) | Long-term debt obligations exclude $11.8 million in total unamortized discounts on our senior notes, and the fair value of interest rate swap agreements of $14.0 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 September 2011 LIBOR. The LIBOR fluctuates and may result in differences in the presented interest expense on long-term debt obligations. |
38
Table of Contents
(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 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 $82.8 million through 2012. The contracts with fixed amounts plus a variable component include firm commitments of $22.5 million for 2011, with additional commitments through 2012 that are subject to price increases or variable quantities based on patient usage. | |
(5) | Consists of purchase commitments for diabetes supplies of $37.1 million, technology-related agreements of $28.4 million and advertising commitments of $0.7 million. Additionally, $49.9 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 September 24, 2011. |
The remaining minimum pension funding requirement of $30.5 million under the Internal
Revenue Code for the 2010 plan year was paid in the third quarter of 2011.
As
of September 24, 2011, we had letters of credit outstanding of
approximately $8.0 million, the majority
of which were issued under our senior unsecured revolving credit
facility and serve as collateral for the deductible portion of our workers compensation
coverage.
As of September 24, 2011, we had total gross liabilities for income tax contingencies of
$140.7 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.
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 Adopted and Recently Issued Financial Accounting Standards
Recently Adopted Financial Accounting Standard
Testing Goodwill for Impairment
In September 2011, the Financial Accounting Standards Board (FASB) issued an accounting
standard intended to reduce the cost and complexity of the annual goodwill impairment test by
providing entities an option to perform a qualitative assessment to determine whether further
impairment testing is necessary. Under the amendments in this standard, an entity is not required
to calculate the fair value of a reporting unit unless the entity determines that it is more likely
than not that its fair value is less than its carrying amount. The amendments are
effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill
impairment tests performed as of a date before September 15, 2011, if an entitys financial
statements for the most recent annual or interim period have not yet been issued. Our early
adoption of this standard in 2011 had no impact on our unaudited interim
condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
39
Table of Contents
Recently Issued Accounting Pronouncement
Presentation of Comprehensive Income
In June 2011, the 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 September 24, 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.
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.
40
Table of Contents
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
In the ordinary course of business, the Company is involved in litigation, claims, government
inquiries and audits, 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 10, 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:
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
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. In
September 2011, the Company settled both of these matters for a de minimus amount.
Other Matters. Twenty-two lawsuits have been filed since the announcement of the merger on
July 21, 2011 described in Note 1, Basis of Presentation, to the accompanying unaudited interim
condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on
Form 10-Q that name as defendants the Company, the Companys Board of Directors, and Express
Scripts. The purported class action complaints allege, among other things, a breach of fiduciary
duty in connection with the approval of the pending Merger Agreement between the Company and
Express Scripts.
Item 1A. | Risk Factors |
Reference is made to the risk factors set forth in Part I, Item 1A, Risk Factors, of our
Annual Report on
Form 10-K for the fiscal year ended December 25, 2010 and of our Quarterly Report on Form 10-Q for
the quarter ended June 25, 2011, 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 reports.
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.
We are subject to numerous foreign and domestic, federal and state regulations. If we or our
suppliers fail to comply with existing or future applicable laws and regulations, we could suffer
civil or criminal penalties or other damages, including the loss of our licenses to operate our
mail-order pharmacies, and our ability to participate in foreign and domestic, federal and state
healthcare programs. As a consequence of the severe penalties we may face, we must devote
significant operational and managerial resources to comply with these laws and regulations.
Although we believe we and our suppliers are substantially compliant with all existing statutes and
regulations applicable to our business, different interpretations and enforcement policies related
to these laws and regulations could subject our current practices to allegations of impropriety or
illegality, or require us to make significant changes to our operations. Currently, the government
is conducting numerous, and often overlapping audits on pharmacies and suppliers of products to
Medicare and Medicaid members. PolyMedica Corporation and Accredo
Health Group are subject to
such audits and face or may face recoupment demands which may result
in the payment or offset of prior reimbursement from the government. In addition, we cannot predict the impact of future
legislation and regulatory changes on our business or ensure we will be able to obtain or maintain
the regulatory approvals required to
operate our business. Our international business is also susceptible to a changing political
and regulatory landscape. Changes in laws or interpretations in countries in which we operate may
impair our ability to serve these customers and adversely impact the financial condition, liquidity
and operating results of our international operations.
Moreover, our clinical research activities are subject to a number of complex and
stringent regulations affecting the biotechnology and pharmaceutical industries. We offer services
relating to the conduct of clinical trials and the preparation of marketing applications, and are
required to comply with applicable regulatory requirements governing, among other things, the
design, conduct, performance, monitoring, auditing, recording, analysis and reporting of these
trials. In the United States, the Food and Drug Administration (FDA) governs these activities
pursuant to the agencys Good Clinical Practice (GCP) regulations. Although we monitor our clinical
trials, registries and studies to test for compliance with applicable laws and regulations in the
U.S. jurisdictions in which we operate, and have adopted standard operating procedures that are
designed to satisfy regulatory requirements, our business is subject to several regulatory
jurisdictions with complex and varied regulatory frameworks. Any failure to maintain compliance
with GCPs or other applicable regulations could lead to a variety of sanctions including, among
others, suspension or termination of a clinical study, civil penalties, criminal prosecutions or
debarment from assisting in the submission of new drug applications, any of which could have a
material adverse effect on our business, financial condition and results of operations.
