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OMNICARE INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the Omnicare, Inc. Consolidated Financial Statements, related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report"). In addition, see "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information." You should also refer to our audited Consolidated Financial Statements and the notes thereto and the related MD&A, including critical accounting policies, for the year ended December 31, 2013, which appear in our 2013 Annual Report on Form 10-K ("2013 Annual Report"). As used in this Quarterly Report, unless otherwise specified or the context otherwise requires, the terms "Omnicare," "Company," "its," "we," "our" and "us" refer to Omnicare, Inc. and its consolidated subsidiaries. Executive Overview Omnicare is a leading healthcare services company that specializes in the management of complex pharmaceutical care. We operate two primary businesses, Long-Term Care Group ("LTC") and Specialty Care Group ("SCG"), each serving a different customer population but sharing a common objective: advancing health outcomes at the lowest possible cost. Through LTC, we are the nation's largest provider of pharmaceuticals and related pharmacy and ancillary services to long-term care facilities as well as chronic care facilities and other settings. Through SCG, we provide specialty pharmacy and commercialization services for the biopharmaceutical industry. We leverage our specialized clinical capabilities and innovative technology solutions across both primary businesses as key components of the value management believes we provide to our customers. We service customers across the United States. Through LTC, we operate the nation's largest institutional pharmacy business, based on both revenues and the number of beds served. Due to the size and scope of LTC, we believe we have unique cost advantages, especially pertaining to the sourcing of pharmaceuticals. The scale of our operations has also provided us the opportunity to make investments in proprietary automation technology to reduce our dispensing costs while improving the accuracy and consistency of our service delivery. LTC's customers consist of skilled nursing facilities, assisted living facilities, independent living communities, hospitals, correctional facilities, and other healthcare service providers. In light of a customer mix that is heavily concentrated in the senior citizen market, we have a high level of insight into geriatric pharmaceutical care. As of September 30, 2014, LTC provided pharmacy services in the U.S. in 47 states and the District of Columbia. LTC dispensed approximately 28 million prescriptions in the third quarter of 2014. SCG operates across a broad spectrum of the healthcare continuum, serving the needs of biopharmaceutical manufacturers, physicians, nurses, caregivers and patients. SCG's services are largely centered on the specialty pharmaceutical market. These services are based on four platforms: brand support services, supply chain solutions, patient support services and specialty pharmacy. The brand support services, supply chain solutions and patient support services platforms are integrated fee-for-service platforms which focus on helping the drug manufacturer market, distribute and obtain reimbursement for their products. Through its specialty pharmacy platform, SCG dispenses specialized pharmaceuticals that are high cost, have complex reimbursement and supply chain challenges, have limited patient populations and are not available through normal retail channels. These specialized drugs deal primarily with specific categories of drugs and disease states, such as rheumatoid arthritis, multiple sclerosis, oncology and growth hormones. We believe that we have an attractive business model, with a market leadership position in the long-term care market, and our position in the growing specialty care market supported by strong cash flows. Moreover, we believe that our business model is appropriately aligned with the interests of our customers, payors and patients as many of the factors that benefit Omnicare, such as new low-cost generic introductions and more accurate and efficient automation technologies, also have a favorable effect on our key constituencies. As such, we believe we can play a role in lowering the country's healthcare costs while striving for positive patient outcomes. In the first nine months of 2014, SCG continued its strong financial performance primarily as a result of strong organic growth and drug price inflation within our specialty pharmacy platform. The LTC business experienced increased financial performance year-over-year due to increased drug price inflation along with a higher average number of beds served primarily related to our business with Kindred Healthcare, Inc. ("Kindred"). 