The following selected consolidated financial data have been derived from the consolidated financial statements of the Company contained elsewhere in this Annual Report on Form 10-K and the Company’s Annual Report on Form 10-K for the fiscal years ended December 31, 2013 and 2012. The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, including the notes thereto.
In January 2012, the Company completed the acquisition of all of the outstanding equity interests of HealthTran, a full-service PBM, in exchange for $250.0 million in cash, subject to certain customary post-closing adjustments.
On October 1, 2013, the Company completed the acquisition of Restat, LLC, a privately held pharmacy PBM based in Milwaukee, Wisconsin, for a purchase price of $409.5 million in cash subject to certain customary post-closing adjustments. The purchase price was funded from Catamaran’s existing cash balance and $350.0 million in borrowings under the Revolving Facility. The acquisition provides the Company the opportunity to bring Catamaran's full-suite of technology and clinical services to Restat's clients, including mail and specialty pharmacy services.
In March 2014, the Company issued $500.0 million aggregate principal amount of the 4.75% Senior Notes due 2021. 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.
10) See Exhibit 12.1 to this Annual Report for the computation of the ratios of earnings to fixed charges.
When relying on forward-looking information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. In making the forward-looking statements contained in this MD&A, the Company does not assume any future significant acquisitions, dispositions or one-time items. It does assume, however, the renewal of certain customer contracts. Every year, the Company has major customer contracts that come up for renewal. In addition, the Company also assumes new customer contracts. In this regard, the Company is pursuing large opportunities that present a very long and complex sales cycle which substantially affects its forecasting abilities. The Company has assumed certain timing for the realization of these opportunities which it believes is reasonable but which may not be achieved. Furthermore, the pursuit of these larger opportunities does not ensure a linear progression of revenue and earnings since they may involve significant up-front costs followed by renewals and cancellations of existing contracts. The Company has assumed certain revenues which may not be realized. The Company has also assumed that the material factors referred to in the previous paragraph will not cause such forward-looking information to differ materially from actual results or events. There can be no assurance that such assumptions will reflect the actual outcome of such items or factors. Accordingly, investors are cautioned not to put undue reliance on forward-looking statements.
The Company provides a broad range of 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. The PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail pharmacy claims management, 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. The Company also owns and operates a network of mail and specialty pharmacies.
The Company's specialty pharmacy offering provides customers the ability to control spending on specialty medications and ensure patients receive the necessary, personalized support for complex medications in one of the fastest growing sectors of pharmaceutical spending. The Company’s specialty therapy medication management program uses a highly-trained and specialized clinical staff organized in disease pods, a patient-centric approach, and evidence based clinical treatment protocols. The patient care team communicates with the patient, patient’s physician, and other caregivers as needed to obtain a complete medical and pharmacy history and then craft an individualized treatment plan, including patient education, counseling and expected therapy outcomes. Plan savings are achieved as the cost for specialty medication using this program is generally lower than retail pricing. In addition, the Company is a national provider of drug benefits to its customers under the federal government’s Medicare Part D program.
The Company evaluates customer contracts to determine whether it 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 most of its transactions with customers and revenue is recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, plus an administrative fee, if applicable (“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 the claims adjudication process, (iii) commits to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) manages the overall prescription drug relationship with the patients, who are participants of customers’ plans, and (v) has credit risk for the price due from the customer. In instances where the Company merely administers a customer’s network pharmacy contract to which the Company is not a party and under which the Company does not assume pricing risk and credit risk, among other factors, the Company only records an administrative fee as revenue. For these customers, the Company earns an administrative fee for collecting payments from the customer and remitting the corresponding amount to the pharmacies in the customer’s network. In these transactions, the Company acts as an agent for the customer. As the Company is not the principal in these transactions, the drug ingredient cost is not included in revenue or in cost of revenue (“net reporting”). As such, there is no impact to gross profit based upon whether gross or net reporting is used.
The Company is also a leading provider of HCIT solutions and services to payors, and other participants in the pharmaceutical supply chain in North America. The Company’s product offerings include a wide range of software products for managing prescription drug programs and for drug prescribing and dispensing. The Company’s solutions are available on a license basis with on-going maintenance and support or on a transaction fee basis using an Application Service Provider (“ASP”) model. The Company’s payor customers include managed care organizations, Blue Cross Blue Shield organizations, government agencies, employers and intermediaries such as pharmacy benefit managers. The solutions offered by the Company’s services assist payors in managing the complexity and reducing the cost of their prescription drug programs and dispensing activities.
The Company’s operating expenses primarily consist of cost of revenue, selling, general and administrative (“SG&A”) costs, depreciation, and amortization. Cost of revenue includes the costs of drugs dispensed as well as costs related to the products and services provided to customers and costs associated with the operation and maintenance of the transaction processing centers. These costs include salaries and related expenses for professional services personnel, transaction processing centers’ personnel, customer support personnel and depreciation expense related to data center operations. SG&A costs relate to selling expenses, commissions, marketing, network administration and administrative costs, including legal, accounting, investor relations and corporate development costs. Depreciation expense relates to the depreciation of property and equipment used by the Company for general corporate purposes to conduct its PBM and HCIT businesses. Amortization expense relates to definite-lived intangible assets from business acquisitions.
