On September 17, 2014, the Corporation entered into the Credit Agreement. The Credit Agreement consisted of a $225.0 million term loan facility and a $310.0 million revolving credit facility. On December 9, 2016, the Corporation entered into the Amendment increasing the revolving credit facility were increased to $370.0 million and $300.0 million on the term loan. Borrowings under the Credit Agreement bear interest at a floating rate equal to, at the Corporation's option, a base rate plus a margin between 0.50% and 1.25% per annum, or a Eurodollar Rate plus a margin between 1.50% and 2.25% per annum, in each case depending on the leverage ratio of the Corporation as defined by the Credit Agreement. The base rate is the greater of the prime lending rate in effect on such day, the federal funds effective rate plus 0.5%, and the Eurodollar Rate plus 1.0%. As of December 31, 2016, borrowings under the term loan bore interest at a rate of 2.8% per annum based upon the one month adjusted LIBO rate plus margin, and the revolving credit facility bore interest at a rate of 2.7% per annum based upon the LIBO rate plus applicable margin.
Based upon the amount of variable rate debt outstanding as of December 31, 2016, a 100 basis point change in interest rates would affect the Corporation's future net income by approximately $2.9 million on an annual basis. The estimated change to the Corporation's interest expense is determined by considering the impact of hypothetical interest rates on the Corporation's borrowing cost and debt balances. These analyses do not consider the effects, if any, of the potential changes in the Corporation's credit ratings or leverage and the overall level of economic activity of the Corporation. Further, in the event of a change of significant magnitude, the Corporation's management would expect to take actions intended to further mitigate its exposure to such change.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
PharMerica Corporation together with its subsidiaries, (the "Corporation"), is a pharmacy services company that services healthcare facilities, provides pharmacy management services to hospitals, provides specialty infusion services to patients outside a hospital setting, and offers the only national oncology pharmacy in the United States. The Corporation is the second largest institutional pharmacy services company in the United States based on revenues and customer licensed beds under contract, operating 99 institutional pharmacies, 19 specialty infusion pharmacies, and 4 specialty oncology pharmacies in 45 states. The Corporation's customers are typically institutional healthcare providers, such as skilled nursing facilities, nursing centers, assisted living facilities, hospitals, individuals receiving in-home care and other long-term alternative care providers. The Corporation is generally the primary source of supply of pharmaceuticals to its customers.
Operating Segments
The Corporation consists of three operating segments: institutional pharmacy, specialty infusion services and specialty oncology pharmacy. Management believes the nature of the products and services are similar, the payers for the products and services are common among the segments and all segments operate in the healthcare regulatory environment. In addition, the segments are economically similar. Accordingly, management has aggregated the three operating segments into one reporting segment.
Principles of Consolidation
All intercompany transactions have been eliminated.
Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates are involved in collectability of accounts receivable, revenue recognition, inventory valuation, supplier rebates and the valuation of long-lived assets and goodwill. Actual amounts may differ from these estimates.
Potential risks and uncertainties, many of which are beyond the control of the Corporation, include, but are not necessarily limited to, such factors as overall economic, financial and business conditions; the overall condition of the Corporation's customers and suppliers; the intense competition in the Corporation's industry; the loss of one or more key pharmaceutical manufacturers; changes in manufacturers' rebate programs; the risk of loss of revenues due to the loss of certain customers or a customer or owner of a skilled nursing facility entering the institutional pharmacy business; the effects of the loss of a large customer and the Corporation's ability to adequately restructure its operations to offset the loss; the home infusion joint ventures formed with hospitals could adversely affect the Corporation's financial results; the decline in operating revenues and profitability with an increase in the Corporation's generic dispensing rate; the loss of prescription volumes and revenue from pharmaceutical products that develop unexpected safety or efficacy concerns; reduction in reimbursement rates for the Corporation's products and/or medical treatments or services may reduce profitability; modifications to the Medicare Part D program which may reduce revenue or impose additional costs; changes in Medicaid reimbursement which may reduce revenue; the payments of significant penalties and damages for failure to comply with complex and rapidly evolving laws and regulations, as well as licensure requirements; the adverse results from material litigation or governmental inquires including the possible insufficiency of any accruals established by the Corporation could have a material impact on the Corporation's business; failure to comply with Medicare and Medicaid regulations could result in loss of eligibility to participate in these programs; efforts by payers to control costs; healthcare reform adversely impacting the liquidity of the Corporation's customers thus affecting their ability to make timely payments to the Corporation; increasing enforcement in the U.S. healthcare industry negatively impacting the Corporation's business; further consolidation of managed care organizations and other third-party payers adversely affecting the Corporation's profits; federal and state medical privacy regulations increasing costs of operations and exposing the Corporation to civil and criminal sanctions; interruption or damage to the Corporation's sophisticated information systems; purchasing a significant portion of the Corporation's pharmaceutical products from one supplier; attracting and retaining key executives, pharmacists, and other healthcare personnel; revenues and volumes adversely affected by certain factors in markets in which the Corporation operates, including weather; the provisions in the Corporation's certificate of incorporation and bylaws could delay or prevent a change of control that stockholders favor; changes in volatility of the Corporation's stock price; successfully pursuing development and acquisition activities; indebtedness that restricts the Corporation's ability to pay cash dividends and has a negative impact on the Corporation's financing options; exposure to changes in interest rates; the potential impact of the litigation proceedings with AmerisourceBergen Drug Corporation ("ABDC") regarding the Previous Prime Vendor Agreement ("Previous PVA") and collection of the $72.3 million receivable included in other long-term assets on the accompanying consolidated balance sheets; the Corporation's ability to collect outstanding receivables, changes in tax laws and regulations, changes to critical accounting estimates and changes in and interpretations of accounting rules and standards.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and cash equivalents with original maturities of three months or less. The Corporation places its cash in financial institutions that are federally insured. As of December 31, 2015 and 2016, the Corporation did not hold a material amount of funds in cash equivalent money market accounts.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Corporation follows a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1:
|
Observable inputs such as quoted prices in active markets;
|
Level 2:
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the Corporation to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:
|
A.
|
Market approach:
Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
|
|
B.
|
Cost approach:
Amount that would be required to replace the service capacity of an asset (replacement cost).
|
|
C.
|
Income approach:
Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
|
Financial liabilities and non-financial assets recorded at fair value at December 31, 2015 and 2016, are set forth in the tables below (dollars in millions):
As of December 31, 2015
|
Asset/(Liability)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
|
Financial Liability
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Plan
|
|
$
|
(8.2
|
)
|
|
$
|
-
|
|
|
$
|
(8.2
|
)
|
|
$
|
-
|
|
|
|
|
A
|
Contingent Consideration
|
|
$
|
(11.5
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(11.5
|
)
|
|
|
|
C
|
Mandatorily Redeemable Interest
|
|
$
|
(5.8
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(5.8
|
)
|
|
|
|
C
|
As of December 31, 2016
|
Asset/(Liability)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
|
Financial Liability
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Plan
|
|
$
|
(8.8
|
)
|
|
$
|
-
|
|
|
$
|
(8.8
|
)
|
|
$
|
-
|
|
|
|
|
A
|
Contingent Consideration
|
|
$
|
(8.1
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(8.1
|
)
|
|
|
|
C
|
Mandatorily Redeemable Interest
|
|
$
|
(4.0
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4.0
|
)
|
|
|
|
C
|
The deferred compensation plan liability represents an unfunded obligation associated with the deferred compensation plan offered to eligible employees and members of the Board of Directors of the Corporation. The fair value of the liability associated with the deferred compensation plan is derived using pricing and other relevant information for investments in phantom shares of certain available investment options, primarily mutual funds. This liability is classified as other long-term liabilities in the accompanying consolidated balance sheets.
