The Company’s principal executive offices, along with PBM and HCIT operations, are located in an approximately 300,000 square foot leased office facility located at 1600 McConnor Parkway, Schaumburg, Illinois (suburban Chicago). This lease expires in January 2025. Additionally, the Company maintains PBM and HCIT operations in several other leased locations in the U.S. and Canada, including Arizona, Arkansas, Colorado, Georgia, Illinois, Ontario (Canada), Massachusetts, Maryland, Pennsylvania, Wisconsin and Texas. We operate mail pharmacy facilities in Indiana, Florida, Ohio and Texas and specialty pharmacies in Alabama, Georgia, Indiana, Kansas, Louisiana, Maine,
Massachusetts, Mississippi, Nevada, Tennessee, Texas and West Virginia. The Company believes these properties are adequate for its current operations. All of the Company's facilities are leased, except the mail and specialty pharmacy located in Jeffersonville, Indiana, which is owned by the Company.
On July 2, 2012, the Company completed the Merger with Catalyst, a full-service PBM. Each share of Catalyst common stock outstanding immediately prior to the effective time of the Merger (other than shares owned by the Company or Catalyst or any of their respective wholly-owned subsidiaries) was converted in the Merger into the right to receive 1.3212 Company common shares (0.6606 of a Company common share prior to the October 2012 two-for-one stock split) and $28.00 in cash. This resulted in the Company issuing approximately 66.8 million shares of common stock, assuming 0.5 million Catalyst warrants, and paying $1.4 billion in cash to Catalyst shareholders to complete the Merger.
On September 20, 2012, the Company executed a two-for-one stock split effected by a stock dividend on the issued and outstanding common shares of the Company. The additional common shares were issued on October 1, 2012. All share and per share data presented in this Annual Report have been adjusted to reflect this stock split.
Certain statements included in this MD&A, including those that express management's objectives and the strategies to achieve those objectives, as well as information with respect to the Company's beliefs, plans, expectations, anticipations, estimates and intentions, constitute “forward-looking statements” within the meaning of applicable securities laws. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies. We caution that such forward-looking statements involve known and unknown risks, uncertainties and other risks that may cause our actual financial results, performance, or achievements to be materially different from our estimated future results, performance or achievements expressed or implied by those forward-looking statements. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation, our ability to achieve increased market acceptance for our product offerings and penetrate new markets; our ability to compete successfully; our dependence on, and ability to retain, key customers; customer demands for enhanced services levels or loss or unfavorable modification with our customers; the risks and challenges associated with our PBM partnering agreement with Cigna Corporation due to the size of the client and the complexity and term of the agreement; consolidation in the healthcare industry; our ability to identify and complete acquisitions, manage our growth, integrate acquisitions and achieve expected synergies from acquisitions; changes in industry pricing benchmarks and continuing market and economic challenges; our ability to maintain our relationships with pharmacy providers, pharmaceutical manufacturers, third-party rebate administrators and suppliers; compliance with existing laws, regulations and industry initiatives and future change in laws or regulations in the healthcare industry; our ability to maintain our relationships with suppliers; the outcome of any legal or tax proceeding that has been or may be instituted against us; the existence of undetected errors or similar problems in our software products; potential liability for the use of incorrect or incomplete data; interruption of our operations due to outside sources and breach of our security by third parties; our dependence on the expertise of our senior management and other personnel; maintaining our intellectual property rights and litigation involving intellectual property rights; our ability to obtain, use or successfully integrate third-party licensed technology; our ability to accurately forecast our financial results; our level of indebtedness and the covenants and restrictions in the agreements governing our outstanding indebtedness; our access to sufficient capital to fund our future requirements and potential write-offs of goodwill or other intangible assets. In addition, numerous factors could cause actual results with respect to the proposed Healthcare Solutions acquisition to differ materially from those in the forward-looking statements, including, without limitation, the possibility that the expected efficiencies and cost savings from the proposed transaction will not be realized, or will not be realized within the expected time period; the risk that the Catamaran and Healthcare Solutions businesses will not be integrated successfully; the ability to obtain regulatory approvals of the proposed transaction on the proposed terms and schedule contemplated by the parties; disruption from the proposed transaction making it more difficult to maintain business and operational relationships; the risk of customer attrition at Healthcare Solutions or Catamaran; the timing of the closing of the proposed acquisition; and the possibility that the proposed acquisition does not close, including, but not limited to, due to the failure to satisfy the closing conditions.
THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A REPRESENTS THE COMPANY'S CURRENT EXPECTATIONS AND, ACCORDINGLY, IS SUBJECT TO CHANGE. HOWEVER, THE COMPANY EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING INFORMATION, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY APPLICABLE LAW.
The mail pharmacies provide members flexibility, privacy, and easy access to their maintenance medications while offering significant plan savings to the customer. These pharmacies provide high quality service, member support and convenient, easy-to-use mail service delivery throughout the United States. Plan savings for mail service are dependent on plan design features, including co-payments and incentives, and utilization patterns.
The frequency with which the Company’s customer contracts come up for renewal, and the potential for one of the Company’s larger customers to terminate, or elect not to renew, its existing contract with the Company, create the risk that the Company’s results of operations may be volatile. The Company’s customer contracts generally do not have terms longer than three years and, in some cases, are terminable by the customer on relatively short notice. The Company’s larger customers generally seek bids from other PBM providers in advance of the expiration of their contracts. If existing customers elect not to renew their contracts with the Company at the expiration of the current terms of those contracts, and in particular if one of the Company’s largest customers elects not to renew, the Company’s recurring revenue base will be reduced and results of operations will be adversely affected.
The Company has demonstrated its ability to serve a broad range of clients from large managed care organizations and state governments to employer groups with fewer than a thousand members. The Company believes its principal competitive strengths are:
The Company’s technology platform allows it to provide customized comprehensive PBM services by offering customers a selection of services to choose from to meet their unique needs. The Company believes this à la carte offering is a key differentiator from its competitors.
Selected trends and highlights for the year ended December 31, 2014 compared to the same period in 2013
Our results for the year ended December 31, 2014 reflect the successful execution of our business model, which emphasizes the alignment of our financial interests with those of our clients through greater use of generics, low-cost brands and utilization of the Company's mail and specialty pharmacies. A key focus during the year was completing the integration of the Restat, LLC ("Restat") acquisition and implementing Cigna, our largest client. The additional scale and product offerings helped the Company continue to see the positive trends we experienced in 2013 related to improved pricing from increased scale and increased generic usage, and enabled the Company to offset the negative impact of various marketplace forces affecting pricing and plan structure, among other factors, and thus we were able to continue to generate improvements in our results of operations. Additionally, the regulatory environment continued to evolve during the year and we have continued to make significant investments in our product offerings designed to keep us ahead of the competition.
The integration of our recent acquisitions has helped drive overall growth in our top line revenue as well as in our overall operating results. We also continue to benefit from better management of ingredient costs through increased competition among generic manufacturers. The average generic dispensing rate ("GDR"), or the number of generic prescriptions as a percentage of the total number of prescriptions dispensed, for Catamaran clients reached 86% in 2014, compared to 84% in 2013. This trend is a result of a consultative client management approach and the strategic management of generic utilization, channel management, clinical programs, plan design and the use of a preferred network. This increase was helped considerably by a continuing wave of major generic releases.