The PBM and pharmacy industries are intensely competitive, generally resulting in continuous pressure on gross profit as a percentage of total revenue. Industry consolidation and dramatic growth in managed healthcare have led to increasingly aggressive pricing of PBM services. Given the pressure on all parties to reduce healthcare costs, the Company expects this competitive environment to continue for the foreseeable future. In order to remain competitive, the Company looks to continue to drive purchasing efficiencies of pharmaceuticals to improve operating margins, and target the acquisition of other businesses to achieve its strategy of expanding its product offerings and customer base. The Company also looks to retain and expand its customer base by improving the quality of service provided by enhancing its solutions and lowering the total drug spend for customers.
Operating income increased $125.2 million, or 28.2%, in 2014 to $569.0 million as compared to $443.8 million in 2013. The increase is largely attributable to an increase of $234.4 million in gross profit as a result of the increased adjusted prescription claim volume noted previously. The increase in gross profit was partially offset by a $77.6 million increase in SG&A expenses due to additional costs to support the
growth in the PBM business, plus a $10.0 million increase in amortization expense primarily due to the intangible assets acquired as a result of the Restat acquisition.
Also subsequent to the end of the current reporting period, on January 2, 2015, the Company completed the acquisition of Salveo, an independent specialty pharmacy with 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 acquisition provides the Company with the opportunity to expand its geographic footprint and therapy mix in the specialty pharmacy market.
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 and for general corporate purposes.
Revenue increased $6.8 billion, or 46.0%, to $21.6 billion during 2014 from $14.8 billion in 2013 as a result of an increase in adjusted prescription claim volume of 36.5% to 404.1 million in 2014 from 296.0 million during 2013. Several factors drove the increase in the adjusted prescription claim volume, including organic growth added through new customer implementations which includes the continued implementation of the Cigna contract as well as additional claim volume related to a full year contribution from the Restat book of business. Additionally, revenue per prescription claim increased in 2014 as a result of increased specialty claim volume. Specialty claims carry a significantly higher average revenue per prescription as compared to the Company's general book of business.
During 2013, cost of revenue increased $4.4 billion, or 48.3%, to $13.7 billion as compared to $9.2 billion in 2012. The increase in cost was consistent with the increased revenue during 2013, which was driven by the increased revenue from the PBM segment as a result of the increased adjusted claim volume, acquisition of Restat, new customer starts in 2013 as well as additional services sold to existing customers.
Gross profit increased $234.4 million, or 20.8%, to $1.4 billion during 2014, mainly due to an increase in PBM revenues as discussed above. Consolidated gross profit percentage decreased from 7.6% of revenue for the year ended December 31, 2013 to 6.3% of revenue for the year ended December 31, 2014, mainly due to Cigna transactions which were a large driver of the Company's revenue increase, carrying a significantly lower gross profit percentage as compared to the historical PBM business. This decrease was offset by positive impact from increased generic utilization and increased mail and specialty penetration during 2014.
Depreciation expense relates to property and equipment used in all areas of the Company except for those depreciable assets directly related to the generation of revenue, which is included in the cost of revenue in the consolidated statements of operations. Depreciation expense increased $21.6 million, or 56.8%, to $59.5 million for the year ended December 31, 2014 from $37.9 million in 2013, driven by new fixed assets placed in service in 2014 to support the continued growth in the Company's business as well as a full year of depreciation of Restat assets.
Amortization expense for the year ended December 31, 2014 increased $10.0 million to $213.2 million compared to $203.2 million for the year ended December 31, 2013, as a result of having a full year of Restat amortization as compared to one quarter of Restat amortization in 2013.
Amortization expense for the year ended December 31, 2013 was $203.2 million compared to $130.1 million for the year ended December 31, 2012. The increase in amortization expense was driven mainly by an additional half year of amortization of the intangible assets acquired in the Merger with Catalyst as well as additional amortization as a result of the acquisition of Restat.
Interest and other expense, net increased $19.5 million to $61.1 million for the year ended December 31, 2014 from $41.6 million in 2013. The increase is driven by an increase in the interest expense of $16.4 million to $55.5 million for the year ended December 31, 2014 from $39.1 million in 2013. The increase in interest expense is a result of a higher average principal amount of long-term debt outstanding resulting from the issuance in March 2014 of $500 million aggregate principal of the Senior Notes. Refer to Note 9 - Long - Term Liabilities in the notes to the consolidated financial statements for more information related to the Company's debt agreements. Interest expense increased $13.3 million to $39.1 million for the year ended December 31, 2013 compared to 2012, driven by a full year of outstanding borrowings under the Company's credit facility used to partially finance the Merger with Catalyst and an additional $350.0 million utilized to partially finance the acquisition of Restat.
The Company recognized income tax expense of $134.2 million for the year ended December 31, 2014, representing an effective tax rate of 26.4%, compared to $103.4 million, representing an effective tax rate of 25.7%, for the same period in 2013. The increase in tax expense in 2014 compared to 2013 was mainly due to higher taxable income partially offset by tax benefits related to cross jurisdictional financing.
tax rate decreased during 2013 due to certain costs the Company incurred in 2012 that were not deductible as a result of the Catalyst Merger which increased the effective rate in 2012. Additionally, tax benefits related to cross jurisdictional financing reduced the effective tax rate in 2013 versus 2012.