The contingent consideration represents future earn-outs associated with the Corporation's acquisition of an infusion business and a hospital services business both purchased in 2015. The fair values of the liabilities associated with the contingent consideration were derived using the income approach with unobservable inputs, which included future gross profit forecasts and present value assumptions, and there was little or no market data. The Corporation assessed the fair values of the liabilities as of the acquisition date and will re-assess the fair value quarterly thereafter until settlement. These liabilities are classified as other current and other long-term liabilities in the accompanying consolidated balance sheets.
The mandatorily redeemable interest represents a future obligation associated with the Corporation's acquisition of a specialty pharmacy business, OncoMed Specialty, LLC ("Onco") which the Corporation made its initial purchase of interests in Onco on December 6, 2013 and made a purchase of additional interests in Onco in December 2016. The mandatorily redeemable interest is classified as a long-term liability and measured at fair value. The fair value was derived using the income approach with unobservable inputs, which included a future gross profit forecast and present value assumptions, and there was little or no market data. The Corporation assessed and adjusted the mandatorily redeemable interest liability to estimated fair value as of December 31, 2016 which resulted in a reduction in the liability of $3.2 million resulting in a decrease in interest expense in the accompanying consolidated income statements.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
For the years ended December 31, 2015 and December 31, 2016, there were no transfers between the valuation hierarchy Levels 1, 2 and 3. The following table summarizes the change in fair value of the Corporation's contingent consideration and mandatorily redeemable interest identified as Level 3 for the years ended December 31, 2015 and December 31, 2016 (in millions):
|
|
Contingent
Consideration
|
|
|
Mandatorily
Redeemable
Interest
|
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2014
|
|
$
|
1.1
|
|
|
$
|
8.3
|
|
Additions from business acquisitions
|
|
|
11.9
|
|
|
|
-
|
|
Contingent consideration payments
|
|
|
(1.1
|
)
|
|
|
-
|
|
Change in fair value
|
|
|
(0.4
|
)
|
|
|
(2.5
|
)
|
Balance, December 31, 2015
|
|
|
11.5
|
|
|
|
5.8
|
|
Additions from business acquisitions
|
|
|
1.4
|
|
|
|
-
|
|
Contingent consideration payments
|
|
|
(3.9
|
)
|
|
|
-
|
|
Change in fair value
|
|
|
(0.9
|
)
|
|
|
(1.8
|
)
|
Balance, December 31, 2016
|
|
$
|
8.1
|
|
|
$
|
4.0
|
|
The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable, inventory and accounts payable approximate fair value because of the short-term maturity of these instruments. The Corporation's debt approximates fair value due to the terms of the interest being set at variable market interest rates (Level 2).
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consist of amounts due from Prescription Drug Plans ("PDPs") under Medicare Part D, institutional healthcare providers, the respective state Medicaid programs, third party insurance companies, and private payers. The Corporation's ability to collect outstanding receivables is critical to its results of operations and cash flows. To provide for accounts receivable that could become uncollectible in the future, the Corporation establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to the extent it is probable that a portion or all of a particular account will not be collected.
The Corporation has an established process to determine the adequacy of the allowance for doubtful accounts, which relies on analytical tools, specific identification, and benchmarks to arrive at a reasonable allowance. No single statistic or measurement determines the adequacy of the allowance for doubtful accounts. The Corporation monitors and reviews trends by payer classification along with the composition of the Corporation's accounts receivable aging. This review is focused primarily on trends in private and other payers, PDPs, dual eligible co-payments, historic payment patterns of long-term care institutions, and monitoring respective credit risks. In addition, the Corporation analyzes other factors such as revenue days in accounts receivables, denial trends by payer types, payment patterns by payer types, subsequent cash collections, and current events that may impact payment patterns of the Corporation's long-term care institution customers. Accounts receivable are written off after collection efforts have been completed in accordance with the Corporation's policies.
The Corporation's accounts receivable and summarized aging categories are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Institutional healthcare providers
|
|
$
|
145.9
|
|
|
$
|
138.2
|
|
Medicare Part D
|
|
|
30.2
|
|
|
|
42.5
|
|
Private payer and other
|
|
|
26.8
|
|
|
|
28.1
|
|
Insured
|
|
|
31.1
|
|
|
|
38.7
|
|
Medicaid
|
|
|
12.6
|
|
|
|
15.6
|
|
Medicare
|
|
|
3.2
|
|
|
|
3.4
|
|
Allowance for doubtful accounts
|
|
|
(49.3
|
)
|
|
|
(31.1
|
)*
|
|
|
$
|
200.5
|
|
|
$
|
235.4
|
|
|
|
|
|
|
|
|
|
|
0 to 60 days
|
|
|
63.0
|
%
|
|
|
62.9
|
%
|
61 to 120 days
|
|
|
15.3
|
%
|
|
|
15.7
|
%
|
Over 120 days
|
|
|
21.8
|
%
|
|
|
21.4
|
%
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
* The Corporation reclassified $2.5 million of the allowance to other long-term assets on the consolidated balance sheet as certain related receivables were reclassified as of December 31, 2016.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following is a summary of activity in the Corporation's allowance for doubtful accounts (dollars in millions):
|
Beginning
Balance
|
|
Charges Included in Selling, General & Administrative Expenses
|
|
Write-offs
|
|
Ending
Balance
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
$
|
56.7
|
|
|
$
|
23.2
|
|
|
$
|
(21.8
|
)
|
|
$
|
58.1
|
|
Year Ended December 31, 2015
|
|
$
|
58.1
|
|
|
$
|
7.9
|
|
|
$
|
(16.7
|
)
|
|
$
|
49.3
|
|
Year Ended December 31, 2016
|
|
$
|
49.3
|
|
|
$
|
6.3
|
|
|
$
|
(24.5
|
)
|
|
$
|
31.1
|
|
In the fourth quarter of 2015, the Corporation reversed an allowance of $4.6 million related to a customer's outstanding receivable for which a settlement payment was received which significantly exceeded the existing net receivable. This reversal is reflected in the "Charges Included in Selling, General & Administrative Expenses" column above.