Total revenue in 2014 was $21.6 billion as compared to $14.8 billion in 2013. The increase is largely attributable to an increase in PBM revenue of $6.8 billion which was mainly due to organic growth driven by new customer contract implementations, including the continued implementation of the Cigna contract, as well as a full year of results from the Restat acquisition. As a result of these factors, the Company's adjusted prescription claim volume increased 36.5% in 2014 to 404.1 million from 296.0 million during 2013. Adjusted prescription claim volume equals the Company's retail and specialty pharmacy prescriptions, plus mail pharmacy prescriptions multiplied by three. The mail pharmacy prescriptions are multiplied by three to adjust for the fact that they typically include a three month supply of product days compared with retail and specialty prescriptions which typically include a one month supply.
The Company reported net income attributable to the Company of $317.3 million, or $1.53 per share (fully-diluted), for the year ended December 31, 2014, an increase of $55.1 million or 21.0% compared to $262.2 million, or $1.27 per share (fully-diluted), in 2013. Net income attributable to the Company is higher for the year ended December 31, 2014 as compared to 2013 as a result of new customer contract implementations during the year, including the continued implementation of the Cigna contract, as well as a full year contribution from the Restat book of business. These positive impacts to net income attributable to the Company were offset by an increase in operating expenses as discussed above, as well as an increase in interest expense of $16.4 million as a result of the issuance in March 2014 of $500.0 million aggregate principal amount of the Senior Notes, offset by a repayment of $300.0 million of the Company's outstanding borrowings under the Revolving Facility in March 2014.
Strong operational results and strong attention to cash management yielded cash flow from operations of $590.2 million in 2014, an increase of $114.8 million from 2013.
Subsequent to the end of the current reporting period, on February 26, 2015, the Company announced that it had entered into a definitive agreement to acquire Healthcare Solutions, Inc. ("Healthcare Solutions") a current PBM customer operating in the workers' compensation space, for a purchase price of $405 million in cash, subject to customary post-closing adjustments. The acquisition provides the Company the opportunity to further expand our presence in the workers' compensation market. The acquisition is expected to be completed in the second quarter of 2015, subject to certain customary closing conditions.
Cost of revenue increased $6.6 billion, or 48.1%, to $20.2 billion in 2014 from $13.7 billion in 2013, primarily due to the increased adjusted claim volume due to the reasons noted in the revenue discussion above. During the years ended December 31, 2014 and 2013, the cost of prescriptions dispensed from the Company's PBM segment accounted for 98.2% and 97.6% of the cost of revenue, respectively. The cost of prescriptions dispensed is substantially comprised of the actual cost of the prescription drugs sold, plus any applicable shipping or dispensing costs. As a percentage of revenue, cost of revenue was 93.7% and 92.4% for the years ended December 31, 2014 and 2013, respectively, a slight increase which was mostly due to increased volume related to the Cigna contract transactions, which carry a lower margin per claim as compared to the Company's general book of business. This increase is partially offset by increased utilization of generics and increased volumes at the Company's mail and specialty pharmacies. The Company continues to focus on increasing generic utilization, mail and specialty penetration and improved pricing as a result of increased scale in order to lower our costs of goods sold.
Gross profit increased $392.3 million, or 53.5%, to $1.1 billion during 2013 as compared to 2012, mostly due to incremental PBM revenues. Gross profit percentage increased from 7.4% of revenue for the year ended December 31, 2012 to 7.6% of revenue for the year ended December 31, 2013. The PBM segment's gross profit percentage increased due to the synergies realized from the Company's acquisitions.
SG&A costs for the year ended December 31, 2014 were $518.4 million, $440.8 million and $369.5 million for the years ended December 31, 2013 and 2012, respectively. SG&A costs consist primarily of employee costs in addition to professional services costs, facilities and costs not related to cost of revenue. SG&A costs have increased $77.6 million, or 17.6%, from 2013 to 2014 due to having a full year of costs to support and integrate the business acquired from Restat that were only present for one quarter of the year in 2013. Additionally, operating costs increased due to the continued implementation of the Cigna contract along with increased costs as a result of organic increases in SG&A in order to support the growth of the PBM segment.
Depreciation expense for the year ended December 31, 2013 increased $21.2 million from $16.7 million in 2012 as a result of an additional half of year of depreciation from the assets acquired in the Merger with Catalyst, the acquisition of Restat, along with new fixed asset purchases in 2013 to support the continued growth in the Company's business.
The Company recognized income tax expense of $103.4 million, representing an effective tax rate of 25.7% in 2013 compared to $69.3 million, representing an effective tax rate of 36.4% for the same period in 2012. The increase in tax expense in 2013 compared to 2012 was mainly due to higher taxable income as a result of the Merger with Catalyst as well as new customer implementations in 2013. The effective
PBM revenue increased by $6.8 billion, or 46.5% to $21.4 billion for the year ended December 31, 2014 as compared to $14.6 billion in 2013. The increase in PBM revenue is primarily due to organic growth as a result of the implementation of new customer contracts in 2014, including the continued implementation of the Cigna contract as well as a full year of revenue contribution from the acquisition of Restat, which was completed on October 1, 2013. As a result of these customer additions, adjusted prescription claim volume for the PBM segment increased 36.5% to 404.1 million from 296.0 million during 2013. Additionally, revenue per prescription claim has increased in 2014 as a result of increased specialty claim volume, which has a higher revenue per prescription claim rate, as compared to the Company's general book of business.
PBM revenue increased $4.8 billion, or 49.5%, for the year ended December 31, 2013 as compared to 2012 primarily due to a full year of revenue contribution from Catalyst, the acquisition of Restat, as well as due to new customer starts during 2013.
PBM cost of revenue was $20.2 billion for the year ended December 31, 2014, compared to $13.6 billion for the same period in 2013, an increase of $6.6 billion, or 48.4%, due to the increase in PBM revenue and increased adjusted prescription claim volume. PBM cost of revenue is predominantly comprised of the cost of prescription drugs. As a percentage of PBM revenue, PBM cost of revenue was 94.1% and 92.8% for the years ended December 31, 2014 and 2013, respectively. The increase in the PBM cost of revenue as a percentage of PBM revenue was primarily due to the additional Cigna volume which carries significantly lower gross profit percentage as compared to the historical PBM business, coupled with the significant volume associated with the Cigna business representing a larger proportion of total PBM revenue. This was offset in part by the increased use of lower cost generic drugs and higher utilization at the Company's mail and specialty pharmacies. Generic drug usage continues to be a focus of the industry, and the Company, to help drive down health care costs for our customers. The average GDR for PBM clients reached 86% in 2014, a 2% increase from 2013. This increase was achieved through a broad range of plan design solutions, helped considerably by a continuing wave of major generic releases. The Company will continue to seek opportunities for increased generic prescription drug usage to help reduce overall prescription drug costs to its customers and the Company.