The Company manages its business in two segments: PBM and HCIT, and evaluates segment performance based on revenue and gross profit. Information about the Company’s reportable segments for the years ended December 31, 2014, 2013 and 2012 is presented below:
HCIT revenue increased $3.9 million, or 2.6% to $151.9 million for the year ended December 31, 2014 as compared to $148.0 million in 2013. The increase was primarily due to an increase in revenues earned from transaction processing as a result of increased volume from existing customers and higher rates.
HCIT cost of revenue decreased $4.4 million, or 6.3%, to $66.1 million for the year ended December 31, 2014 as compared to $70.5 million for the year ended December 31, 2013. HCIT cost of revenue increased $4.8 million, or 7.3%, to $70.5 million for the year ended December 31, 2013 as compared to $65.7 million for the same period in 2012. HCIT cost of revenue includes the direct support costs for the HCIT business as well as depreciation expense of $4.0 million, $4.3 million and $3.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. In addition, HCIT cost of revenue includes stock-based compensation expense of $2.3 million, $1.4 million and $0.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. The Company's HCIT costs do not always directly correlate with changes in revenue. Most of the increased revenues of 2014 were related to transaction processing, which often do not incur cost increases when volumes rise due to the scalability of the Company's systems. HCIT cost of revenue increased in 2013 as compared to 2012 mainly due to investments in our systems.
HCIT gross profit decreased $11.8 million, or 13.3%, to $77.5 million for the year ended December 31, 2013 as compared to $89.3 million in 2012, and gross profit percentage was 52.4% for the year ended December 31, 2013, as compared to 57.6% in 2012. The decreases in gross profit and gross profit percentage are attributable to revenue decreases in transaction processing volumes and cost of revenue increases as discussed above.
EBITDA increased $288.4 million for the year ended December 31, 2013, compared to 2012, primarily due to the Merger with Catalyst as well as an organic increase in sales within the PBM segment from new customer contract implementations. This was partially offset by costs to support the Merger integration, as well as increased costs incurred to support the Company's business growth.
Below is a reconciliation of the Company's reported net income to Non-GAAP net income and the related Adjusted EPS for the years ended December 31, 2014, 2013 and 2012.
Adjusted EPS for the year ended December 31, 2014 was $2.28 as compared to $2.00 in 2013. The increase in Adjusted EPS is mainly due to an increase in net income attributable to the Company which was driven by an increase in the PBM revenue as a result of organic growth from new customer contract implementations as well as the acquisition of Restat and was partially offset by increased costs incurred to support the Company's business growth.
Adjusted EPS for the year ended December 31, 2013 was $2.00 as compared to $1.19 in 2012. The increase in Adjusted EPS was mainly due to increased gross profit earned from the expansion of the Company's PBM business along with a decrease in the transaction and integration costs related to the Catalyst Merger that the Company completed in 2012. This increase was partially offset by increased costs incurred to support the Company's continued growth.
At December 31, 2014 and 2013, the Company had cash and cash equivalents totaling $1.0 billion and $387.2 million, respectively. The Company believes that its cash on hand, together with cash generated from operating activities, and the amount available under its Credit Agreement, will be sufficient to support planned operations for the foreseeable future. At December 31, 2014, cash and cash equivalents consist of cash on hand, deposits in banks and bank term deposits with original maturities of 90 days or less.
Rebates receivable of $863.8 million relate to billed and unbilled PBM receivables from pharmaceutical manufacturers and third-party administrators in connection with the administration of the rebate program where the Company is the principal contracting party. The receivable and related payables are based on estimates, which are subject to final settlement. The rebates receivable balance increased $557.9 million from $306.0 million at December 31, 2013 due to increased volume of rebate eligible claims processed in 2014, as well as the timing of receipts from pharmaceutical manufacturers and third party administrators. The Company does not process rebates for all PBM customers and accordingly the rebates receivable balance does not always fluctuate proportionately with changes in revenues and prescription claim volumes.
As of December 31, 2014, goodwill and other intangible assets were $4.7 billion and $1.0 billion, respectively. Goodwill increased by $4.4 million from December 31, 2013 to December 31, 2014 mainly due to working capital adjustments related to the acquisition of Restat. Intangible assets decreased by $213.2 million from December 31, 2013 to December 31, 2014 due to intangible asset amortization. Please refer to Note 7 - Goodwill and Other Intangibles Assets for future amortization expense as of December 31, 2014.
For the year ended December 31, 2013, the Company used $497.7 million of cash for investing activities which consisted primarily of cash used to acquire Restat. Cash used for investing activities decreased $1.1 billion as compared to 2012 due to cash consideration paid to acquire Catalyst and HealthTran in 2012. During 2013, the Company used $128.8 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.
For the year ended December 31, 2012, the Company used $1.6 billion of cash for investing activities, which consisted primarily of cash used to acquire HealthTran and Catalyst. Additionally, the Company used $40.2 million for purchases of property and equipment to support increased transaction volume.
For the year ended December 31, 2013, the Company generated $38.8 million of cash from financing activities, a decrease of $1.3 billion from 2012 which consisted primarily of the Company's $1.5 billion draw on the Credit Agreement to finance the Merger in 2012.