Bad debt expense for the year ended December 31, 2016 was favorably impacted by approximately $5.6 million related to collections of certain previously reserved receivables under note agreements and the settlement of a customer's trade receivable of $3.2 million.
Deferred Financing Fees
The Corporation capitalizes financing fees related to acquiring or issuing new debt instruments. These expenditures include bank fees and premiums, legal costs, and filing fees. The Corporation amortizes these deferred financing fees using the effective interest method.
Inventory
Inventory is primarily located at the Corporation's pharmacy locations. Inventory consists solely of finished products (primarily prescription drugs) and is valued at the lower of first-in, first-out ("FIFO") cost or market. Physical inventories are performed at a minimum on a quarterly basis at the end of the quarter at all pharmacy sites. Cost of goods sold is adjusted based upon the results of the physical inventory counts.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost on the acquisition date and are depreciated using the straight-line method over their estimated useful lives or lease term, if shorter, as follows (in years):
|
Estimated
Useful Lives
|
Leasehold improvements
|
|
1-7
|
Equipment and software
|
|
3-10
|
Expenditures for maintenance, repairs and renewals of minor items are expensed as incurred. Major rebuilds and improvements are capitalized. For the years ended December 31, 2014, 2015 and 2016, maintenance and repairs were $11.1 million, $12.5 million and $12.6 million, respectively.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the asset or asset group to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. If estimated future undiscounted net cash flows are less than the carrying amount of the asset or group of assets, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset or asset group to its then fair value. The Corporation incurred no fixed asset impairment charges for the years ended December 31, 2015 and 2016.
Capitalization of Internal Software Costs
The Corporation capitalizes the costs incurred during the application development stage, which includes costs to design the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary project stage along with post-implementation stages of internal use computer software are expensed as incurred. Capitalized development costs are amortized generally over five years and are subject to impairment evaluations. Costs incurred to maintain existing software development are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs requires judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. For the years ended December 31, 2015 and 2016, the Corporation capitalized internally developed software costs of $14.3 million and $22.2 million, respectively. As of December 31, 2015 and 2016, net capitalized software costs, including acquired assets and amounts for projects which have not been completed, totaled $32.6 million and $42.4 million, respectively.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Other Intangibles
The Corporation's policy is to perform a qualitative assessment of its reporting units to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, unless events or circumstances warrant the need to perform a quantitative assessment. The Corporation performed the qualitative assessment of its institutional pharmacy and specialty oncology reporting units at December 31, 2016 and did not find it necessary to perform the quantitative analysis. The Corporation performed the quantitative assessment as of December 31, 2016 for its specialty infusion reporting unit. The specialty infusion reporting unit's fair values as calculated were approximately 13.0% greater than current book value.
The Corporation's finite-lived intangible assets are comprised primarily of trade names, customer relationship assets, limited distributor relationships, doctor and insurer relationships and non-compete agreements. Finite-lived intangible assets are amortized on a straight-line basis over the course of their lives ranging from 5 to 20 years. Upon an impairment review resulting from a triggering event, intangible assets are reviewed on a specific pharmacy basis or as a group of pharmacies depending on the intangible assets under review.
Self-Insured Employee Health Benefits
The Corporation is self-insured for the majority of its employee health benefits. The Corporation's self-insurance for employee health benefits includes a stop-loss policy to limit the maximum potential liability of the Corporation for both individual and aggregate claims per year. The Corporation records a monthly expense for self-insurance based on historical claims data and inputs from third-party administrators. For the years ended December 31, 2014, 2015 and 2016, the expense for employee health benefits was $15.5 million, $15.7 million and $15.2 million, respectively, the majority of which was related to its self-insured plans. As of December 31, 2015 and 2016, the Corporation had $1.8 million and $1.9 million, respectively, recorded as a liability for self-insured employee health benefits.
Supplier Rebates
The Corporation receives rebates on purchases from select vendors and suppliers for achieving market share or purchase volumes. Rebates for brand name products are generally based upon achieving a defined market share tier within a therapeutic class and can be based on either purchasing volumes or actual prescriptions dispensed. Rebates for generic products are primarily based on achieving purchasing volume requirements, or in the case of the Prime Vendor Agreement with Cardinal Health ("Cardinal Health PVA"), contractually based requirements. The Corporation generally accounts for these rebates and other incentives received from its vendors and suppliers, relating to the purchase or distribution of inventory, on an accrual basis as an estimated reduction of cost of goods sold and inventory. The estimated accrual is adjusted, if necessary, after the third party validates the appropriate data and notifies the Corporation of its agreement under the terms of the contract. The Corporation considers these rebates to represent product discounts, and as a result, the rebates are allocated as a reduction of product cost and relieved through cost of goods sold upon the sale of the related inventory or as a reduction of inventory for drugs which have not yet been sold.
Delivery Expenses
The Corporation incurred delivery expenses of $60.8 million, $56.6 million and $55.4 million for the years ended December 31, 2014, 2015 and 2016, respectively, to deliver products sold to its customers. Delivery expenses are reported as a component of cost of goods sold in the accompanying consolidated income statements.
Stock Option Accounting
The measurement and recognition of compensation cost for all share-based payment awards made to employees and non-employee directors is based on the grant date fair value of the award. The Corporation recognizes share-based compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award.
Restructuring and Impairment Charges
Restructuring and impairment charges in the consolidated financial statements represent amounts expensed for purposes of realigning corporate and pharmacy locations.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Corporation accrues for tax obligations, as appropriate, based on facts and circumstances in the various tax jurisdictions.
Mandatorily Redeemable Interest
On December 6, 2013, the Corporation acquired 37.5% of the membership interests of OncoMed Specialty, LLC (the "Onco Acquisition") while also obtaining control of the business. Following the Corporation's exercise of its rights to purchase additional interests of Onco in December 2016, the Corporation now owns an aggregate of 81.5% of the membership interests of Onco as of December 31, 2016. The subsidiary is consolidated in the Corporation's consolidated financial statements and the mandatorily redeemable interest is classified as debt within other long-term liabilities in the consolidated balance sheets.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09 (ASU 2016-09) "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" intended to simplify the accounting for employee share-based payments. Under this guidance all excess tax benefits ("windfalls") and deficiencies ("shortfalls") related to employee stock compensation will be recognized within income tax expense. Under prior guidance windfalls were recognized to additional paid-in capital ("APIC") and shortfalls were only recognized to the extent they exceed the pool of windfall tax benefits. The Corporation adopted ASU 2016-09 on January 1, 2016 and as a result recorded a decrease to the tax provision for excess tax benefits of $0.9 million for the year ended December 31, 2016.