For the year ended December 31, 2013, compared to 2012, PBM cost of revenue increased $4.4 billion, or 48.6%. The increase was in line with the increase in PBM revenues during this period. As a percentage of PBM revenue, PBM cost of revenue was 92.8% and 93.4% for the years ended December 31, 2013 and 2012, respectively. The decrease in the PBM cost of revenue as a percentage of PBM revenue was primarily due to the synergies realized as a result of the Catalyst Merger as well as the increased use of lower cost generic drugs and higher utilization of the Company's owned mail and specialty pharmacies.
PBM gross profit increased $226.1 million, or 21.6% to $1.3 billion for the year ended December 31, 2014, compared to $1.0 billion in 2013 due to new customer contract implementations including Cigna as well as incremental revenue as a result of the Restat acquisition. PBM gross profit percentage was 5.9% and 7.2% for the years ended December 31, 2014 and 2013, respectively. PBM gross profit percentage decreased primarily as a result of the Cigna volume which carries a significantly lower gross profit percentage as compared to the historical PBM business, coupled with the significant volume associated with the Cigna business representing a larger proportion of total PBM revenue. This decrease was partially offset by an improved usage of generics and higher utilization at the Company's mail and specialty pharmacies.
HCIT gross profit increased $8.4 million, or 10.8%, to $85.8 million for the year ended December 31, 2014 as compared to $77.5 million for the year ended December 31, 2013. HCIT gross profit percentage was 56.5% for the year ended December 31, 2014, as compared to 52.4% for the same period in 2013. The increases in HCIT gross profit and HCIT gross profit percentage are attributable to the mix of the Company's HCIT revenue moving to more transaction processing as a percentage of total revenues. This reduced the percentage of revenues attributable to professional services, which carry the lowest gross profit percentage in the Company's HCIT segment due to the direct labor costs associated with professional services.
The Company reports its financial results in accordance with GAAP, but Company management also evaluates and makes operating decisions using EBITDA and Adjusted EPS. The Company's management believes that these measures provide useful supplemental information regarding the performance of business operations and facilitates comparisons to its historical operating results. The Company also uses this information internally for forecasting and budgeting as it believes that the measures are indicative of the Company's core operating performance. Note, however, that these items are performance measures only, and do not provide any measure of the Company's cash flow or liquidity. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance in accordance with GAAP, and investors and potential investors are encouraged to review the reconciliations of EBITDA and Adjusted EPS that are included below.
The following is a reconciliation of the Company's reported net income to EBITDA for the years ended December 31, 2014, 2013 and 2012.
EBITDA increased $135.8 million for the year ended December 31, 2014 compared to 2013, primarily due to an increase in sales within the PBM segment as a result of organic growth from new customer contract implementations, including the continued implementation of the Cigna contract, as well as the acquisition of Restat. This was partially offset by increased costs incurred to support the Company's business growth.
Adjusted EPS adds back the impact of all amortization of intangible assets, net of tax. Amortization of intangible assets arises from the acquisition of intangible assets in connection with the Company's business acquisitions. The Company excludes amortization of intangible assets from non-GAAP Adjusted EPS because it believes (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of the Company's business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets. Investors should note that the use of these intangible assets contributes to revenue in the period presented as well as future periods and should also note that such expenses will recur in future periods.
The Company’s sources of liquidity have primarily consisted of cash provided by operating activities, proceeds from its public offerings, proceeds from credit facilities and stock option exercises. In March 2014, the Company issued $500.0 million aggregate principal amount of
the Senior Notes. The Company used part of the net proceeds from this offering to repay $300.0 million of the Company's outstanding borrowings under the Revolving Facility. On October 1, 2013, the Company completed the acquisition of Restat for a purchase price of $409.5 million in cash, which was funded from Catamaran’s existing cash balance and $350.0 million in borrowings under the Revolving Facility. Due to the borrowings from the Credit Agreement and the Senior Notes the Company incurred a significant increase in its interest expense as compared to prior years and expects this expense and the related principal payments to continue throughout the term of the Credit Agreement and the Senior Notes. As of December 31, 2014, the Company had approximately $950.0 million of outstanding debt under its Credit Agreement and approximately $800.0 million of available borrowing capacity thereunder. As of December 31, 2014, the Company had approximately $500 million of outstanding debt under the Senior Notes. Refer to Note 9 - Long-Term Liabilities in the notes to the consolidated financial statements for more information regarding the Credit Agreement and the Senior Notes.
As of December 31, 2014, all of the Company’s cash and cash equivalents were exposed to market risks, primarily changes in U.S. interest rates. Declines in interest rates over time would reduce interest income related to these balances. Additionally, although the Company's primary operations are in the U.S., the Company is incorporated as a Canadian company. Cash that the Company holds in the U.S. would be subject to taxation if it is repatriated to Canada; however, the Company has determined that its U.S. earnings are permanently reinvested in the U.S. and accordingly deferred income taxes have not been recorded on the Company's U.S. earnings. Due to the Merger, the Company was required to pay a tax on its non-repatriated U.S. earnings through the end of 2012. As a result, the Company did not have any non-repatriated earnings prior to the end of 2012.
Selected balance sheet highlights at December 31, 2014 are as follows:
Accounts receivable represent trade accounts receivable from our customers. Accounts receivable increased $294.8 million to $1.3 billion at December 31, 2014 from $1.0 billion at December 31, 2013, driven by increases in revenue of $6.8 billion during the year ended December 31, 2014, largely attributable to the implementation of new customer contracts. The accounts receivable balance is impacted by changes in revenues, as well as the timing of collections, and is continually monitored by the Company to ensure timely collections and to assess the need for any changes to the allowance for doubtful accounts.
Accounts payable predominantly relates to amounts owed to retail pharmacies for prescription drug costs and dispensing fees in connection with prescriptions dispensed by the retail pharmacies to the members of the Company’s customers when the Company is the principal contracting party with the pharmacy. As of December 31, 2014, the accounts payable balance has increased $150.0 million to $967.8 million from $817.8 million at December 31, 2013, due to increased prescription claim transactions driven by new customer contracts implemented in 2014.
Accrued liabilities are mainly comprised of customer deposits, salaries and wages payables, contingent consideration and other accrued liabilities related to operating expenses of the Company. Accrued liabilities increased to $327.2 million at December 31, 2014 from $254.1 million at December 31, 2013.
For the year ended December 31, 2014, the Company generated $590.2 million of cash through its operations. Cash provided by operating activities increased by $114.8 million compared to the same period in 2013. Cash from operating activities has increased during this period mainly due to the Company's increased revenue base driven by organic growth as a result of new customer contract implementations in 2014 as well as the inclusion of three additional quarters of Restat results, which drove a net income increase of $75.0 million. The Company's operating cash flow increased compared to 2013 by $39.6 million due to the timing of receipts and payments on the Company's outstanding accounts receivable, accounts payable and accrued expenses balances. These increases were offset by a cash outflow of $19.3 million related to other assets, driven by an increase in inventory as a result of an expanding mail and specialty business.