30 -------------------------------------------------------------------------------- In April 2012, we entered into capped call transactions with a counterparty. The capped call transactions are intended to reduce potential economic dilution upon conversion of the 3.75% Convertible Senior Subordinated Notes due 2042. The capped calls settle in four annual tranches through March 2016, one of which settled in the first quarter of 2014. We received approximately 0.6 million net shares upon settlement with a value of approximately $38 million. The remaining capped calls provide a hedge against economic dilution, but not against diluted share count under GAAP, up to an average stock price of approximately $68.75 per share through March 2016. In June 2014, through privately negotiated transactions, we repurchased approximately $52 million in aggregate principal amount of our outstanding 3.75% Convertible Senior Subordinated Notes due 2025 (the "2025 Notes") for approximately $134 million in cash. We recognized loss on the repurchase of approximately $8 million and wrote off debt issuance costs of $1 million in the three and six months ended June 30, 2014 which were reflected in "Other charges" and "Interest Expense" on the Consolidated Statements of Comprehensive Income, respectively. On June 30, 2014, as previously announced, John L. Workman, our CEO and a director, retired from all positions with the Company. Effective upon his retirement, Nitin Sahney, our President and Chief Operating Officer, became our President and Chief Executive Officer and a member of our Board of Directors. During the third quarter of 2014, settlement payments of $116 million and $8.24 million were made related to the Gale and Silver complaints, respectively (each as described in "Note 7 - Commitments and Contingencies", of the Notes to the Consolidated Financial Statements), and $4.24 million was received related to the our motion for sanctions filed against relator Gale and his attorneys. In the second quarter of 2014, we finalized the sale of Retail for net proceeds of approximately $6 million. Additionally, in the three and nine months ended September 30, 2014, we finalized the sale of Hospice for proceeds of approximately $65 million and recorded an after-tax loss of $4 million on the disposal. In the nine months ended September 30, 2014, we recorded an impairment loss of $40 million to reduce the carrying value of Hospice to fair value. For a further description of our business activities, see the "Business" caption of Part I, Item 1 of the 2013 Annual Report. Regulatory Matters Update As part of ongoing operations, Omnicare and our customers are subject to legislative and regulatory changes impacting operations and the level of reimbursement received from the Medicare and Medicaid programs. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "ACA"), changed the requirements for the Centers for Medicare & Medicaid Services' ("CMS") calculation of maximum prescription drug reimbursement amounts under state Medicaid programs, as discussed below. In March 2013, President Obama issued a sequestration order that mandates spending reductions impacting most federal programs, as required under the terms of the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. The sequestration order requires a 2% cut to Medicare payments to providers and health plans. Sequestration generally applies to Medicare fee-for-service claims with dates-of-service or dates-of-discharge on or after April 1, 2013, and payments made to Medicare Advantage organizations and Medicare Part D sponsors on or after April 1, 2013. Under current law, as amended by subsequent legislation, Medicare sequestration is scheduled to last through fiscal year 2024, although legislation could be enacted at any time to end or modify the terms of sequestration. We believe that this reduction in CMS payments to Medicare Part D plan sponsors generally does not directly affect the amounts that we are paid under our existing agreements with Medicare Part D plan sponsors. However, it is possible that the sequestration reductions could lead Medicare Part D plan sponsors to seek lower rates through renegotiation. We cannot assure you that sequestration or other future policies impacting federal spending on Medicare will not adversely affect our business. Effective for federal fiscal year 2015, which began October 1, 2014, CMS has increased reimbursement rates paid to skilled nursing facilities for services provided under Medicare Part A by 2.0% compared to fiscal year 2014 levels. We cannot assure you, however, that Medicare reimbursement rates in future years will not be reduced. Pursuant to the ACA, certain federal upper limit ("FUL") prices for certain generic and multisource branded drugs under Medicaid which had generally been calculated using wholesale acquisition cost will instead be calculated using average manufacturer price ("AMP"), which is a price reported by manufacturers to CMS. The ACA also changed certain definitions relating to AMP and other requirements for calculation of AMP and FULs. CMS has released, for review and comment only, draft FULs and related 31 -------------------------------------------------------------------------------- data, as well as its draft methodology for calculating such FULs. We submitted comments to CMS on various aspects of these draft FULs and methodology, including our assessment that the draft weighted AMPs do not reflect the market prices at which these drugs can be acquired in the marketplace. The FUL methodology has not been finalized to date. Although CMS had announced its intention to finalize the FULs for multiple source drugs in July 2014, on June 2, 2014, CMS announced that it would not be finalizing the draft FULs at that time. CMS stated that further detailed guidance would be provided for states to implement the ACA FULs, that it expects to provide a new finalization date for the FULs when it releases such guidance, and that it will continue to analyze the draft monthly FUL data, including the relationship of those FULs to the National Average Drug Acquisition Cost pricing. CMS has also released proposed