In February 2016, the FASB issued ASU No. 2016-02, "Leases", which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective in the first quarter of 2019 on a modified retrospective basis and early adoption is permitted. The Corporation is still evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs". The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update is effective for fiscal years beginning after December 15, 2015. Effective January 1, 2016, the Corporation adopted the provisions of ASU 2015-03.
In February 2015, the FASB issued ASU 2015-02 "Amendments to the Consolidation Analysis"
.
The amendments in this update change the analysis that a reporting entity must conduct to determine whether limited partnerships and similar legal entities should be consolidated. The guidance responds to public concerns that current accounting for certain legal entities might require a reporting entity to consolidate another legal entity in situations in which the reporting entity's contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity's voting rights, or the reporting entity is not exposed to a majority of the legal entity's economic benefits or obligations. The update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this standard did not have a material impact on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" related to accounting for income taxes which changes the balance sheet classification of deferred taxes, requiring deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The new guidance is effective for the Corporation beginning with annual and interim periods in 2017, with early adoption permitted. The Corporation elected not to early adopt the guidance. The Corporation will adopt this ASU beginning January 1, 2017. The Corporation will no longer present a current deferred tax asset and a noncurrent deferred tax liability, instead those amounts will be combined to a net noncurrent deferred tax asset on its consolidated balance sheet.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers", which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, which delayed the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, "Revenue from Contracts with Customers: Principal versus Agent Considerations" which clarifies the implementation guidance on principal versus agent considerations.
The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new revenue recognition standard will be effective in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Corporation currently anticipates adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Corporation currently anticipates adopting the standard using the modified retrospective method. Since the Corporation is still in the process of completing its analysis on the impact this guidance will have on its consolidated financial statements and related disclosures, the Corporation is not able to determine if it will have a material impact on its consolidated financial statements.
NOTE 2—ACQUISITIONS
2016 Acquisitions
During the year ended December 31, 2016, the Corporation completed acquisitions of four long-term care businesses and two infusion businesses (collectively the "2016 Acquisitions"), none of which were individually significant to the Corporation. The 2016 Acquisitions required cash payments of approximately $50.3 million in the aggregate. The resulting amount of goodwill and identifiable intangibles related to these transactions in the aggregate were $20.1 million and $30.6 million, respectively. The Corporation believes the resulting amount of goodwill reflects its expectation of synergistic benefits of the acquisitions. Tax deductible goodwill associated with the 2016 Acquisitions was $10.4 million as of December 31, 2016. The net assets and operating results of the 2016 Acquisitions have been included in the Corporation's consolidated financial statements from their respective dates of acquisition.
There was $1.4 million amounts contingently payable related to the 2016 Acquisitions as of December 31, 2016.
The 2016 Acquisitions on a combined basis increased consolidated revenues by $18.4 million for the year ended December 31, 2016.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2—ACQUISITIONS (Continued)
2015 Acquisitions
During the year ended December 31, 2015, the Corporation completed acquisitions of two long-term care businesses, two infusion businesses and one hospital services business (collectively the "2015 Acquisitions"), none of which were individually significant to the Corporation. The 2015 Acquisitions had an estimated purchase price of $83.7 million, comprised of a net cash payment of $76.4 million and an estimated fair value of contingent consideration of $7.3 million. The resulting amount of goodwill and identifiable intangibles related to these transactions in the aggregate were $48.5 million and $41.2 million, respectively. The Corporation believes the resulting amount of goodwill reflects its expectation of synergistic benefits of the acquisitions. Tax deductible goodwill associated with the acquisitions was $33.3 million as of December 31, 2016. The net assets and operating results of the 2015 Acquisitions have been included in the Corporation's consolidated financial statements from the respective dates of acquisition.
Amounts contingently payable related to the 2015 Acquisitions, representing payments originating from earn-out provisions of the infusion acquisition and hospital services acquisition, were $6.7 million as of December 31, 2016.
Pro Forma
Pro forma financial statements are not presented on the 2015 Acquisitions and 2016 Acquisitions as the results are not material to the Corporation's consolidated financial statements.
Other
For the years ended December 31, 2014, 2015 and 2016, the Corporation incurred $13.3 million, $20.5 million, and $20.2 million, respectively, of acquisition related costs, which have been classified as a component of merger, acquisition, integration costs and other related charges.
NOTE 3—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following (dollars in millions):
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
20.4
|
|
|
$
|
21.7
|
|
Equipment and software
|
|
|
185.7
|
|
|
|
220.7
|
|
Construction in progress
|
|
|
12.4
|
|
|
|
8.5
|
|
|
|
|
218.5
|
|
|
|
250.9
|
|
Accumulated depreciation
|
|
|
(144.0
|
)
|
|
|
(165.1
|
)
|
Total equipment and leasehold improvements
|
|
$
|
74.5
|
|
|
$
|
85.8
|
|
Depreciation expense totaled $20.3 million, $23.1 million, and $23.8 million for the years ended December 31, 2014, 2015 and 2016, respectively.