For the year ended December 31, 2013, the Company generated $475.4 million of cash through its operations. Cash provided by operating activities increased by $225.7 million compared to 2012 mostly due to an increase in net income of $177.7 million or 146.8% to $298.7 million from $121.0 million during 2012. This net income increase was mainly due to the Company's increased revenue base as a result of the Merger with Catalyst, the acquisition of Restat and organic growth as a result of new customer contract implementations in 2013. Cash from operations also increased due to an increase in non-cash amortization expense of $73.1 million offset by a cash outflow of $49.8 million related to the timing of receipts and payments on the Company's outstanding accounts receivable, accounts payable and accrued expenses balances.
For the year ended December 31, 2014, the Company used $60.1 million of cash for investing activities, a decrease of $437.6 million as compared to the year ended December 31, 2013. This decrease was driven by the cash consideration paid to acquire Restat in 2013. During 2014 the Company used $78.1 million for purchases of property and equipment to support increased transaction volume and invest in systems to effectively and efficiently integrate the operations of recent acquisitions. The cash used was partially offset by proceeds from restricted cash of $20.0 million. As the Company grows, it continues to purchase capital assets to support increases in its information technology network capacity and personnel. The Company monitors and budgets these costs to ensure the expenditures aid in the strategic growth of the Company.
For the year ended December 31, 2014, the Company generated $94.6 million of cash from financing activities as compared to $38.8 million for the year ended December 31, 2013. During the year ended December 31, 2014 the Company's financing activities consisted primarily of borrowings under the Senior Notes of $492.5 million and $337.5 million of repayments on the Company's Credit Agreement.
Cash flows from financing activities generally also fluctuate based on the timing of option exercises by the Company’s employees, which are affected by market prices, vesting dates and expiration dates. The associated tax benefit on the exercise of stock options will also fluctuate based on the timing of option exercises, the market price of the Company's shares at the time of exercise, and the exercise price of the option. The Company will continue to incur significant cash outflows related to its amounts due under the Credit Agreement. Refer to Contractual Obligations later in this MD&A for further analysis of future payments due under the Company's Credit Agreement.
The Company’s future capital requirements depend on many factors, including its integration of recent acquisitions and any future transactions. The Company expects to fund its operating and working capital needs, and business growth requirements through cash flow from operations, its cash and cash equivalents on hand and its funds available under the Senior Notes and Credit Agreement. See Note 9 - Long-Term Liabilities in the notes to the consolidated financial statements for more information on the Company's Senior Notes and Credit Agreement.
Subsequent to the end of the Company's current reporting period, on January 2, 2015, the Company completed the acquisition of Salveo, an independent specialty pharmacy platform with pharmacy locations in New York and California, for a purchase price of $260.0 million in cash, subject to certain customary post-closing adjustments. The purchase price was funded from Catamaran's existing cash balance.
If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, the Company might be required to obtain additional funds through operating improvements, capital markets transactions, asset sales or financing from third parties or a combination thereof. The Company cannot provide assurance that these additional sources of funds will be available or, if available, will have reasonable terms.
The following table summarizes the Company’s significant contractual obligations as of December 31, 2014 and the effect such obligations are expected to have on the Company’s liquidity and cash in future periods assuming all obligations reach maturity (in millions):
The interest payments are calculated based on the Company's senior secured term loan borrowings that carry an annual interest rate of 2.14% on $500.0 million which has been fixed through the Company's interest rate swap agreements and the Company's rate of 1.81% on the remaining $450.0 million of its senior secured term loan borrowings outstanding as of December 31, 2014. The interest rate applicable to the Company's senior secured term loan borrowings may fluctuate in the future based on changes in the LIBOR rate. See Note 9 - Long-Term Liabilities in the notes to the consolidated financial statements for further information on the terms of the Company's long-term debt obligations.
The interest payments are calculated based on the $500.0 million aggregate principal amount of the Senior Notes which carry an interest rate of 4.75%. Interest payments are due semi-annually on March 15 and September 15 of each year, beginning on September 15, 2014. See Note 9 - Long-Term Liabilities in the notes to the consolidated financial statements for further information on the terms of the Company's long-term debt obligations.
The above table excludes $35.4 million related to the Company’s accrued liability for uncertain tax positions; the Company is unable to reliably estimate the period of cash settlement, if any, with the respective taxing authorities.
In March 2014, the Company issued $500.0 million aggregate principal amount of the Senior Notes. The Company used the net proceeds from this offering to repay $300.0 million of the Company's outstanding borrowings under the Revolving Facility leaving the Company with approximately $800.0 million of available borrowing capacity under the Revolving Facility as of December 31, 2014. The Company used the remainder of the net proceeds from this offering for general corporate purposes.
The Company recognizes revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) the service or product has been provided to the customer and no uncertainties exist surrounding product acceptance; (iii) the amount of fees to be paid by the customer is fixed or determinable; and (iv) the collection of fees is reasonably assured. Areas of judgment and subjectivity in the Company’s revenue recognition include principal versus agent considerations for PBM contracts, arrangements with multiple elements, and professional service revenues under long-term contracts for HCIT contracts.
Principal versus agent considerations: The Company evaluates customer contracts using the indicators of the principal versus agent revenue accounting guidance to determine whether the Company acts as a principal or as an agent in the fulfillment of prescriptions through the participating pharmacy network. Assessing each contract requires judgment, and the conclusions reached on each contract will greatly impact the amount of revenue recorded. While gross profit is not impacted by the conclusion reached, revenues and cost of revenues will vary significantly. The Company assesses each contract to determine if the Company is acting as a principal or an agent. Key factors that the Company considers when determining whether it acts as a principal or an agent includes: (i) whether the Company has separate contractual relationships with customers and with pharmacies, (ii) is the Company responsible to validate and manage a claim through its claims adjudication process, (iii) does the Company commit to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) does the Company manage the overall prescription drug plan relationship with the patients, who are participants of customers’ plans, (v) who has credit risk for the amount due from the customer, and (vi) does the Company have direct obligations to the participating pharmacies to pay for the prescription drug spend. The Company weighs the criteria that are present in order to conclude whether the contract should be recorded gross as a principal, or net as an agent.
Company. In most cases, the Company is able to conclude that the separate deliverables have stand alone value since most of the deliverables are sold as stand alone products or services. A key area of judgment is for the Company to determine the relative selling prices of the undelivered items. The relative selling prices of undelivered elements, such as professional services, or ASP services, are determined based on stated pricing within the contract with each customer, or pricing for the same product sold to other customers. Professional services relative selling prices are determined based on billing rates per hour based on the type of professional services provided, whereas ASP services are generally based on transaction fee rates, or standard monthly access and processing fees. When the Company is unable to determine the relative selling prices based on contractual terms with the customer or from pricing of the same product sold to other customers, the Company uses its best estimate of the selling price for that deliverable. Once the relative selling prices are determined, revenue is allocated to each unit of accounting or element based on relative fair values.