regulations relating to the calculation of AMP and FUL pursuant to the ACA changes, and in the same release has proposed that Medicaid reimbursement of drugs to which FUL do not apply be based upon an "actual acquisition cost" measure, with new requirements for Medicaid dispensing fees. We submitted comments on these proposals. We cannot assure you that new FULs or other changes in reimbursement for drugs we provide under Medicaid will not adversely affect our business. Consolidated Results of Operations for the Three and Nine Months Ended September 30, 2014 The following summary table presents our consolidated financial information and results of operations as well as Adjusted operating income and Adjusted income from continuing operations (in thousands). Three months ended Nine months ended September 30, September 30, 2014 2013 2014 2013 Net sales $ 1,608,055 $ 1,515,168 $ 4,789,677 $ 4,477,229 Operating income (loss) 135,742 (60,776 ) 398,740 154,280 Adjusted operating income (a) 152,609 144,340 451,766 420,801 Income (loss) from continuing operations 68,077 (69,351 ) 192,961 26,265 Adjusted income from continuing operations (a) 79,602 75,332 234,719 216,294 (a) Adjusted operating income and Adjusted income from continuing operations exclude certain items not considered part of our core operating results and certain non-cash charges. We believe that presenting these non-GAAP financial measures enhances investors' understanding of how management assesses the performance of our businesses. We use non-GAAP measures for budgeting purposes, measuring actual results, allocating resources and in determining employee incentive compensation. Our method of calculating non-GAAP financial results may differ from those used by other companies and, therefore, comparability may be limited. See the "Special Items" caption of this MD&A for a description of the excluded items and a reconciliation of Adjusted operating income and Adjusted income from continuing operations to the most comparable GAAP financial measures. Net sales for the three and nine months ended September 30, 2014 were favorably impacted by the positive impact of drug price inflation in both LTC and SCG as well as a higher number of net beds served within LTC primarily related to our business with Kindred. Partially offsetting these factors were reductions in reimbursement coupled with competitive pricing issues. See the discussion of sales and operating income results in more detail under the "Long-Term Care Group Segment" and "Specialty Care Group Segment" captions below. Gross margin was 21.9% and 22.2% in the three and nine months ended September 30, 2014, respectively, compared to 23.2% and 23.7%, respectively, in the comparable prior year periods. Gross profit was unfavorably affected by certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement coupled with competitive pricing issues. Additionally, gross margin was unfavorably impacted by growth in the SCG segment, which has a mix of business with lower margins. Favorably impacting gross profit dollars was the effect of drug price inflation, cost reduction and productivity improvement initiatives, as well as lower payroll and employee benefit costs. Our consolidated selling, general and administrative ("operating") expenses as a percentage of net sales were 11.1% and 11.5% in the three and nine months ended September 30, 2014, respectively, compared to 12.1% and 12.6%, respectively, in the comparable prior year periods. Operating expenses were favorably impacted by the continued progress in lowering operating expenses through our non-drug purchasing program, lower payroll and employee benefit costs and reduced operating expenses due to the disposition of certain assets, primarily in our medical supply services business in the second quarter of 2013. Partially offsetting these factors was increased depreciation expense for assets related to our initiatives to improve our infrastructure and customer service. 32 -------------------------------------------------------------------------------- Interest expense, net of investment income for the three and nine months ended September 30, 2014, was lower than in the prior-year periods primarily due to the refinancing activities completed in 2014 and 2013. Our effective tax rate for the three and nine months ended September 30, 2014 and September 30, 2013 is different than the applicable federal statutory rate primarily as a result of the impact of state and local income taxes and additional tax benefits recognized in 2014 for prior year settlement payments, and the non-deductible portion of the settlement payments made related to the Gale and Silver complaints (each as described in "Note 7 - Commitments and Contingencies" of the Notes to the Consolidated Financial Statements). Long-Term Care Group Segment Three months ended Nine months ended September 30, September 30, (In thousands) 2014 2013 2014 2013 Net sales $ 1,183,398 $ 1,157,951 $ 3,565,092 $ 3,458,772 Operating income $ 142,285 $ 4,207 $ 444,402 $ 259,953 Scripts dispensed 27,699 27,963 83,960 84,547 LTC net sales for the three and nine months ended September 30, 2014 were favorably impacted by increased drug price inflation along with a higher average number of beds served primarily related to our business with Kindred. These increases were partially offset by reductions in reimbursement coupled with competitive pricing issues related to our facilities contracts, as well as a reduction in sales due to the disposition of