N
OTE 4—GOODWILL AND INTANGIBLES
The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2016 (dollars in millions):
Balance at December 31, 2014 as adjusted
|
|
$
|
323.6
|
|
Goodwill acquired from 2015 acquisitions
|
|
|
47.4
|
|
Balance at December 31, 2015, as adjusted
|
|
|
371.0
|
|
Goodwill acquired from 2016 acquisitions
|
|
|
20.1
|
|
Goodwill adjustments from 2015 acquisitions
|
|
|
1.2
|
|
Balance at December 31, 2016
|
|
$
|
392.3
|
|
The following table presents the components of the Corporation's intangible assets (dollars in millions):
Finite Lived Intangible Assets
|
|
Balance at
2014
|
|
|
Additions
|
|
|
Balance at
2015
|
|
|
Additions
|
|
|
Balance at
2016
|
|
Customer relationships
|
|
$
|
177.5
|
|
|
$
|
39.3
|
|
|
$
|
216.8
|
|
|
$
|
28.9
|
|
|
$
|
245.7
|
|
Trade name
|
|
|
62.2
|
|
|
|
0.9
|
|
|
|
63.1
|
|
|
|
0.9
|
|
|
|
64.0
|
|
Non-compete agreements
|
|
|
19.9
|
|
|
|
1.0
|
|
|
|
20.9
|
|
|
|
1.3
|
|
|
|
22.2
|
|
Sub Total
|
|
|
259.6
|
|
|
|
41.2
|
|
|
|
300.8
|
|
|
|
31.1
|
|
|
|
331.9
|
|
Accumulated amortization
|
|
|
(82.0
|
)
|
|
|
(28.6
|
)
|
|
|
(110.6
|
)
|
|
|
(33.7
|
)
|
|
|
(144.3
|
)
|
Net intangible assets
|
|
$
|
177.6
|
|
|
$
|
12.6
|
|
|
$
|
190.2
|
|
|
$
|
(2.6
|
)
|
|
$
|
187.6
|
|
Amortization expense relating to finite-lived intangible assets was $20.1 million, $28.6 million, and $33.7 million for the years ended December 31, 2014, 2015 and 2016, respectively.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
N
OTE 4—GOODWILL AND INTANGIBLES
(Continued)
Total estimated amortization expense for the Corporation's finite-lived intangible assets for the next five years and thereafter are as follows (dollars in millions):
Year Ending December 31,
|
|
|
|
2017
|
|
$
|
36.2
|
|
2018
|
|
|
34.8
|
|
2019
|
|
|
31.1
|
|
2020
|
|
|
29.0
|
|
2021
|
|
|
22.8
|
|
Thereafter
|
|
|
33.7
|
|
|
|
$
|
187.6
|
|
NOTE 5—CREDIT AGREEMENT
On
September
17, 2014, the Corporation entered into a credit agreement by and among the Corporation, the lenders named therein (the "Lenders"), Bank of America, N.A., as administrative agent, JP Morgan Chase Bank N.A., as syndication agent, and U.S. Bank, National Association, Citibank, N.A., MUFG Union Bank, N.A., BBVA Compass Bank and SunTrust Bank as co-documentation agents (the "Credit Agreement"). The Credit Agreement replaced the $450.0 million five-year credit agreement dated as of May 2, 2011, am
ong the Corporation, Citibank, N.A., as Administrative Agent, and certain lenders (the "Prior Credit Agreement"). The Credit Agreement consists of a $225.0 million term loan facility and a $310.0 million revolving credit facility. The terms and conditions of the Credit Agreement are customary to facilities of this nature.
As a result of the payoff of the Prior Credit Agreement, the Corporation recorded a loss on debt extinguishment of $4.3 million in the Consolidated Income Statements during the year ended December 31, 2014. The loss recorded consisted primarily of unamortized deferred financing fees associated with the Prior Credit Agreement.
On December 9, 2016, the Corporation entered into a First Amendment ("Amendment") to its existing Credit Agreement. Pursuant to the Amendment, among other things, (a) the revolving commitments to the revolving credit facility were increased to $370.0 million, (b) an additional advance under the term loan was provided in an outstanding principal amount equal to $89.1 million which, when combined with the $210.9 million then outstanding under the term loan as of the date of the Amendment, equals $300.0 million outstanding under the term loan, (c) the amount by which commitments may be increased after the initial closing was increased from $190.0 million to $200.0 million, and (d) The Huntington National Bank was added as a new lender to the Credit Agreement.
As of December 31, 2016, $297.2 million was outstanding under the term loan facility and $176.5 million was outstanding under the revolving credit facility. Indebtedness under the Credit Agreement matures on September 17, 2019, at which time the commitments of the Lenders to make revolving loans also expire.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5—CREDIT AGREEMENT (Continued)
The table below summarizes the total outstanding debt of the Corporation (dollars in millions):
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
Term Debt - payable to lenders at LIBOR plus applicable margin (2.77% as of December 31, 2016), matures September 17, 2019
|
|
$
|
219.4
|
|
|
$
|
297.2
|
|
Revolving Credit Facility payable to lenders, interest at LIBOR plus applicable margin (2.72% as of December 31, 2016), matures September 17, 2019
|
|
|
207.0
|
|
|
|
176.5
|
|
Deferred financing costs, net
|
|
|
(2.1
|
)
|
|
|
(1.9
|
)
|
Capital lease obligations
|
|
|
0.9
|
|
|
|
1.6
|
|
Total debt
|
|
|
425.2
|
|
|
|
473.4
|
|
Less: Current portion of long-term debt
|
|
|
11.6
|
|
|
|
15.6
|
|
Total long-term debt
|
|
$
|
413.6
|
|
|
$
|
457.8
|
|
The Corporation's indebtedness has the following maturities (dollars in millions):
Year Ending December 31,
|
|
Term Debt
|
|
|
Revolving
Credit
Facility
|
|
|
Deferred Financing Costs
|
|
|
Capital
Lease
Obligations
|
|
|
Total
Maturities
|
|
2017
|
|
$
|
15.0
|
|
|
$
|
-
|
|
|
$
|
(0.7
|
)
|
|
$
|
0.6
|
|
|
$
|
14.9
|
|
2018
|
|
|
15.0
|
|
|
|
-
|
|
|
|
(0.7
|
)
|
|
|
0.4
|
|
|
|
14.7
|
|
2019
|
|
|
267.2
|
|
|
|
176.5
|
|
|
|
(0.5
|
)
|
|
|
0.4
|
|
|
|
443.6
|
|
2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.2
|
|
|
|
0.2
|
|
2021
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
297.2
|
|
|
$
|
176.5
|
|
|
$
|
(1.9
|
)
|
|
$
|
1.6
|
|
|
$
|
473.4
|
|
The Credit Agreement provides for the issuance of letters of credit which, when issued, reduce availability under the revolving credit facility. The aggregate amount of letters of credit outstanding as of December 31, 2016 was $2.8 million. After giving effect to the letters of credit, total availability under the revolving credit facility was $190.8 million as of December 31, 2016.
Borrowings under the Credit Agreement bear interest at a floating rate equal to, at the Corporation's option, a base rate plus a margin between 0.50% and 1.25% per annum, or a Eurodollar Rate plus a margin between 1.50% and 2.25% per annum, in each case depending on the leverage ratio of the Corporation as defined by the Credit Agreement. The base rate is the greater of the prime lending rate in effect on such day, the federal funds effective rate plus 0.50%, and the Eurodollar Rate plus 1.00%. The Credit Agreement also provides for letter of credit fees between 1.50% and 2.50% on the letter of credit exposure, depending on the leverage ratio of the Corporation, and 0.125% on the actual daily amount available to be drawn under such letter of credit. The Corporation will also pay fronting fees on the aggregate letter of credit exposure at a rate separately agreed upon between the Corporation and the issuing bank. The Credit Agreement also provides for a commitment fee payable on the unused portion of the revolving credit facility, which shall accrue at a rate per annum ranging from 0.25% to 0.35%, depending on the leverage ratio of the Corporation.
The Credit Agreement contains customary affirmative and negative covenants, as well as customary events of default. The Credit Agreement also requires the Corporation to satisfy an interest coverage ratio and a leverage ratio. The interest charge coverage ratio as of the last day of any fiscal quarter can be no less than 3.00:1.00. The Leverage Ratio as of the last day of any fiscal quarter of the Corporation cannot exceed 3.75:1.00, subject to certain exceptions for permitted acquisitions. In addition, capital expenditures (other than those funded with proceeds of asset sales or insurance) are restricted in any fiscal year to 5.0% of revenues.