The Company administers rebate programs through which it receives rebates and administrative fees from pharmaceutical manufacturers and third-party administrators that are shared with customers. The Company recognizes rebates when the Company is entitled to them, and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers, third-party administrators, and from administrative fees are recorded as a reduction of cost of sales. Rebates owed to the Company’s customers are recorded as a reduction of revenue. The Company determines the amount of rebates to record based on the number and types of claims submitted, the rebate program terms with its customers, the Company’s rebate contracts, and any additional information that becomes available. The amount of rebates ultimately earned by the Company, or paid to its customers, is contingent upon several factors, including validation of claims data submitted by the Company, and may require adjustments in future periods to the amounts originally estimated. Historically, adjustments to the Company’s original rebate estimates have not been significant.
Goodwill and intangible assets are impacted by the Company’s fair value measurements at initial recording. Beginning in 2009, the Company applied the revised business combination guidance as issued by the Financial Accounting Standards Board (“FASB”). Measurements of goodwill and purchased intangible assets are based on models derived from a market participant point of view. Along with the methodology used to measure assets and liabilities acquired, the guidance also impacts the types of assets and liabilities required to be measured and recognized. Management’s conclusions about the composition of relevant market participants, the types of assets and liabilities required to be measured, and the methodology used to measure the assets and liabilities will all have a significant impact on the purchase price allocation for business combinations.
The annual qualitative assessment for goodwill is impacted by management’s assessment of reporting units, allocation of the consolidated Company’s assets and liabilities to each reporting unit, management’s estimate of future operating results, and a selection of peers to establish a comparable market group. The annual impairment test completed for 2014 did not indicate any impairment of the Company’s two reporting units, and did not reveal that an impairment would be reasonably likely in the near future.
As noted above, long-lived assets are only required to be tested for impairment when events or circumstances indicate that the net carrying amount of the asset may not be recoverable. Assessing whether an impairment test is necessary requires management to monitor results of the business that utilize the long-lived assets, as well as outside market forces that may impact the future recoverability of the long-lived assets. No events or other circumstances occurred in 2014, 2013 or 2012 that caused management to conclude any of its long-lived assets may not be recoverable. In October 2012, the Company launched its new specialty brand BriovaRx, formerly known as Medfusion and Ascend, delivering personalized, holistic care to patients with complex chronic and conditions to improve health outcomes. As a result of the re-branding of the specialty business, the Company concluded that the useful life of the intangible asset that the Company recorded for the MedfusionRx trade name should be reduced since the name would no longer be used by the Company, which was the asset's highest and best use. Before adjusting the useful life of the asset, the Company considered whether the asset had any value as a defensible asset which would extend its useful life. The Company determined that the MedfusionRx trade name had an insignificant value as a defensible asset, and the asset's useful life should be shortened due to the name change of the business. As a result, the Company recorded an additional $8.0 million in amortization expense during 2012.
In assessing the valuation of the allowance for doubtful accounts, management reviews the collectability of accounts receivable in aggregate and on an individual account-basis. Delinquency is assessed based primarily on contractual terms, and management’s judgment is used as the basis for allowances required. Management reviews the accounts receivable on an individual customer-basis to determine if events such as subsequent collections, discussions with management of the debtor companies, or other activities lead to the conclusion to either increase or decrease the calculated allowance. Factors considered when reviewing accounts receivable in the aggregate include the overall age of receivables, macro-economic issues impacting classes of customers and recent collection trends. The conclusions and estimates made are further impacted by changes in economic and market conditions as well as changes to the customers’ financial condition. Changes in estimates for the allowance of doubtful accounts have not had a significant impact on the results of the Company during 2014, 2013, or 2012.
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Benefits from tax positions are recognized in the consolidated financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority having full knowledge of all relevant information. Management’s estimates of future operating results and tax planning strategies, assessment of the probability of future tax benefits realization, and the determination of the likelihood of tax positions being sustained upon exam, are key judgments which management makes which impact the accounting for income taxes and necessary valuation allowances.
See Note 2 - Significant Accounting Policies in the notes to the consolidated financial statements for information on recent accounting pronouncements that the Company adopted. The Company is currently assessing the impact on its financial condition and future operating results for recently issued accounting guidance, and does not expect the recently issued guidance to have a significant impact on the Company’s financial condition or future results of operations.
We have audited the accompanying consolidated balance sheets of Catamaran Corporation and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In July 2012, SXC Health Solutions Corp. changed the name and brand for the company to Catamaran Corporation. The Company's common shares trade on the Nasdaq Stock Market under the ticker symbol "CTRX" and on the Toronto Stock Exchange under ticker symbol “CCT.”
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include its wholly-owned subsidiaries as well as non-controlled entities. Amounts in the consolidated financial statements are expressed in U.S. dollars, except where otherwise indicated. Within the financial statements and tables presented, the totals of certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain reclassifications have been made to conform the prior years’ consolidated financial statements to the current year’s presentation.
The consolidated financial statements include the accounts of the Company and its controlled subsidiaries, which are generally wholly owned. All significant inter-company transactions and balances have been eliminated in consolidation. Any non-controlling interest in the equity of a subsidiary is reported in equity in the Consolidated Statements of Shareholders' Equity. Net income attributable to the non-controlling interest is subtracted from Net Income to arrive at Net Income Attributable to the Company in the Consolidated Statements of Operations.
When the Company enters into arrangements with multiple deliverables, exclusive of arrangements with software deliverables, it applies the Financial Accounting Standards Board's guidance for revenue arrangements with multiple deliverables and evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (i) whether the delivered item has value to the customer on a stand-alone basis, and (ii) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Revenue is allocated to each unit of accounting or element based on relative selling prices. The Company determines relative selling prices by using either (i) vendor specific objective evidence (“VSOE”) if it exists; or (ii) third-party evidence of selling price ("TPE"). When neither VSOE nor TPE of selling price exists for a deliverable, the Company uses its best estimate of the selling price for that deliverable.
The Company evaluates customer contracts to determine whether the Company acts as a principal or as an agent in the fulfillment of prescriptions through its participating pharmacy network. The Company acts as a principal in certain of its transactions with customers and, in these cases, revenues are recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, plus the Company’s administrative fees (“gross reporting”). Gross reporting is appropriate when the Company (i) has separate contractual relationships with customers and with pharmacies, (ii) is responsible to validate and manage a claim through its claims adjudication process, (iii) commits to set prescription prices for the pharmacy, (iv) manages the overall prescription drug plan relationship with the patients, who are members of customers’ plans, and (v) has credit risk for the amount due from the customer.
Long-lived assets or asset groups held and used, including P&E and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Circumstances that could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; the accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its previously estimated useful life. Recoverability is assessed based on the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset or asset group. An impairment loss is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss is measured as the amount by which the carrying amount of undiscounted cash flows exceeds fair value. During each of the years ended December 31, 2014, 2013 and 2012, no events or circumstances occurred that indicated that the carrying amounts of the long-lived assets may not be recoverable.