certain assets, primarily in our medical supply services business in the second quarter of 2013. While we are focused on reducing our costs to mitigate the impact of drug pricing and reimbursement issues, we cannot assure you that such issues or other pricing and reimbursement pressures will not adversely impact LTC's net sales. Operating income for the three and nine months ended September 30, 2014 was unfavorably affected by certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement and pricing as well as the year-over-year impact of certain other "special items", further discussed in the "Special Items" section of this MD&A. Operating income for the three and nine months ended September 30, 2013 was unfavorably impacted by a settlement charge of $120 million plus attorneys fees related to the Gale and Silver matters as described in "Note 7 - Commitments and Contingencies" of the Notes to the Consolidated Financial Statements. Operating income was favorably impacted largely by the favorable dollar effect of drug price inflation, cost reduction and productivity improvement initiatives, as well as lower payroll and employee benefit costs. Specialty Care Group Segment Three months ended Nine months ended September 30, September 30, (In thousands) 2014 2013 2014 2013 Net sales $ 424,580 $ 357,057 $ 1,224,319 $ 1,017,127 Operating income $ 34,203 $ 26,845 $ 97,057 $ 82,005 SCG net sales for the three and nine months ended September 30, 2014 were positively impacted primarily by organic growth and drug price inflation in our specialty pharmacy business. Favorable drug utilization was driven primarily by growth in our multiple sclerosis and oncology therapies. We also saw year-over-year growth in our fee-for-service platforms. SCG operating income for the three and nine months ended September 30, 2014 were favorably affected primarily by the same factors as those impacting the net sales increase. Partially offsetting these positive factors was the unfavorable impact of mix within the SCG segment toward business with lower margins, reimbursement pressures, and investments in facilities and personnel in order to position the segment for future growth. Restructuring and Other Related Charges See "Restructuring and Other Related Charges" under "Note 2 - Significant Accounting Policies" of the Notes to Consolidated Financial Statements. 33 --------------------------------------------------------------------------------Special Items We believe that presenting certain non-GAAP financial measures, which exclude items not considered part of our core operating results and certain non-cash charges ("Special Items"), enhances investors' understanding of how we assess the performance of our businesses. We use non-GAAP measures for budgeting purposes, measuring actual operating results, allocating resources and in determining employee incentive compensation. Our method of calculating non-GAAP financial results may differ from those used by other companies and, therefore, comparability may be limited. Financial results for the three and nine months ended September 30, 2014 and 2013 included the Special Items presented in the table below, which also contains a reconciliation of our non-GAAP amounts to their most directly comparable GAAP financial measure (in thousands). Three months ended Nine months ended September 30, September 30, 2014 2013 2014 2013 Settlement, litigation and other related charges (i) $ 12,868 $ 143,484 $ 27,467 $ 169,615 Other charges (ii) 3,999 61,632 25,559 96,906 Subtotal - operating expense Special Items 16,867 205,116 53,026 266,521 Amortization of discount on convertible notes (iii) 6,139 6,218 18,484 18,474 Debt redemption costs - net (iv) - 4,784 647 4,784 Total - Special Items $ 23,006 $ 216,118 $ 72,157 $ 289,779 Total - Special items after tax (v) $ 11,525 $ 144,683 $ 41,758 $ 190,029 Operating income (loss) $ 135,742 $ (60,776 ) $ 398,740 $ 154,280 Operating expense Special Items 16,867 205,116 53,026 266,521 Adjusted operating income $ 152,609 $ 144,340 $ 451,766 $ 420,801 Income (loss) from continuing operations $ 68,077 $ (69,351 ) $ 192,961 $ 26,265 Total Special Items - after tax 11,525 144,683 41,758 190,029 Adjusted income from continuing operations $ 79,602 $ 75,332 $ 234,719 $ 216,294 (i) See "Note 7 - Commitments and Contingencies"of the Notes to Consolidated Financial Statements. (ii) See "Other Charges" under "Note 2 - Significant Accounting Policies" of the Notes to Consolidated Financial Statements. (iii) We recorded non-cash interest expense from the amortization of debt discount on our convertible notes. (iv) Interest expense includes charges for debt redemption losses and costs related to our previously announced refinancing transactions. See "Note 5 - Debt" of the Notes to Consolidated Financial Statements. (v) The tax effect was calculated by multiplying the tax-deductible pretax amounts by the appropriate effective tax rate. Financial Condition, Liquidity and Capital Resources Cash and cash equivalents at September 30, 2014 were $287 million compared with $356 million at December 31, 2013. We generated positive net cash flows from operating activities of continuing operations of $355 million during the nine months ended September 30, 2014, compared with $456 million during the nine months ended September 30, 2013. Compared to the same prior year period, operating cash flow was favorably impacted primarily by the year-over-year change in timing of inventory purchases and timing of accounts payable payments. During