As of December 31, 2016 the Corporation was compliant with the financial covenants contained within the Credit Agreement.
The obligations under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Corporation and secured by liens on substantially all of the Corporation's assets.
Deferred Financing Fees
The Corporation capitalized a total of $3.2 million in deferred financing fees associated with the Credit Agreement and recorded them as a reduction to long-term debt in the accompanying consolidated balance sheets. As of December 31, 2016, the Corporation had $1.9 million of unamortized deferred financing fees.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6—COMMITMENTS AND CONTINGENCIES
Legal Action and Regulatory
The Corporation maintains liabilities for certain of its outstanding investigations and litigation. In accordance with the provisions of U.S. GAAP for contingencies, the Corporation records a liability when it is probable that such a liability has been incurred and the amount of the loss can be reasonably estimated. To the extent that the resolution of contingencies results in actual losses that differ from the Corporation's recorded liabilities, earnings will be charged or credited accordingly. The Corporation cannot know the ultimate outcome of the pending matters described below, and there can be no assurance that the resolution of these matters will not have a material adverse impact on the Corporation's consolidated results of operations, financial position or cash flows. As a part of its ongoing operations, the Corporation is subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by government/regulatory authorities responsible for enforcing the laws and regulations to which the Corporation is subject. Further, under the federal False Claims Act (the "FCA") , private parties have the right to bring qui tam, or "whistleblower," suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. The inherently unpredictable nature of legal proceedings may be impacted by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) significant facts are in dispute; (vi) a large number of parties are participating in the proceedings (including where it is uncertain how liability, if any, will be shared among defendants); or (vii) the proceedings present a wide range of potential outcomes.
The Corporation is the subject of certain investigations and is a defendant in a number of cases, including those discussed below.
On March 4, 2011, a relator, Mark Silver, on behalf of the U.S. Government and various state governments, filed a complaint in the United States District Court for the District of New Jersey against the Corporation. The complaint alleges that, in violation of the Federal Anti-Kickback Statute and of the FCA, the Corporation offered below cost or below fair market value prices on drugs for which nursing homes were at financial risk (e.g., Medicare Part A), in exchange for so-called preferred or exclusive provider status that would allow the Corporation to dispense drugs to patients for which the Corporation could bill federal health care program payers such as Medicare Part D and Medicaid. On February 19, 2013, the U.S. Government declined to intervene in the case. The complaint has been amended several times, most recently on November 12, 2013, and thereafter served upon the Corporation. On December 6, 2013, the Corporation moved to dismiss the amended complaint for failure to state a claim upon which relief may be granted and on September 29, 2014, the court declined to dismiss the case, but limited the relevant time period for which claims could be brought against the Corporation. On March 4, 2016 and April 1, 2016, the Corporation filed motions to dismiss and for summary judgment, respectively, for lack of subject matter jurisdiction under the FCA prior public disclosure bar. On May 9, 2016, the Court granted the joint motion of Silver and the Corporation and dismissed with prejudice all successor liability claims against the Corporation for or regarding the conduct of Chem Rx Corporation. On November 28, 2016, the Court ruled in favor of the Corporation's March and April motions and this case was dismissed. In December of 2016, Silver filed an appeal of the dismissal and summary judgment. The Corporation intends to continue to defend the case vigorously.
On November 20, 2013, the complaint filed against the Corporation by a relator, Robert Gadbois, on behalf of the U.S. Government and various state governments, was unsealed by the United States District Court for the District of Rhode Island. The complaint alleges that the Corporation dispensed controlled and non-controlled substances in violation of the CSA and in violation of relevant state laws, and
that as a result,
the dispenses were not eligible for payment and that the claims the Corporation submitted to the Government were false within the meaning of the FCA. The U.S. Government and the various state governments declined to intervene in this case.
On October 3, 2014, the Corporation's motion to dismiss was granted by the court. The relator appealed the court's decision and on December 16, 2015, the First Circuit Court of Appeals granted the relator its appeal and remanded the case to the District Court to allow the relator to file a motion to supplement his complaint and to allow the District Court to rule upon that motion. On December 30, 2015, the Corporation filed with the First Circuit Court of Appeals a petition for a re-hearing en banc, which was denied on January 25, 2016. The Corporation filed a petition for certiorari with the U.S. Supreme Court on April 22, 2016 asking the Supreme Court to review the First Circuit's decision. On June 27, 2016, the Supreme Court denied the petition. Thereafter, on June 28, 2016, the case was returned to the District Court through the issuance by the First Circuit of its Mandate. Subsequently, the relator passed away. On August 29, 2016, the District Court held a status conference and ordered the relator to file a motion to supplement by December 29, 2016. The Corporation has until March 1, 2017 to respond. The Corporation intends to continue to defend the case vigorously.
On September 10, 2014, the Corporation filed a Complaint in Jefferson Circuit Court in Louisville, Kentucky against AmerisourceBergen Drug Corporation ("ABDC") for failure of ABDC to comply with certain pricing and rebate provisions of the Previous Prime Vendor Agreement ("Previous PVA"). The Corporation subsequently filed a First Amended Verified Complaint on September 26, 2014 asserting additional breaches of the Previous PVA
.
As a result of ABDC's failure to comply with certain pricing and rebate provisions, the Corporation had recorded a receivable of $40.8 million related to these disputes at December 31, 2014. Separately, as of December 31, 2014, the Corporation had recorded $12.2 million for additional rebates owing from ABDC which at that time the Corporation believed were not in dispute and had previously been paid by ABDC in all the prior quarters. These receivables totaled $53.0 million and were included in prepaids and other assets in the accompanying consolidated balance sheet as of December 31, 2014. During the period of January 1, 2015 through March 31, 2015, an additional $19.3 million, net of payments received, of certain rebates and guarantees owed by ABDC under the Previous PVA were recognized, which brought the total gross receivable to $72.3 million at December 31, 2015.
On March, 2, 2015, the Corporation notified ABDC of its intent to terminate the Previous PVA effective April 1, 2015. The Corporation also announced that it had entered into the Cardinal Health Prime Vendor Agreement ("Cardinal Health PVA") effective April 1, 2015. On March 3, 2015, the Corporation received a letter from ABDC terminating the Previous PVA effective immediately based upon the Corporation's alleged failure to pay certain disputed miscellaneous charges and the Corporation's signing of the Cardinal Health PVA. The Corporation believes ABDC did not have the right to immediately terminate the contract pursuant to the terms of the Previous PVA. On March 6 and March 13, 2015, the Corporation withheld from ABDC normal recurring payments for drug purchases of approximately $48.9 million. On May 18, 2015, ABDC filed an Amended Counterclaim seeking additional financial damages against the Corporation and asserted claims against two counter-defendants. On November 23, 2015, the Corporation filed its Third Amended Complaint against ABDC for additional financial damages, amounts overcharged by ABDC, and for certain rebates not paid by ABDC under the Previous PVA.