Goodwill is not amortized, but rather, is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company completes its goodwill impairment test annually as of October 31. Circumstances that could trigger an interim impairment test include: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; a change in reporting units; the likelihood that a reporting unit
The Company’s functional currency and reporting currency is the U.S. dollar. Monetary items denominated in foreign currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date and non-monetary items are translated at rates in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in the consolidated statements of operations as "Interest and other expense, net."
Non-refundable investment tax credits for Scientific Research and Experimental Development (“SRED”) activities are recorded when the Company has reasonable assurance that the credit will be realized. Management has made a number of estimates and assumptions in determining the expenditures eligible for the investment tax credit claim. It is possible that the allowable amount of the investment tax credit claim could be materially different from the recorded amount upon assessment by the Canada Revenue Agency. Non-refundable investment tax credits are recorded as a reduction of income tax expense on the consolidated statements of operations.
In July 2013, the FASB issued authoritative guidance containing changes to the presentation of an unrecognized tax benefit when a loss or credit carryforward exists. The new standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in the settlement of the uncertain tax positions. The Company adopted this standard on January 1, 2014; however, the implementation of the standard did not have a significant impact on its financial results or in the presentation and disclosure of its financial statements.
In February 2013, the FASB issued an update on the reporting of amounts reclassified from accumulated other comprehensive income. An entity is required to present either parenthetically on the face of the financial statements or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. However, an entity is not required to show the income statement line item affected for certain components that are not required to be reclassified in their entirety to net income, such as amounts amortized into net periodic pension cost. The standard was effective prospectively for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted this standard on January 1,
2013; however, the implementation of the amendments did not have a significant impact on its financial results or in the presentation and disclosure of its financial statements.
No other new accounting standards have been adopted during the year ended December 31, 2014.
In August 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. Adoption of the standard is not expected to have a significant impact on the Company's financial results or in the presentation and disclosure of its financial statements.
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
No other new standards have been issued during the year ended December 31, 2014 that the Company assessed to have a significant impact on its financial results or in the presentation and disclosure of its financial statements.
All share and per share data presented in these consolidated financial statements have been adjusted to reflect the stock split noted above.
During the years ended December 31, 2014 and 2013 the Company recognized $33.7 million and $8.7 million of amortization expense from intangible assets acquired in the Restat acquisition, respectively.
On July 2, 2012, the Company completed its merger with Catalyst, a full-service PBM. Each share of Catalyst common stock outstanding immediately prior to the effective time of the Merger (other than shares owned by the Company or Catalyst or any of their respective wholly-owned subsidiaries) was converted in the Merger into the right to receive 1.3212 (0.6606 prior to split adjustment) of a Company common share and $28.00 in cash. This resulted in the Company issuing approximately 66.8 million common shares, issuing 0.5 million warrants, and paying
$1.4 billion in cash to Catalyst stockholders to complete the Merger. The results of Catalyst have been included in the Company's results since July 2, 2012.
The Merger was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of their maturities. The fair value for the acquired customer relationships intangible asset was valued using an excess earnings model based on expected future revenues derived from the customers acquired. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill.
All of the assets and liabilities recorded for the Merger are included within the Company's PBM segment. Goodwill of $525 million related to the Catalyst Merger is tax deductible. The goodwill recognized by the Company represents many of the synergies and business growth opportunities that the Company expected to be realized from the Merger. The synergies included improved pricing from the Company's suppliers due to the increased volume of prescription drug purchases, pull through opportunities of the combined companies' mail and specialty service offerings, and a more efficient leveraging of resources to achieve operating profits.
The following summarizes the fair values assigned to the assets acquired and liabilities assumed at the acquisition date (in thousands):
In January 2012, the Company completed the acquisition of all of the outstanding equity interests of HealthTran LLC (“HealthTran”), a full-service PBM, in exchange for $250.0 million in cash, subject to certain customary post-closing adjustments, in each case upon the terms and subject to the conditions contained in the HealthTran purchase agreement. HealthTran was an existing HCIT client and utilized a Company platform for its claims adjudication services. The acquisition provided the opportunity to create new revenues from HealthTran's customer base and generate cost savings through purchasing and SG&A synergies. The results of HealthTran have been included in the Company's results since January 1, 2012. Costs related to the HealthTran acquisition of $0.9 million were included in SG&A expenses for the year ended December 31, 2011.
During the years ended December 31, 2014 and 2013 the Company recognized $12.6 million and $14.6 million of amortization expense from intangible assets acquired in the HealthTran acquisition, respectively. None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired.
Subsequent to the end of the Company's current reporting period, on January 2, 2015, the Company completed the acquisition of Salveo Specialty Pharmacy, Inc. ("Salveo"), an independent specialty pharmacy platform with pharmacy locations in New York and California, for a purchase price of $260.0 million in cash, subject to certain customary post-closing adjustments. The purchase price was funded from Catamaran's existing cash balance. The initial accounting for this acquisition was incomplete at the time these financial statements were available for issuance. The Company expects to finalize its accounting for this acquisition as soon as practicable, but no later than one year from the acquisition date.
Subsequent to the end of the Company's current reporting period, on February 26, 2015, the Company announced it has entered into a definitive agreement to acquire Healthcare Solutions, Inc., a current PBM client that serves the workers' compensation market, for $405 million in cash, subject to certain customary post-closing adjustments. The acquisition is expected to be completed in the second quarter of 2015, subject to certain customary closing conditions.
and associated activities. The Company evaluated its investment in Script Relief and determined that Script Relief is a variable interest entity with Catamaran being the primary beneficiary, as the Company's underlying PBM and pharmacy contracts represent Script Relief's key business operations and the Company has the power to direct these activities. As a result, Script Relief is consolidated in the Company's consolidated financial statements with the amounts attributable to the non-controlling interests disclosed. Through April 2016, the Company has the right to purchase all of the outstanding interests owned by the other equity member of Script Relief. The purchase of the outstanding interests is at the Company's sole discretion and is subject to a contractually-defined purchase price.
Depreciation expense, including property and equipment acquired under capital leases, totaled $63.5 million, $42.2 million, and $20.2 million for the years ended December 31, 2014, 2013, and 2012, respectively. Of the total depreciation expense, $4.0 million, $4.3 million, and $3.5 million was related to the data center operations and allocated to cost of revenue for the years ended December 31, 2014, 2013 and 2012, respectively.
The changes in the carrying amounts of goodwill by reportable segment for the years ended December 31, 2014 and 2013 are as follows (in thousands):
Initial goodwill recorded in connection with the acquisition of Restat in October 2013 and another insignificant acquisition in 2013.
In March 2014, the Company issued $500.0 million aggregate principal amount of 4.75% Senior Notes due 2021 (the “Senior Notes”). The Senior Notes mature on March 15, 2021 and bear interest at 4.75% per year. The Company pays interest semi-annually on the Senior Notes on March 15 and September 15 of each year, or the first business day thereafter if such date is not a business day. The Company made an initial interest payment of $12.1 million in September 2014 on the Senior Notes. The Company received approximately $492.5 million in net proceeds from the Senior Note offering, after deducting $7.5 million in underwriting discounts. Additionally the Company incurred approximately $2.0 million in offering expenses. The Company used part of the net proceeds from this offering to repay $300.0 million of the Company's outstanding borrowings under the Revolving Facility and the remainder of the net proceeds from this offering for general corporate purposes.