For the year ended December 31, 2012, the Company generated $1.4 billion of cash from financing activities, which mainly consisted of the Company's $1.5 billion draw on the Credit Agreement to finance the Merger as well as the issuance of 12.0 million common shares in May 2012, which resulted in net proceeds of $519.1 million. Offsetting these proceeds was $18.8 million in fees the Company paid to lenders related to the Credit Agreement executed in July 2012, the repayment of $617.0 million of debt related to the Company's and Catalyst's previous credit facilities in place prior to the Merger, and a portion of the Company's Credit Agreement.
Subsequent to the end of the Company's current reporting period, on February 26, 2015, the Company announced that it had entered into a definitive agreement to acquire Healthcare Solutions, a PBM operating in the workers' compensation space, for $405 million in cash, subject to customary post-closing adjustments. The purchase price is expected to be funded through cash on the balance sheet and/or available Revolving Facility borrowings. The acquisition is expected to be completed in the second quarter of 2015, subject to certain customary closing conditions.
Outstanding amounts under the Credit Agreement are due on the Credit Agreement's maturity date, July 2, 2018. The amount noted includes the amount borrowed by the Company under the senior secured term loan as of December 31, 2014, which will fluctuate based on the principal amounts outstanding under the senior secured term loan.
Aggregate principal amount of the Senior Notes is due on the Senior Notes' maturity date, March 15, 2021.
As of January 31, 2015, the Company had 207,493,541 common shares outstanding, 1,448,532 options outstanding, and 1,876,563 restricted stock units (“RSUs”) outstanding. The options are exercisable on a one-for-one basis into common shares. The outstanding RSUs are subject to time-based and performance-based vesting restrictions. The number of outstanding RSUs as of January 31, 2015 assumes the associated performance targets will be met at the maximum level for the performance-based RSUs. Once vested, RSUs convert on a one-for-one basis into common shares.
The following table provides summary quarterly results (unaudited) for the eight quarters prior to and including the quarter ended December 31, 2014 (in thousands except share and per share data):
On October 1, 2013, the Company completed the acquisition of Restat, a privately held pharmacy benefit manager based in Milwaukee, Wisconsin, for a purchase price of $409.5 million in cash subject to certain customary post-closing adjustments. The purchase price was funded from Catamaran’s existing cash balance and $350.0 million in borrowings under the Revolving Facility. The acquisition provides the Company the opportunity to bring Catamaran's full-suite of technology and clinical services to Restat's clients, including mail and specialty pharmacy services.
Arrangements with multiple elements: When the Company enters into arrangements with multiple deliverables it must consider: (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, whether delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the
The Company’s goodwill and long-lived assets (including property and equipment, and purchased intangibles subject to amortization) are subject to periodic impairment testing. Pursuant to the Accounting Standards Update("ASU") ASU 2011-08 in 2011 related to the testing of goodwill impairment, the Company performed a qualitative assessment to determine if indicators of impairment were present. See Note 2 - Significant Accounting Policies in the notes to the consolidated financial statements for additional information on the Company's 2014 goodwill impairment test. 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. Both asset impairment tests and considerations are impacted by various estimates and judgments made by management. Events that may cause a potential impairment in the Company's goodwill or long-lived assets would be the loss of a significant customer or group of customers, a fundamental change in the structure of the healthcare industry, including the method and manner in which pharmacy benefit managers are compensated or a significant decline in future expected profitability.
The Company considered the recent turmoil in the credit markets in assessing whether these events may indicate that the Company's long-lived assets were impaired. The assets assessed are mostly computer equipment, acquired customer lists and goodwill.
We have audited Catamaran Corporation’s (the Company) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A(b) of the Company’s December 31, 2014 annual report on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
In our opinion, Catamaran Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's revenue is primarily derived from prescription drug sales. The Company has a small portion of its revenue that is derived from transaction processing and other services related to its HCIT products.
When the Company enters into arrangements with multiple deliverables involving software, the Company applies the accounting guidance for software. The entire arrangement fee is allocated to each element in the arrangement based on the respective VSOE of fair value of each element.
When an arrangement includes software and non-software deliverables, the Company allocates the arrangement consideration to the non-software deliverables, and to the software deliverables as a group, based on the relative selling prices of all deliverables in the arrangement. When a tangible product contains software that is not essential to the product’s functionality, that nonessential software and any other deliverables within the arrangement that relate to that nonessential software are accounted for under accounting guidance for software. The non-software deliverables sold by the Company typically do not include software deliverables that are considered essential to the functionality of a tangible product.
PBM revenue: The Company’s PBM revenue is primarily derived from sales of prescription drugs, together with any associated administrative fees, to customers and participants through the Company’s nationwide network of pharmacies. Revenue related to the sales of prescription drugs by the Company’s nationwide network of pharmacies is recognized when the claims are adjudicated. Claims are adjudicated at the point-of-sale using the Company’s on-line processing system. The Company records an offsetting reduction to revenue for any rebates earned from pharmaceutical manufacturers and third-party administrators that are payable to the Company’s customers.
HCIT revenue: HCIT revenues are generated primarily from transaction processing and related services. The Company recognizes revenue for its HCIT products and services at the time the transaction is processed, or at the time the service is provided. If multiple elements are required to be delivered under a customer contract, the Company follows the guidance described above in relation to multiple elements.