On April 1, 2016, the Jefferson Circuit Court ruled that the Corporation could not set-off payment the amounts that ABDC owed the Corporation against amounts that ABDC had invoiced the Corporation. Instead the Corporation must first pay ABDC and continue the litigation against ABDC to collect any amounts owed to the Corporation by ABDC upon the conclusion of the entire lawsuit. As a result, the Corporation owes approximately $48.9 million of payments for drug purchases in the first quarter of 2015. The Corporation has continued the litigation in the Jefferson Circuit Court against ABDC. On April 11, 2016, the Corporation filed a Motion to Alter and Amend the April 1, 2016 order of the Jefferson Circuit Court asking the judge to reconsider the final and appealable aspect of the order. On August 8, 2016, the Jefferson County Circuit Court issued an order that granted the Corporation's April 11, 2016 Motion to Alter and Amend the Judgment entered on April 1, 2016. The Court granted the Corporation's motion to remove the final and appealable designation from the April 1, 2016 order; therefore, the Corporation does not have to post a bond, pay ABDC post-judgment interest, or appeal to the Kentucky Court of Appeals for further relief. The Jefferson Circuit Court's ruling on the right to set-off does not in any way adversely affect the Corporation's claims against ABDC and the Corporation's ability to pursue all of its claims against ABDC in the Jefferson Circuit Court.
Amounts owed to and from ABDC were previously offset resulting in a net receivable of $23.4 million from ABDC in the accompanying consolidated balance sheet at December 31, 2015 classified as an other long-term asset. As a result of the ruling on the right to set-off during the first quarter of 2016, the Corporation recorded amounts related to this matter on a gross basis resulting in a receivable from ABDC to $72.3 million and the payable to $48.9 million. Accordingly, the $72.3 million receivable from ABDC is reflected in other long-term assets and the $48.9 million payable is reflected in other long-term liabilities in the accompanying consolidated balance sheet as of December 31, 2016.
The Corporation has claims for additional damages resulting from ABDC's breaches of the Previous PVA. The Corporation intends to vigorously pursue its claims. At this time, the Corporation is unable to determine the ultimate impact of these litigation proceedings on its consolidated financial condition, results of operations, or liquidity. The litigation with ABDC could continue for an extended period of time. The Corporation cannot provide any assurances about the outcome of the litigation.
In addition, the Corporation is involved in certain legal actions and regulatory investigations arising in the ordinary course of business. At December 31, 2016, the Corporation had accrued approximately $19.1 million related to the pending and settled legal actions and investigations included in other current liabilities and other long-term liabilities in the accompanying balance sheet.
On August 14, 2013, the California Department of Health Care Service ("DHCS") announced its intent to implement a ten (10) percent reimbursement reduction for numerous healthcare providers, including long term care pharmacies, retroactive to June 1, 2011. The Corporation estimated its total liability to be approximately $3.3 million which was recorded as a reduction to revenue in the third quarter of 2013.
The DHCS implemented the reduction prospectively beginning in the first quarter of 2014; however, the price reduction retroactive to June 1, 2011 was not implemented until the fourth quarter of 2015. The Corporation had overestimated the retroactive component of the recoupment and therefore, $2.5 million of the original accrual was reversed in the fourth quarter of 2015.
Leases
The Corporation leases real estate properties, buildings, vehicles, and equipment under cancelable and non-cancelable leases. The leases expire at various times and have various renewal options. Certain leases that meet the lease capitalization criteria have been recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments are based on the Corporation's incremental borrowing rate at the inception of the lease. The Corporation recorded the following lease expense for the periods presented (dollars in millions):
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Pharmacy locations and administrative offices lease expense
|
|
$
|
15.8
|
|
|
$
|
15.8
|
|
|
$
|
16.4
|
|
Office equipment lease expense
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
1.8
|
|
Total lease expense
|
|
$
|
18.1
|
|
|
$
|
18.2
|
|
|
$
|
18.2
|
|
Future minimum lease payments for those leases having an initial or remaining non-cancelable lease term in excess of one year are as follows for the years indicated (dollars in millions):
Year Ending December 31,
|
|
Operating Leases
|
|
|
Capital Lease
Obligations
|
|
|
Total
|
|
2017
|
|
$
|
16.1
|
|
|
$
|
0.6
|
|
|
$
|
16.7
|
|
2018
|
|
|
12.9
|
|
|
|
0.4
|
|
|
|
13.3
|
|
2019
|
|
|
9.1
|
|
|
|
0.4
|
|
|
|
9.5
|
|
2020
|
|
|
5.7
|
|
|
|
0.2
|
|
|
|
5.9
|
|
2021
|
|
|
2.5
|
|
|
|
-
|
|
|
|
2.5
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
46.3
|
|
|
$
|
1.6
|
|
|
$
|
47.9
|
|
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7—MERGER, ACQUISITION, INTEGRATION COSTS AND OTHER CHARGES
Merger, acquisition, integration costs and other charges were $13.6 million, $21.3 million and $20.8 million for the years ended December 31, 2014, 2015 and 2016, respectively. These costs primarily relate to costs incurred prior to an acquisition such as professional advisory fees and the costs associated with integrating completed acquisitions into our business, such as IT transition and facility related costs.
NOTE 8-RESTRUCTURING COSTS AND OTHER CHARGES
In July 2013, the Corporation commenced the implementation of its restructuring plan as a result of the loss of two of the Corporation's significant customers, Kindred and Golden Living. The plan was a major initiative primarily designed to optimize operational efficiency while ensuring that the Corporation remains well-positioned to serve its clients and achieve sustainable, long-term growth. The Corporation's restructuring plan included steps to right size its cost structure by adjusting its workforce and facility plans to reflect anticipated business needs. In addition, in the year ended December 31, 2015, the Corporation began a restructuring and centralization initiative related to its specialty infusion business which was completed in 2016.
The Corporation recorded restructuring costs and other related charges of approximately $3.3 million, $0.5 million and $2.9 million during the years ended December 31, 2014, 2015 and 2016, respectively. The restructuring charges primarily included severance pay, the buy-out of employment agreements, lease terminations, and other exit-related asset disposals, professional fees and facility exit costs.