41
Table of Contents
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).
The following is a summary of the Companys share repurchase activity for the three months
ended September 24, 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 June 25, 2011 |
16,023,403 | $ | 2,000,052 | |||||||||||||
June 26 to July 23, 2011 |
| $ | | | $ | 2,000,052 | ||||||||||
July 24 to August 20, 2011 |
6,262,704 | $ | 55.89 | 6,262,704 | $ | 1,650,052 | ||||||||||
August 21 to September 24, 2011 |
| $ | | | $ | 1,650,052 | ||||||||||
Third quarter 2011 totals |
6,262,704 | $ | 55.89 | 6,262,704 | ||||||||||||
(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 September 24, 2011. The average per-share cost for repurchases under the 2011 Program from inception through September 24, 2011 was $60.57. |
Pursuant to the 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 merger 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) |
42
Table of Contents
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.
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. Since July 21, 2011, as
a result of the pending merger with Express Scripts, directors and executive officers have not been
permitted to enter into new trading plans.
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 October 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) | |||||||||||||
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 | 22,921 | 65,277 | |||||||||||||
Timothy C. Wentworth Group President, Employer/Key Accounts |
84,280 | Option exercise of an aggregate of 84,280 shares shall occur in various tranches when stock reaches a specific price. | 45,715 | 90,171 | 329,128 |
(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 October 1, 2011. | |
(2) | This column reflects the number of shares remaining to be sold as of October 1, 2011. | |
(3) | This column reflects the number of shares sold under the plan through October 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 October 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 October 1, 2011 outside of the plan. |
43
Table of Contents
(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 October 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 October 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 October 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 October 1, 2011. | |
(2) | This column reflects the number of shares remaining to be sold as of October 1, 2011. | |
(3) | This column reflects the number of shares sold under the plan through October 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 October 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 October 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 October 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 October 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 shareholders and others under Section
16 of the Exchange Act. In addition, Medco makes available on the Investor Relations page of its
Internet site, its most recent proxy statements and its most recent annual reports to stockholders.
Medco uses the Investor Relations page of its Internet site at
http://www.medcohealth.com/investor to disclose important information to the public.
44
Table of Contents
Information contained on Medcos Internet site, or that can be accessed through its Internet
site, does not constitute a part of this Quarterly Report on Form 10-Q. Medco has included its
Internet site address only as an inactive textual reference and does not intend it to be an active
link to its Internet site. Our corporate headquarters are located at 100 Parsons Pond Drive,
Franklin Lakes, New Jersey 07417 and the telephone number at this location is (201) 269-3400.
Item 6. | Exhibits |
Number | Description | Method of Filing | ||||
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 No. 4 dated July 25, 2011 to Second
Amended and Restated Receivables Purchase
Agreement dated July 28, 2008, among Medco
Health Receivables, LLC, the financial
institutions and commercial paper conduits
party thereto and Citicorp North America,
Inc., as administrative agent.
|
Filed with this document. | ||||
10.2 | 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. | ||||
10.3 | 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. | ||||
10.4 | Medco Health Solutions, Inc. 2006 Change in
Control Executive Severance Plan, as amended.
(incorporated by reference to Exhibit 10.3 to
the Registrants Quarterly Report on Form
10-Q filed July 25, 2011).
|
Incorporated by reference. | ||||
31.1 | Certification of Chief Executive Officer
pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
Filed with this document. | ||||
31.2 | Certification of Chief Financial Officer
pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
Filed with this document. | ||||
32.1 | Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Filed with this document. | ||||
32.2 | Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Filed with this document. |
45
Table of Contents
Number | Description | Method of Filing | ||||
101.INS | XBRL Instance Document.
|
Filed with this document. | ||||
101.SCH | XBRL Taxonomy Extension Schema.
|
Filed with this document. | ||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase.
|
Filed with this document. | ||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase.
|
Filed with this document. | ||||
101.LAB | XBRL Taxonomy Extension Label Linkbase.
|
Filed with this document. | ||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase.
|
Filed with this document. |
46
Table of Contents
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: October 26, 2011 | By: | /s/ David B. Snow, Jr. | ||
Name: | David B. Snow, Jr. | |||
Title: | Chairman and Chief Executive Officer | |||
Date: October 26, 2011 | By: | /s/ Richard J. Rubino | ||
Name: | Richard J. Rubino | |||
Title: | Senior Vice President, Finance and Chief Financial Officer |
47