As discussed, in connection with the Senior Notes, the Company incurred approximately $7.5 million in underwriting debt discount and approximately $2.0 million in debt issuance costs. The $7.5 million debt discount incurred in connection with the Senior Notes is presented on the consolidated balance sheet as a reduction to long-term debt. The debt discount amounts are being amortized to interest expense over the life of the Senior Notes. The Company uses the straight-line method to amortize the debt discount amounts as it does not result in a materially different amount of interest expense than the effective interest rate method. The $2.0 million in offering expenses incurred in connection with the issuance of the Senior Notes are presented on the consolidated balance sheet as other assets. The offering expenses are being amortized to
A subsidiary guarantor will be released from its obligations under its respective guarantee of the Senior Notes upon the release or discharge of such subsidiary guarantor from its guarantee of obligations under the Credit Agreement or certain other future indebtedness in an aggregate principal amount in excess of $175.0 million, or upon the earlier occurrence of certain other customary circumstances as set forth in the indenture governing the Senior Notes. The Senior Notes and the guarantees by the subsidiary guarantors are the general senior unsecured obligations of the Company and the subsidiary guarantors, respectively and rank equally in right of payment with the existing and future senior unsecured indebtedness of the Company and the subsidiary guarantors, respectively.
Prior to the scheduled maturity of the Senior Notes, the Company may at any time redeem all or a part of the Senior Notes, upon not less than 30 nor more than 60 days’ prior written notice at a redemption price equal to the greater of: (i) 100% of the principal amount of the Senior Notes to be redeemed, and (ii) the sum of the present values of the remaining scheduled payments of principal of and interest on the Senior Notes to be redeemed (exclusive of interest accrued to the applicable redemption date) discounted to such redemption date on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at the then current treasury rate plus 50 basis points, plus, in each case, accrued and unpaid interest thereon to, but not including, the applicable redemption date.
If the Company experiences a change of control triggering event (as defined in the supplemental indenture governing the Senior Notes), holders of the Senior Notes may require the Company to purchase the Senior Notes at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The Company is not required to make mandatory redemption payments or sinking fund payments with respect to the Senior Notes.
The indenture governing the Senior Notes includes certain restrictive covenants, including covenants that limit the Company's ability and the ability of our subsidiaries to, among other things, incur secured debt; enter into sale and leaseback transactions; and amalgamate, consolidate, merge or transfer substantially all of the Company's assets to another entity. The covenants are subject to a number of important exceptions and qualifications set forth in the indenture.
The indenture governing the Senior Notes provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the trustee or holders of at least 25% in aggregate principal amount of and accrued but unpaid interest on the then outstanding Senior Notes may declare the principal amount of all the Senior Notes to be due and payable immediately. As of December 31, 2014, the Company was in compliance with the covenants under the Senior Notes.
After giving effect to the Amendment, the interest rates applicable to the Term Loan Facility and the Revolving Facility will continue to be based on a fluctuating rate of interest measured by reference to either, at the Company's option, (i) a base rate, plus an applicable margin, or (ii) an adjusted London interbank offered rate (adjusted for maximum reserves) (“LIBOR”), plus an applicable margin. The applicable margin, in each case, will continue to be adjusted from time to time based on the Company's consolidated leverage ratio for the previous fiscal quarter. The Amendment provides for a reduction in the applicable margins that would be in effect at any time when the Company's consolidated leverage ratio is greater than 1.50 to 1 and less than 2.50 to 1. After giving effect to the Amendment, the initial applicable margin for all borrowings was 0.625% per annum with respect to base rate borrowings and 1.625% per annum with respect to LIBOR borrowings. The Company intends to continue to elect the LIBOR rate as it has previously done during the term of the loan. This resulted in the applicable interest rate decreasing to 1.81% at December 31, 2014 from 2.25% prior to the Amendment. See Note 18 - Financial Instruments for information on the Company's interest rate swap agreements.
In connection with the Amendment, the Company made a $100.0 million prepayment on the Term Loan Facility to reduce its outstanding balance to $1.0 billion from $1.1 billion. In addition, the Company made scheduled principal repayments of $12.5 million in 2013 on the Term Loan Facility leaving the Company with $987.5 million outstanding as of December 31, 2013. The Company made scheduled principal repayments of $37.5 million on the Term Loan Facility in 2014 leaving the Company with $950.0 million outstanding as of December 31, 2014.
The Company utilized funds from the Revolving Facility to make the prepayment in connection with the Amendment, leaving the Company with $700.0 million of remaining available borrowing capacity under the Revolving Facility at the time of the Amendment execution. On October 1, 2013, the Company utilized $350.0 million under the Revolving Facility to partially fund the acquisition of Restat. In 2013, the Company repaid $150.0 million, of the amount borrowed under the Revolving Facility, leaving the Company with approximately $500.0 million of borrowing capacity under the Revolving Facility as of December 31, 2013. In March 2014 the Company used the proceeds from the offering of the Senior Notes (refer above for a detailed discussion) to repay $300.0 million of the outstanding borrowings under the Revolving Facility. As of December 31, 2014, the Company had approximately $800.0 million of available borrowing capacity under the Revolving Facility.
In connection with executing the Amendment, the Company paid $2.3 million in direct lender fees to the syndication of banks providing credit to the Company. The fees consisted of a $1.3 million debt discount related to the Term Loan Facility and $1.0 million of debt issuance costs related to the Revolving Facility. The $1.3 million debt discount incurred in connection with the Amendment is presented on the consolidated balance sheet as a reduction to long-term debt, along with the $24.1 million of unamortized debt discount incurred in connection with the execution of the Credit Agreement. The debt discount amounts are being amortized to interest expense over the amended life of the Term Loan Facility. The Company uses the straight-line method to amortize the debt discount as it does not result in a materially different amount of interest expense than the effective interest rate method. The additional $1.0 million debt issue cost incurred in connection with the execution of the Amendment related to the Revolving Facility, along with $16.6 million of unamortized debt issuance costs incurred in connection with the execution of the Credit Agreement are presented on the consolidated balance sheet as other assets. The debt issuance costs are being amortized to interest expense over the amended life of the Revolving Facility using the straight-line method.
The amortization related to financing costs and debt discounts totaled $8.5 million, $9.1 million, and $5.0 million for the years ended December 31, 2014, December 31, 2013, and December 31, 2012, respectively.
As a result of executing the Amendment, the Company assessed whether the modifications to the Credit Agreement were substantial and should be accounted for using extinguishment accounting. The Company made its assessment both on a total basis of all lenders and on an individual basis for each member of the syndicate. The Company performed separate assessments for the Term Loan Facility and the Revolving Facility. As a result of the assessments, the Company recorded an additional interest expense charge of $0.4 million from unamortized debt discount and debt issuance costs during the year ended December 31, 2013.
The carrying value of the Company's debt at December 31, 2014 approximates its fair value.