The Company’s cost of revenue includes the cost of pharmaceuticals dispensed, either directly dispensed at its mail and specialty pharmacy locations, or indirectly through its nationwide network of participating pharmacies. Cost of revenue is reduced for rebates earned from pharmaceutical manufacturers and third-party administrators. Cost of revenue also includes the cost of personnel to support the Company’s transaction processing services, system sales, maintenance, and professional services. In addition, the Company includes in cost of revenue an amount of depreciation expense that is related to property and equipment used to provide services to customers.
The fair value of contingent consideration is based upon probability-weighted discounted cash flow models, utilizing the Company's expectation of the amounts to be paid in the future to settle the contingent purchase price. The inputs utilized in calculating the fair value of the contingent purchase price liabilities are not observable in the marketplace. The fair value of the Company’s interest rate contracts is based upon
observable market-based inputs that reflect the current value of the difference between the fixed rate payments the Company will make to the counter party, and the future variable rate receipts from the counterparty.
Inventory consists primarily of prescription drugs held for resale and is carried at the lower of cost or net realizable value. Inventory costs are calculated using the first-in, first-out method and the weighted-average method.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. 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. Individual customer events such as subsequent collections, discussions with management of the debtor companies, or other activities are used by management as factors in concluding whether to increase or decrease the calculated allowance. Any increase or decrease to the allowance is recognized in the statements of operations as bad debt expense within selling, general and administrative expense.
or significant portion of a reporting unit will be sold or otherwise disposed of; the results of testing for recoverability of a significant asset group within a reporting unit; and the recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
The Company administers a rebate program through which it receives rebates and administrative fees from pharmaceutical manufacturers and third-party administrators that are shared with a majority of the Company’s customers. The rebates earned for the administration of the program are recorded as a reduction of cost of revenue and the portion of the rebate payable to customers, if applicable, is treated as a reduction of revenue. Rebates receivable include billed and unbilled PBM receivables from pharmaceutical manufacturers and third-party administrators. The Company records the gross rebate receivable and the related payable to the customers based on estimates, which are subject to final settlement due to the required validation of claims data submitted to the pharmaceutical manufacturers and third-party administrators, as well as contingent items contained in the total calculation for rebates earned. The estimates are based upon claims submitted and the Company’s rebate contracts, and are adjusted as additional information becomes available. Upon billing the pharmaceutical manufacturer or third-party administrator, any difference between the Company’s estimate and the actual amount of the rebate receivable is recorded to cost of revenue, net of the estimated impact to the Company’s customers. The Company generally pays rebates to its customers on a quarterly basis, or as agreed upon with its customers. There are certain instances where the Company pays rebates to its customers on a more accelerated basis. As of December 31, 2014 and 2013, total unbilled pharmaceutical manufacturer rebates receivable amounted to $366.7 million and $54.6 million, respectively.
The Company accounts for derivative instruments pursuant to derivative and hedge accounting guidance. The guidance requires that all derivative instruments are recorded on the balance sheet at their respective fair values. The Company records the change in the fair value of its derivative instruments deemed as cash flow hedges through other comprehensive income in each reporting period.
(c) Recent accounting standards issued and not yet adopted are summarized below:
In June 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-12, Accounting for Share-Based Payments, when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target shall not be reflected in estimating the fair value of the award at the grant date. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 for all entities, however earlier adoption is 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 October 1, 2013, the Company completed the acquisition of all of outstanding equity interests of Restat, LLC ("Restat"), a privately held pharmacy benefit manager based in Milwaukee, Wisconsin, for a purchase price of $409.5 million in cash subject to certain customary post-closing adjustments. The purchase price was funded from Catamaran’s existing cash balance and $350.0 million in borrowings under a five-year senior secured revolving credit facility (the “Revolving Facility”). The acquisition provides the Company the opportunity to bring Catamaran's full-suite of technology and clinical services to Restat's clients, including mail and specialty pharmacy services. The results of Restat have been included in the Company's results since October 1, 2013. The consolidated statement of operations for the year ended December 31, 2013 includes Restat's total revenues of $209.2 million following the acquisition.
The acquisition 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 recorded 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. Fair values for acquired amortizable intangible assets were determined as follows: customer relationships were valued using an excess earnings model based on expected future revenues derived from the customers acquired, non-compete agreements were valued using discounted cash flow models based on expected future results of Restat, trademarks/tradenames were valued using a royalty savings model based on future projected revenues of Restat and applicable market royalty rates and licenses utilized a replacement cost approach. 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 acquisition are included within the Company's PBM segment. The residual amount of the purchase price after allocation to identifiable net assets represents goodwill. Goodwill is non-amortizing for financial statement purposes. Goodwill of $227.8 million related to the Restat acquisition is tax deductible. The goodwill recognized by the Company represents many of the synergies and business growth opportunities that the Company anticipates may be realized from the acquisition of Restat. The synergies include improved pricing from the Company's suppliers due to the increased volume of prescription drug purchases, pull through opportunities of the Company's mail and specialty service offerings, and a more efficient leveraging of resources to achieve operating profits.
(a) As previously reported in the Company's Form 10-K for the period ended December 31, 2013.