the third quarter of 2014, settlement payments of $116 million and $8.24 million were made related to the Gale and Silver complaints, respectively and $4.24 million was received related to our motion for sanctions filed against relator Gale and his attorneys as described in "Note 7 - Commitments and Contingencies" of the Notes to the Consolidated Financial Statements. The 2013 period included litigation settlement payments of $20 million. Further favorably impacting operating cash flow was the excess of tax deductible interest expense over book interest expense related to certain of our convertible debentures and notes, which resulted in a net increase in our deferred tax liabilities during the nine months ended September 30, 2014 and 2013 of $25 million and $21 million, respectively ($214 million cumulative, the recorded deferred tax liability, as of September 30, 2014). The recorded deferred tax liability will, under certain circumstances, be realized in the future upon conversion or redemption of debentures or notes which would reduce operating cash flow. Net cash from investing activities of continuing operations was $3 million for the nine months ended September 30, 2014 as compared to net cash used of $66 million for the nine months ended September 30, 2013 . The 2014 period includes approximately 34 -------------------------------------------------------------------------------- $71 million that we received for the divestiture of our Retail and Hospice businesses as described in "Note 3 - Discontinued Operations" of the Notes to the Consolidated Financial Statements. Our capital expenditures were $68 million for the first nine months of 2014 compared to $73 million in the same prior year period. These amounts primarily relate to investment in information technology systems and infrastructure, related to our ongoing investment in the business to improve operations and customer service. Net cash used in financing activities was $427 million for the nine months ended September 30, 2014 as compared to $337 million for the prior year period. In June 2014, we entered into separate, privately negotiated agreements to repurchase approximately $52 million in aggregate principle amount of our outstanding 3.75% Convertible Senior Subordinated Notes due 2025 (the "2025 Notes") for $134 million in cash. We recognized a total loss on the repurchase of approximately $8 million, including a reduction of debt issuance costs of $1 million in the nine months ended September 30, 2014, which were reflected in "Other charges" and "Interest Expense" on our Consolidated Statements of Comprehensive Income, respectively. In the fourth quarter of 2013, holders of our 4.00% Junior Subordinated Convertible Debentures due 2033 (the "2033 Debentures") presented approximately $37 million and $1 million of the underlying Series B PIERS and Series A PIERS for conversion, respectively. The conversions settled in the first quarter of 2014, which increased our payments on long-term borrowings and obligations for the nine months ended September 30, 2014. Net cash used in financing activities for the nine months ended September 30, 2013 includes the effect of our 2013 refinancing activities. In August 2013, we entered into separate, privately negotiated exchange agreements under which we retired approximately $180 million in aggregate principal amount of outstanding of our 2025 Notes in exchange for approximately $424 million in aggregate principal amount of newly issued 3.50% Convertible Senior Subordinated Notes due 2044 (the "2044 Notes"). Also, in the nine months ended September 30, 2013, we entered into separate, privately negotiated purchase agreements to repurchase approximately $5 million in aggregate principal amount of our outstanding 2025 Notes and $150 million in aggregate principal amount of our outstanding 7.75% Senior Subordinated Notes, due 2020. During the nine months ended September 30, 2014, we repurchased approximately 2.7 million shares of our common stock through our authorized share repurchase program at an aggregate cost of approximately $160 million and we received 0.6 million net shares of our common stock from the settlement of a tranche of our capped call. During the nine months ended September 30, 2013, we repurchased approximately 2.5 million shares of our common stock at an aggregate cost of approximately $91 million through authorized share repurchase programs, including shares repurchased through our previously disclosed accelerated share repurchase agreements. We had approximately $340 million of share repurchase authority remaining as of September 30, 2014. On September 11, 2014, our Board of Directors approved a quarterly cash dividend of 20 cents per share, or 80 cents per share on an annualized basis for 2014, which is 29.0% higher than the 62 cents per share in dividends paid during 2013. Aggregate dividends paid of $58 million during the nine months ended September 30, 2014 were greater than those paid in the comparable prior year period by approximately $15 million. At September 30, 2014, we had $383 million of borrowings outstanding on our term loan and no outstanding balance under our revolving credit facility except for approximately $14 million of standby letters of credit, most of which are subject to automatic renewal. As a result, we had approximately $286 million available under our revolving credit facility as a source of liquidity. Several series of our outstanding notes and debentures (collectively, the "Convertible