In connection with the closing of the Merger with Catalyst on July 2, 2012, the Company assumed two stock incentive plans (together the "Assumed Plans"), each as amended and adjusted for the purpose of granting awards to certain employees of the Company subsequent to the close of the Merger or to newly hired employees of the Company who were not employed with the Company as of the close of the Merger. The Assumed Plans provide for the grant of stock option awards, RSU awards, performance awards and other stock-based awards to eligible persons. The maximum common shares of the Company allowed to be issued under the Assumed Plans is 1,480,936. Any full-value awards (i.e., any awards other than stock options or SARs) granted under the Assumed Plans are counted against this share limit as 1.45 shares for every one share granted. There were 730,056 stock-based awards available for grant under the Assumed Plans as of December 31, 2014.
The following table summarizes activity related to stock options for the year ended December 31, 2014:
Options granted during 2014, were primarily subject to a graded vesting schedule of four years. Options granted expire seven years from the grant date.
The following table summarizes certain information about the options outstanding at December 31, 2014:
During 2014, the Company granted both time-based RSUs and performance based RSUs to its employees and non-employee directors under both the LTIP and the Assumed Plans. Time-based RSUs vest on a straight-line basis over a range of three to four years. During 2012 and 2013, the Company also granted time-based RSUs that cliff vest after a three to four year period. Performance-based RSUs cliff vest based upon reaching agreed upon three-year performance conditions. The number of outstanding performance-based RSUs as of December 31, 2014 stated below assumes the associated performance targets will be met at the maximum level. The table below summarizes the number of time-based and performance-based RSUs that were granted and outstanding under both plans for the year ended December 31, 2014:
The total fair value of RSUs that vested during 2014, 2013, and 2012 was $20.8 million, $27.3 million, and $18.0 million, respectively. The weighted average grant date fair value of awards granted during 2014, 2013, and 2012 was $44.72, $55.99, and $38.49, respectively.
For the years ended December 31, 2014, 2013, and 2012, the Company recorded stock-based compensation expense of $33.6 million, $25.6 million, and $17.7 million, respectively. At December 31, 2014, there was $34.6 million and $12.0 million unrecognized compensation cost related to RSUs under the LTIP and Assumed Plans, respectively, which is expected to be recognized over a weighted-average period of 2.02 and 2.49 years, respectively.
The total income tax benefit, using the Company’s statutory tax rates, recognized in the statements of operations for stock-based compensation arrangements for years ended December 31, 2014, 2013, and 2012 was $12.7 million, $9.5 million, and $6.5 million, respectively.
The volatility assumption is based on historical volatility at the date of grant for the period equal to the expected life of the option.
The balance of the valuation allowance was $29.7 million at December 31, 2014 compared to $18.4 million at December 31, 2013. The valuation allowance arising from the Canadian operations was $28.4 million at December 31, 2014 and $17.1 million at December 31, 2013. The Canadian valuation allowance increased during the year as a result of a loss from operations. The amount of this valuation allowance is subject to adjustment by the Company in future periods based upon its assessment of evidence supporting the degree of probability that DTAs will be realized.
At December 31, 2014, the Company had a DTA of $28.9 million related to Canadian, US Federal and state NOLs. The NOLs are available to reduce future years’ taxable income and expire beginning in 2031. A valuation allowance of $26.7 million has been established against a portion of the NOLs not anticipated to be utilized.
Accounting guidance for uncertain tax positions prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2014, the Company has an accrued liability in the consolidated balance sheet of $35.4 million. As of December 31, 2013 and 2012, the Company had an accrued liability of $28.9 million and $18.8 million, respectively. This liability related to various uncertain federal and state income tax matters, the resolution of all of which would not have a material impact on the Company’s effective tax rate.
The following table sets forth the computation of basic and diluted EPS for the years ended December 31, 2014, 2013, and 2012 (in thousands, except share and per share data):
The total rental expense under operating leases for the years ended December 31, 2014, 2013, and 2012 was $36.0 million, $35.4 million, and $17.1 million, respectively. The lease renewal terms have not been factored into the commitments noted above as not renewing these leases would not have a detrimental impact on the Company.
Beeman, et al. v. Anthem Prescription Management, Inc., et al. A purported class action lawsuit was filed in February 2004 in the United States District Court for the Central District of California against a number of pharmacy benefit managers, including current subsidiaries of the Company, by several California pharmacies. Plaintiffs allege that defendants failed to comply with statutory obligations under California Civil Code Section 2527 to conduct studies of pharmacy dispensing fees and provide the results to third-party payors in California, and seek money damages. Because the lawsuit was stayed by appeals, including a challenge to the constitutionality of the statute, for nearly its entire history and was remanded back to the District Court in 2014, it is still in its early stages. As of December 31, 2014, based on currently available information, the Company cannot reasonably estimate a potential impact in this matter.
The Company provides comprehensive PBM services to customers, which include managed care organizations, local governments, unions, corporations, HMOs, employers, workers’ compensation plans, third-party health care plan administrators, and federal and state government programs through its network of licensed pharmacies throughout the United States. The PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail and specialty pharmacy claims management, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access and reporting and information analysis.
At December 31, 2014, one customer accounted for 17% of the total accounts receivable balance. At December 31, 2013, one customer accounted for 15% of the total accounts receivable balance.
To manage credit risks, the Company selects counterparties based on credit assessments, limits overall exposure to any single counterparty, and monitors the market position with each counterparty. The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.
The fair value of the interest rate swap liability as of December 31, 2014 was $1.1 million, and is included in other long-term liabilities on the consolidated balance sheet. Interest expense for the year ended December 31, 2014 includes $1.7 million of interest expense reclassified from other comprehensive income into current earnings. As of December 31, 2014, approximately $1.1 million of deferred expenses related to the derivative instruments accumulated in other comprehensive income is expected to be reclassified as interest expense during the next twelve months. This expectation is based on the expected timing of the occurrence of the hedged forecasted transactions.
The Company is subject to foreign exchange risk related to its operations in Canada. The Company does not enter into derivative instruments to mitigate this risk. Exposure to fluctuations in Canadian-dollar denominated transactions is partially offset by Canadian dollar-denominated assets and liabilities.
The contingent purchase price consideration liability as of December 31, 2013 reflects the fair values of potential future payments related to the acquisition of Walgreens Health Initiatives (acquired by Catalyst in 2011). The potential future payments were contingent upon the acquired entity meeting or exceeding certain revenue, gross profit or client retention targets. The contingent consideration criteria was met and during 2014 this liability was settled. Accordingly, there is no outstanding balance as of December 31, 2014. There was no impact on the consolidated statement of operations as a result of this settlement.
The following condensed consolidating financial information has been prepared in accordance with the requirements for presentation of such information (statements of comprehensive income were omitted as all other comprehensive income is attributed to the issuer and was not material in any period presented). The condensed consolidating financial information presented below is not indicative of what the financial position, results of operations or cash flows would have been had each of the entities operated as an independent company during the period for various reasons, including, but not limited to, intercompany transactions and integration of systems.
Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Catamaran Corporation, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate the investments in our subsidiaries and (c) record consolidating entries; and