(b) These measurement period adjustments were recorded from January 1, 2014 through June 30, 2014 to reflect an additional $2.0 million paid to former Restat owners in connection with post-closing working capital adjustment as well as changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing as of the acquisition date.
The Black-Scholes option pricing model was used to calculate the fair value of the replacement warrants and stock options issued.
(b) These measurement period adjustments from the acquisition date through December 31, 2012 were recorded to reflect changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing as of the acquisition date.
During the years ended December 31, 2014 and 2013 the Company recognized $154.7 million and $166.1 million of amortization expense from intangible assets acquired in the Merger, respectively. The estimated fair value of the customer relationship intangible asset was $1.2 billion at the date of acquisition with a useful life of 9 years. The intangible asset acquired will not have any residual value at the end of the amortization period. There were no in-process research and development assets acquired.
During the year ended December 31, 2012, the Company incurred transaction and integration expenses related to the Merger, exclusive of debt financing costs, totaling $27.2 million which includes transaction expenses of $22.8 million. These costs are included in selling, general and administrative ("SG&A") expenses. Additionally, during the year ended December 31, 2012, the Company recorded $17.0 million in charges to SG&A expenses due to transactions related to the Merger, recognized separately from the acquisition of assets and assumptions of liabilities from the Merger. The charges recorded related to $3.5 million in contract settlements and terminations made by Catalyst prior to the acquisition that had future benefit to the Company, $3.1 million for payments made to Catalyst employees based on contractual arrangements which had future benefit to the Company, and $10.4 million in severance charges incurred subsequent to the close of the Merger.
(a) As previously reported in the Company's Form 10-Q for the period ended March 31, 2012.
The following unaudited pro forma financial information presents the combined historical results of operations of the Company and its acquisition of Restat as if the acquisition had occurred on the first day of the fiscal year prior to the fiscal year the acquisition was completed. The unaudited pro forma financial information includes certain adjustments related to the acquisition, such as increased amortization from the fair value of intangible assets acquired recorded as part of the purchase accounting, the elimination of transactions between the Company and the acquired entity, and related income tax effects.
The Company holds an ownership interest in excess of 40%, but not a controlling interest, in Script Relief LLC ("Script Relief"), a Delaware limited liability company. Script Relief operates a direct to consumer pharmacy benefit business, including discount card offerings
Adjustments to the fair value of assets acquired and liabilities assumed for recent acquisitions during the measurement period. The measurement period adjustments were not recast to the 2012 consolidated financial statements as they were not deemed material.
Represents adjustments in connection with the post-closing working capital adjustment as well as changes in the estimated fair values of the associated assets acquired and liabilities assumed for Restat acquisition during the measurement period. The measurement period adjustments were not recast to the 2013 consolidated financial statements as they were not deemed material.
Future amortization associated with intangible assets recorded as of December 31, 2014 is estimated to be $194.0 million in 2015, $166.7 million in 2016, $147.5 million in 2017, $137.2 million in 2018, $126.8 million in 2019, and $196.0 million for years after 2019.
The following table sets forth the components of long-term debt (in thousands), net of unamortized debt discounts as of December 31, 2014 and December 31, 2013.
interest expense over the life of the Senior Notes using the straight-line method. The amortization related to financing costs and debt discounts totaled $1.1 million for the year ended December 31, 2014.
The Senior Notes are jointly and severally and fully and unconditionally guaranteed by each of the Company’s existing and future wholly-owned subsidiaries that guarantees obligations under (i) the Credit Agreement or (ii) certain other future indebtedness in aggregate principal amount in excess of $175.0 million.
Concurrent with the consummation of the Merger on July 2, 2012, the Company executed a credit agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. ("JPMCB"), as administrative agent, and a syndicate of lenders. The Credit Agreement initially provided for a senior secured credit facility in an aggregate amount of $1.8 billion consisting of (i) a five-year senior secured term loan facility in the amount of $1.1 billion (the “Term Loan Facility”) and (ii) the Revolving Facility in the amount of $700.0 million. In July 2012, the Company borrowed $1.4 billion under the Credit Agreement consisting of $1.1 billion under the Term Loan Facility and $300.0 million under the Revolving Facility to fund in part the aggregate cash consideration payable to Catalyst stockholders in the Merger, repay and discharge existing indebtedness of the Company and Catalyst and pay related transaction fees and expenses. Net proceeds received under the Term Loan Facility were $1.1 billion less $29.6 million in debt discount. Additionally, the Company paid $18.8 million in debt issuance costs related to the Revolving Facility.
a decrease in the commitments under the Term Loan Facility from $1.1 billion to $1.0 billion;
additional flexibility for the Company and its subsidiaries to (i) make certain permitted acquisitions, (ii) create liens, (iii) make
modifications to the interest rates and financial covenants applicable to the Company and its subsidiaries as described further below.
