Year ended December 31, 2010 as compared to year ended December 31, 2009
Rebates receivable of $34.2 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. Rebates receivable increased $16.6 million to $34.2 million from $17.6 million at December 31, 2009, due primarily to increased rebate volumes driven by increased prescription drug sales transactions, as well as the timing of payments from pharmaceutical manufacturers and third party administrators.
Accrued liabilities decreased $9.1 million to $21.7 million at December 31, 2010 from $30.8 million at December 31, 2009, primarily due to the timing of payments made to customers in relation to contract performance guarantees and payments made related to assumed liabilities from the NMHC acquisition.
For the year ended December 31, 2009, the Company generated $86.4 million of cash through its operations. Cash provided by operating activities has increased $44.8 million compared to the same period in 2008 mainly due to the increased profitability of the Company. The Company's continued focus on timely collection of its receivables, and effectively managing its working capital also increased operating cash flows. Cash from operations consisted of net income of $46.1 million adjusted for $17.7 million in depreciation and amortization expense, $3.7 million in stock-based compensation expense, a reduction of rebates receivable of $12.0 million, an increase in rebates payable of $10.3 million, an increase in pharmacy benefit claims payable of $10.3 million, and an increase in customer deposits of $3.0 million. These were partially offset by a reduction of accrued liabilities of $1.1 million, an increase in accounts receivable of $16.7 million, and $4.5 million in tax benefits from option exercises.
The annual impairment test 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 2010 did not indicate any impairment of either 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 2010 that caused management to conclude any of its long-lived or intangible assets may not be recoverable.
The Company considered the need to review its investments for an other-than-temporary impairment at each reporting period. The Company reviewed each investment that had a fair value below its amortized cost basis and considered whether the decline in the asset’s value is temporary. For those impairments deemed other-than-temporary, a charge would be recorded to current period earnings. The Company did not record any other-than-temporary impairment charges during 2010 or 2009.
For stock-based awards issued to employees and directors, compensation cost related to those awards is measured based on the fair value of the options on the date of the grant. For stock options, the fair value is determined by using the Black-Scholes-Merton option-pricing model. The compensation cost of the awards expected to vest is recognized on a straight-line basis over the service period as compensation expense and additional paid-in capital. In addition, the Company estimates forfeitures as part of the initial measure of the grant date fair value of the award.
During the first quarter of 2009, the ESPP was amended so that the common shares available for purchase under the ESPP are drawn from reacquired common shares purchased on behalf of the Company in the open market. Prior to the amendment in 2009, the common shares available for purchase under the ESPP were drawn from either authorized but previously un-issued common shares or from reacquired common shares, including those purchased by the Company in the open market. During 2010, 2009, and 2008, the Company delivered 7,072, 12,396, and 4,772 common shares, respectively, under the ESPP.
The Black-Scholes-Merton option-pricing model was used to estimate the fair value of the options at grant date for the years ended December 31, 2010, 2009, and 2008, based on the following assumptions:
Prior to the extinguishment of its long-term debt on December 31, 2009, as discussed in Note 7, the Company was subject to interest rate risk related to variable rate debt. The Company used variable rate debt to finance its acquisition of NMHC in 2008. When interest rates increased, interest expense could increase. Conversely, when interest rates decreased, interest expense could also decrease.
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, 2010 (in thousands):