Notes") are convertible into cash and/or shares of our common stock under specified circumstances, including if the closing price of our common stock is more than 130% of the conversion price for such Convertible Notes during the applicable measurement period. In general, upon conversion, we will pay cash for the principal amount of the Convertible Notes and shares of common stock for the remainder, if any, based on a daily conversion value during the applicable cash settlement averaging period; provided that we will pay cash in lieu of any fractional shares. Payment occurs at the end of the applicable settlement period, which is generally 30 days after we receive a holder's notice of conversion. For additional details on the conversion features of the Convertible Notes, see "Note 11- Debt" of the Notes to the Consolidated Financial Statements in our 2013 Annual Report. The aggregate principle amount of Convertible Notes convertible at any given time is subject to change depending on factors such as the price of our common stock during the applicable measurement period. As of September 30, 2014, approximately $777 million in aggregate principal amount of Convertible Notes was convertible, including the 2025 Notes, the 2033 Debentures, and our 3.75% Convertible Senior Subordinated Notes, due 2042 (the "2042 Notes"). The Company cannot predict the aggregate principal amount of Convertible Notes that will be convertible at any given time or how many, if any, holders of such Convertible 35 -------------------------------------------------------------------------------- Notes will present their Convertible Notes for conversion or the impact of any such conversions on the Company's results of operations, financial condition, liquidity or cash flows. We may, from time to time, refinance our outstanding debt securities, including the Convertible Notes, and may fund such a refinancing with cash on hand, borrowings under our revolving credit facility or the issuance of new senior or subordinated debt securities. Any such refinancing is subject to prevailing market conditions and there can be no assurance as to whether or on what terms any such refinancing will occur. At September 30, 2014, we were not aware of any material commitments and contingencies other than the contractual obligations summarized below under "Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements"; certain acquisition-related payments, including deferred payments and indemnification, potentially due in the future; separation payments; and the matters discussed in "Note 7 - Commitments and Contingencies" of the Notes to the Consolidated Financial Statements. We believe that net cash flows from operating activities, existing cash balances, availability under our revolving credit facility and external sources of financing that we believe are available, will be sufficient to satisfy our future working capital needs, debt servicing, conversion of the Convertible Notes, capital expenditures and other financing requirements for at least the next year, although no such assurances can be given in that regard. We may be unable to refinance maturing debt on terms that are as favorable as those from which we previously benefited or on terms that are acceptable to us. In addition, no assurances can be given regarding our ability to obtain additional financing in the future. Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements Aggregate Contractual Obligations The following table summarizes our aggregate contractual obligations as of September 30, 2014, the nature of which are described in further detail at the "Aggregate Contractual Obligations" caption of the MD&A section in Part II, Item 7 of the 2013 Annual Report, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands): Less Than 1 More than 5 Total Year 1-3 Years 4-5 Years Years Debt obligations $ 2,411,351 $ 798,351 $ 361,250 $ - $ 1,251,750 Capital lease obligations 14,906 6,148 8,210 548 - Operating lease obligations 104,964 21,732 35,490 23,168 24,574 Purchase obligations 36,282 28,525 4,802 2,955 - Other current obligations 240,738 240,738 - - - Other long-term obligations 52,840 - 46,619 3,161 3,060 Subtotal 2,861,081 1,095,494 456,371 29,832 1,279,384 Future interest costs relating to debt and capital lease obligations 1,507,405 83,026 164,628 150,851 1,108,900 Total contractual cash obligations $ 4,368,486 $ 1,178,520 $ 620,999 $ 180,683 $ 2,388,284 Off-Balance Sheet Arrangements A description of our Off-Balance Sheet Arrangements, for which there were no significant changes during the nine months ended September 30, 2014, is presented under "Off-Balance Sheet Arrangements" in Part II, Item 7 of the 2013 Annual Report. Critical Accounting Policies Refer to "Critical Accounting Policies" in Part II, Item 7 of our 2013 Annual Report. There have been no material changes to our critical accounting policies during the nine months ended September 30, 2014. Allowance for Doubtful Accounts The allowance for doubtful accounts as of September 30, 2014 was $195 million, compared with $203 million at December 31, 2013. The allowance for doubtful accounts represented 23.0% and 22.6% of gross accounts receivable (net of contractual allowance adjustments) as of September 30, 2014 and December 31, 2013, respectively. Unforeseen future developments could lead to changes in our provision for doubtful accounts levels and future allowance for doubtful accounts percentages, which could materially impact the overall financial