The Credit Agreement, as amended by the Amendment, requires the Company to maintain a consolidated leverage ratio at all times less than or equal to 4.00 to 1 and a consolidated senior secured leverage ratio at all times less than or equal to 3.25 to 1. The Company's consolidated leverage ratio is defined as the ratio of (1) consolidated total debt to (2) consolidated EBITDA (with add-backs permitted to consolidated EBITDA for (a) fees and expenses related to the Merger, the closing of the Credit Agreement, a specified historic acquisition and future permitted acquisitions, (b) synergies projected by the Company in good faith to be realized as a result of the Merger in an aggregate amount not to exceed a specified threshold and (c) fees and expenses and integration costs related to historical acquisitions by Catalyst in an aggregate amount not to exceed a specified threshold). The Company's new consolidated senior secured leverage ratio is defined as the ratio of (1) (a) consolidated total debt minus (b) any portion of consolidated total debt that is subordinated or not secured by a lien upon the assets of the Company or its subsidiaries to (2) consolidated EBITDA (subject to the permitted add-backs noted above). The Amendment continues to require the Company to maintain an interest coverage ratio greater than or equal to 4.00 to 1. The interest coverage ratio is defined as the ratio of (1) consolidated EBIT (subject to the permitted add-backs noted above) to (2) consolidated interest expense, tested at the end of each fiscal quarter for the rolling four fiscal quarter period then most recently ended. As of December 31, 2014, the Company was in compliance with the covenants of the Credit Agreement, as amended by the Amendment.
The Company’s obligations under the Credit Agreement are guaranteed by all existing and future, direct and indirect, material subsidiaries of the Company (collectively, the “Subsidiary Guarantors”). In addition, the Company and each Subsidiary Guarantor have pledged substantially all of their assets, subject to certain exceptions, to secure the Company’s obligations under the Credit Agreement.
On May 16, 2012, the Company completed a public offering of 12.0 million of its common shares at a price to the public of $45.30 per share. The net proceeds to the Company from the offering were approximately $519.1 million, after deducting the underwriting discounts and commissions and offering expenses. The Company used part of the net proceeds from the offering to pay a portion of the cash component of the Merger consideration and other related fees and expenses in connection with the Merger and the balance was used for general corporate purposes.
The aggregate intrinsic value and remaining contractual term of exercisable stock options at December 31, 2014 was $14.0 million and 3.26 years, respectively. The aggregate intrinsic value and remaining contractual term of all vested options and options that are expected to vest are $21.0 million and 4.47 years, respectively. The total fair value of stock options which vested during the years ended December 31, 2014, 2013 and 2012 was approximately $4.6 million, $3.5 million, and $2.8 million, respectively.
As of December 31, 2014, there were $8.2 million and $1.7 million of unrecognized compensation costs related to stock options for LTIP and Assumed Plans, respectively, which are expected to be recognized over a weighted-average period of 2.39 years and 3.01 years, respectively.
The total intrinsic value of stock options exercised during the years ended December 31, 2014, 2013, and 2012 was $8.2 million, $14.9 million, and $50.3 million, respectively.
On May 16, 2007, shareholders of the Company approved the creation of the Employee Stock Purchase Plan (“ESPP”) which allows eligible employees to withhold annually up to a maximum of 15% of their base salary, or $25,000, subject to U.S. Internal Revenue Service limitations, for the purchase of the Company’s common shares. Common shares will be purchased on the last day of each offering period at a discount of 5% of the fair market value of the common shares on such date. The aggregate number of common shares that may be awarded under the ESPP may not exceed 400,000 common shares. Common shares available for purchase under the ESPP are drawn from reacquired common shares purchased on behalf of the Company in the open market. During 2014, 2013, and 2012, the Company delivered 40,156, 33,728, and 14,697 common shares, respectively, under the ESPP.
The following table summarizes the information about RSUs for the year ended December 31, 2014 under the Company's equity incentive plans:
The Company allocated stock-based compensation costs to the same statement of operations line item as the cash compensation to those employees. Accordingly, the allocation of the compensation costs is as follows for the years ended December 31, 2014, 2013, and 2012 (in thousands):
At December 31, 2014, the Company had gross deferred tax assets (“DTAs”) totaling $137.4 million compared to $98.9 million at December 31, 2013. Of the $137.4 million, $30.8 million of DTAs related to its Canadian operations compared to $18.1 million at December 31, 2013. The Company also had deferred tax liabilities which decreased to $308.8 million at December 31, 2014 from $338.7 million at December 31, 2013.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, including interest and penalties, for 2014, 2013 and 2012 , respectively are as follows (in millions):
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Accrued interest and penalties at December 31, 2014, 2013, and 2012 was $5.9 million, $4.7 million, and $0.5 million, respectively. It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease within twelve months of December 31, 2014. The Company currently estimates that such increases or decreases will not be material.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions, including Canada. With few exceptions, the Company is no longer subject to tax examinations by tax authorities for years prior to 2010.
In September 2014, the Company executed a plan to exit the space it had leased in Bannockburn, IL. As a result of this exit, the Company recorded a charge and corresponding lease loss accrual equal to the present value of the amount by which the net future lease obligations exceed the remaining rent-related deferred balances. As a result of this exit, the Company recorded approximately $5.7 million of lease loss expense during 2014 in SG&A expense in the consolidated statements of operations. As of December 31, 2014, the Company had an accrual for the present value of future amounts due through the end of the lease term of approximately $6.9 million, which is included in accrued expenses and other current liabilities in the consolidated balance sheets. Based on the Company's current assumptions as of December 31, 2014, we expect that cash outflows totaling $7.0 million will occur through July 2015. The exit from the space in Bannockburn, IL did not involve any employee termination costs.
In August 2013, the Company executed a plan to exit a portion of space it had leased in Maryland and entered into a sub-lease agreement with a third-party tenant that was coterminous with the Company's remaining lease term. As a result of this exit, the Company recorded an approximately $5.6 million charge in SG&A expense and corresponding lease loss accrual equal to the present value of the amount by which the net future lease obligations exceed the remaining rent-related deferred balances. The net future lease obligations were calculated by taking the remaining contractual rent obligation less the amount the Company will receive from the sub-lease agreement and recorded at its present value based on the Company's credit adjusted risk-free interest rate. As of December 31, 2014, the Company had an accrual of approximately $5.2 million related to lease exit costs included in accrued expenses and other current liabilities in the consolidated balance sheets. A roll forward of the lease exit cost accrual is presented below (in thousands):
Based on the Company's current assumptions as of December 31, 2014, we expect that cash outflows totaling $6.1 million will occur through June 2022.
(b) Cash paid / received for income taxes and interest was as follows for the years ended December 31, 2014, 2013, and 2012 (in thousands):
Aggregate future minimum payments in respect of non-cancellable operating lease agreements as of December 31, 2014, which extend until 2025, are as follows (in thousands):
In July 2014, the Company received a subpoena from the United States Attorney's Office for the District of Rhode Island, requesting documents and information concerning bona fide service fees and rebates received from certain pharmaceutical manufacturers in connection with certain drugs utilized under Part D of the Medicare program. The Company has been cooperating with the government, collecting and producing documents in response to the subpoena.
The Company manages its business in two segments: PBM and HCIT. The Company evaluates segment performance and allocates resources based upon revenue and gross profit. Selling, general and administrative expenses, depreciation and amortization, interest and other income and interest expense are reported as corporate expenses as these are managed on a consolidated basis by the Company. The Merger with Catalyst or the acquisition of Restat did not change the Company's conclusion on its reporting segments.
Revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, through the Company’s nationwide network of participating pharmacies and the Company's own mail and specialty pharmacies. Revenue and costs related to the sales of prescription drugs are recognized when the claims are adjudicated and the prescription drugs are shipped. Claims are adjudicated at the point-of-sale using an on-line processing system. Revenue and cost primarily consists of sales of prescription drugs to customers and participants.
The Company also provides HCIT solutions and services to providers, payors and other participants in the pharmaceutical supply chain in North America. The Company’s product offerings include a wide range of software products for managing prescription drug programs and for drug prescribing and dispensing. The Company’s solutions are available on a license basis with on-going maintenance and support or on a transaction fee basis using an ASP model. The Company’s payor customers include managed care organizations, Blue Cross Blue Shield organizations, government agencies, employers and intermediaries such as pharmacy benefit managers. The Company’s provider customers include independent, regional chain, institutional, and mail-order pharmacies. The solutions offered by the Company’s services assist both payors and providers in managing the complexity and reducing the cost of their prescription drug programs and dispensing activities. The Company’s profitability from HCIT depends primarily on revenue derived from transaction processing services, software license sales, hardware sales, maintenance, and professional services.
Revenues of the Company are primarily earned in the United States. The Company’s Canadian operations represented less than 0.2% of the Company’s consolidated revenue for the years ended December 31, 2014, 2013 and 2012.
The Company is subject to concentrations of credit risk through cash and cash equivalents and accounts receivable. The Company monitors the credit risk and credit standing of counterparties on a regular basis.
In order to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rates, the Company entered into 3-year interest rate swap agreements with a total notional amount of $500 million to fix the variable LIBOR rate on the Company's term loan to 0.52%, resulting in an effective rate of 2.14% after adding the 1.63% margin per the Credit Agreement. Under the interest rate swap, the Company receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent to fixed-rate debt with respect to the notional amount of such swap agreements. The interest rate contract derivative instrument was designated as a cash flow hedge upon its inception in August 2012 and it expires in August 2015. Hedge effectiveness is assessed by the Company on a quarterly basis. Based on the Company's assessment as of December 31, 2014, the Company concluded that the hedge is highly effective and thus hedge accounting is appropriate.
The estimated fair value of the Company’s financial instruments has been determined based on the Company’s assessment of available market information and appropriate valuation methodologies. However, these estimates may not necessarily be indicative of the amounts that the Company could realize in a current market exchange. See Note 19 for the Company’s disclosure on the fair value of derivative instruments.
Fair value measurement guidance defines a hierarchy to prioritize the inputs to valuation techniques used to measure fair value into three broad levels, with Level 1 considered the most reliable. For assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheet, the table below categorizes fair value measurements across the three levels as of December 31, 2014 (in thousands):
As the fair value measurement for the contingent consideration was based on inputs not observed in the market, these measurements are classified as Level 3 measurements as defined by fair value measurements guidance.
Derivative liabilities relate to the interest rate swap (refer to Note 18 - Financial Instruments for further information), which had a fair value of $1.1 million as of December 31, 2014. As the fair value measurement for the derivative instrument is based on quoted prices from a financial institution, the measurement is classified as Level 2 measurement as defined by fair value measurements guidance.
During 2014 and 2013, there were no movements of fair value measurements between levels 1, 2 and 3.
Catamaran Corporation (the parent company), the issuer of the Senior Notes;