results, financial position or cash flows. For example, a one percentage point increase in the allowance 36 --------------------------------------------------------------------------------for doubtful accounts as a percentage of gross accounts receivable as of September 30, 2014 would result in an increase to the provision for doubtful accounts and related allowance for doubtful accounts of approximately $8 million. See "Accounts Receivable" under "Note 2 - Significant Accounting Policies" of the Notes to Consolidated Financial Statements. Legal Contingencies The status of certain legal proceedings has been updated at "Note 7 - Commitments and Contingencies" of the Notes to Consolidated Financial Statements. Recently Issued Accounting Standards See "Recently Issued Accounting Standards" under "Note 2 - Significant Accounting Policies" of the Notes to Consolidated Financial Statements. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information In addition to historical information, this report contains certain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, all statements regarding the intent, belief or current expectations regarding the matters discussed or incorporated by reference in this document (including statements as to "beliefs," "expectations," "anticipations," "intentions" or similar words) and all statements which are not statements of historical fact. Such forward-looking statements, together with other statements that are not historical, are based on management's current expectations and involve known and unknown risks, uncertainties, contingencies and other factors that could cause results, performance or achievements to differ materially from those stated. The most significant of these risks and uncertainties are described in our Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: overall economic, financial, political and business conditions; trends in the long-term healthcare and pharmaceutical industries; our ability to attract new clients and service contracts and retain existing clients and service contracts; our ability to identify, finance and consummate acquisitions on favorable terms or at all; trends for the continued growth of our businesses; changes in drug pricing; delays and reductions in reimbursement by the government and other payors to Omnicare and our customers; the overall financial condition of our customers and our ability to assess and react to such financial condition; the ability and willingness of our vendors and business partners to continue to provide products and services to Omnicare; the successful integration of acquired companies and realization of contemplated synergies; the continued availability of suitable acquisition candidates; the ability to attract and retain skilled management; competition for qualified staff in the healthcare industry; variations in demand for our products and services; variations in costs or expenses; our ability to implement productivity, consolidation and cost reduction efforts and to realize anticipated benefits; the potential impact of legislation, government regulations, and other government action and/or executive orders, including those relating to Medicare Part D, its implementing regulations and any subregulatory guidance; reimbursement and drug pricing policies and changes in the interpretation and application of such policies, including changes in calculation of average wholesale price; discontinuation of reporting average wholesale price and/or implementation of new pricing benchmarks; legislative and regulatory changes impacting long-term care pharmacies or specialty pharmacies; government budgetary pressures and changes, including federal and state budget shortfalls; efforts by payors to control costs; changes to or termination of our contracts with pharmaceutical benefit managers, Medicare Part D Plan sponsors and/or commercial health insurers or changes in the proportion of our business covered by specific contracts; the outcome of pending and future legal or contractual disputes; potential liability for losses not covered by, or in excess of, insurance; the impact of executive separations; the impact of benefit plan terminations; the impact of differences in actuarial assumptions and estimates as compared to eventual outcomes; events or circumstances that could result in an impairment of assets, including but not limited to, goodwill and identifiable intangible assets; our ability to successfully complete planned divestitures; market conditions; the outcome of audit, compliance, administrative, regulatory, or investigatory reviews; volatility in the market for our stock and in the financial markets generally; timing of conversions of our convertible debt securities; access to adequate capital and financing on acceptable terms; changes in our credit ratings given by rating agencies; changes in tax laws and regulations; changes in accounting rules and standards; the impacts of potential cybersecurity risks and/or incidents; costs to comply with our Corporate Integrity Agreement; and unexpected costs and interruptions from the implementation of our new information technology system. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, our actual results, performance or achievements could differ materially from those expressed in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as otherwise required by law, we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 37-------------------------------------------------------------------------------- |