The following table presents the components of the Corporation's restructuring liability (dollars in millions):
|
|
Balance at
December 31, 2015
|
|
|
Accrual
|
|
|
Utilized Amounts
|
|
|
Balance at
December 31, 2016
|
|
Employee Severance and related costs
|
|
$
|
0.3
|
|
|
$
|
2.3
|
|
|
$
|
(2.4
|
)
|
|
$
|
0.2
|
|
Facility costs
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
(0.9
|
)
|
|
|
0.4
|
|
|
|
$
|
1.0
|
|
|
$
|
2.9
|
|
|
$
|
(3.3
|
)
|
|
$
|
0.6
|
|
The liability at December 31, 2016 represents unpaid severance costs and lease payments.
NOTE 9—HURRICANE SANDY DISASTER RECOVERIES
In October 2012, Hurricane Sandy caused significant damage on Long Island, New York and surrounding areas. The financial impacts of the storm to the Corporation's Long Beach facility as well as damage and disruption at the Corporation's customers' facilities have been recorded as a separate component in the consolidated income statements. For the years ended December 31, 2014 and 2015, Hurricane Sandy disaster recoveries were $1.7 million and $4.9 million, respectively.
The Corporation has recovered certain losses associated with Hurricane Sandy from the insurance carrier, and settled both losses and the business interruption portion of its insurance claim during the year ended December 31, 2015. The Corporation's settlement of covered losses was equal to $6.9 million for business interruption and $5.3 million for other losses. After consideration of a $7.2 million advance by the insurance carrier, the Corporation received a final payment of $5.0 million. During the year ended December 31, 2015, the Corporation realized $4.9 million as income which is shown in the Hurricane Sandy disaster recoveries line item of the consolidated income statement for the year ended December 31, 2015. The cash payment is shown on the consolidated cash flow statement in both operating and investing cash flows, recognizing the amounts that were reimbursed related to the fixed asset losses in investing activities.
NOTE 10—COMMON STOCK, PREFERRED STOCK, TREASURY STOCK, STOCK-BASED COMPENSATION AND OTHER BENEFITS
Common Stock
Holders of the Corporation's common stock are entitled to one vote for each share held of record on all matters on which stockholders may vote. There are no preemptive, conversion, redemption or sinking fund provisions applicable to the Corporation's common stock. In the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in the assets available for distribution, subject to any prior rights of any holders of preferred stock then outstanding. In addition, the Corporation's Credit Agreement imposes restrictions on its ability to pay cash dividends.
Preferred Stock
The certificate of incorporation authorizes the issuance of an aggregate of 1,000,000 million shares of preferred stock. On August 25, 2011, the Board of Directors designated 175,000 shares of preferred stock as Series A Junior Participating Preferred Stock ("Series A Junior Preferred Stock"). As of December 31, 2016, there were no shares of preferred stock outstanding.
The Series A Junior Preferred Stock is entitled to receive quarterly cumulative dividends in an amount per whole share equal to the greater of $10.00 or 1,000 times the dividends declared on the Common Stock since the preceding quarterly dividend payment date, or with respect to the first quarterly dividend payment date, since the date of issuance, and a liquidation preference of a minimum of $10.00 per whole share, plus an amount equal to any accrued dividends and distributions thereon, whether or not declared, to the date of payment, and will be entitled to an aggregate payment per whole share equal to 1,000 times the amount per share distributed to the holders of Common Stock. Holders of Series A Junior Preferred Stock are entitled to vote on each matter on which holders of Common Stock are entitled to vote, and have 1,000 votes per whole share. The preferred stockholders also are entitled to certain corporate governance and special voting rights, as defined in the certificate of designation.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10—COMMON STOCK, PREFERRED STOCK, TREASURY STOCK, STOCK-BASED COMPENSATION AND OTHER BENEFITS (Continued)
The Corporation's Board of Directors may, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the designation, powers, rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding preferred stock would reduce the amount of funds available for the payment of dividends on the Corporation's shares of common stock. Holders of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Corporation before any payment is made to the holders of the Corporation's common stock. Under certain circumstances, the issuance of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Corporation's securities or the removal of incumbent management. The Board of Directors may issue shares of preferred stock with voting and conversion rights that could adversely affect the holders of common stock. Specifically, the Corporation's certificate of incorporation authorizes the Corporation's Board of Directors to adopt a rights plan without stockholder approval. This could delay or prevent a change in control of the Corporation or the removal of existing management.
Treasury Stock Purchases
In August 2010, the Board of Directors authorized a share repurchase of up to $25.0 million of the Corporation's common stock, of which $10.5 million was used. On July 2, 2012, the Board of Directors authorized an increase to the remaining portion of the existing stock repurchase program that allows the Corporation to repurchase up to a maximum of $25.0 million of the Corporation's common stock. Approximately $19.7 million remained available under the program as of December 31, 2016. Share repurchases under this authorization may be made in the open market through unsolicited or solicited privately negotiated transactions, or in such other appropriate manner, and may be funded from available cash or the revolving credit facility. The amount and timing of the repurchases, if any, would be determined by the Corporation's management and would depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. Common stock acquired through the share repurchase program would be held as treasury shares and may be used for general corporate purposes, including reissuances in connection with acquisitions, employee stock option exercises or other employee stock plans. The stock repurchase program does not have an expiration date and may be limited, terminated or extended at any time without prior notice. During the year ended December 31, 2016, the Corporation repurchased no shares of common stock.
The Corporation may redeem shares from employees upon the vesting of the Corporation's stock awards for minimum statutory tax withholding purposes and to cover option exercise costs. The Corporation redeemed 140,031 shares of certain vested awards and exercise of certain stock options for an aggregate price of approximately $3.3 million during the year ended December 31, 2016. These shares have also been designated by the Corporation as treasury stock.
As of December 31, 2016, the Corporation had a total of 2,916,906 shares held as treasury stock.
2015 Omnibus Incentive Plan
Effective April 29, 2015, the Corporation adopted the PharMerica Corporation 2015 Omnibus Incentive Plan (the "Omnibus Plan") under which the Corporation is authorized to grant equity-based and other awards to its employees, officers, directors, and consultants. The Omnibus Plan replaced the Amended and Restated PharMerica Corporation 2007 Omnibus Incentive Plan (the "Prior Plan").
The Corporation has reserved 2,000,000 shares of its common stock for awards to be granted under the Omnibus Plan, subject to certain increases and reductions for grants under the Prior Plan. The following shares shall be added back to the number of shares available for grant under the Omnibus Plan: (i) shares covered by an award that expire or are forfeited, canceled, surrendered, or otherwise terminated without the issuance of such shares; (ii) shares covered by an award that are settled only in cash; and (iii) shares withheld by the Corporation or any subsidiary to satisfy a tax withholding obligation with respect to full value awards granted pursuant to the Omnibus Plan. However, shares surrendered for the payment of the exercise price under stock options (or options outstanding under the Prior Plan), shares repurchased by us with option proceeds (or option proceeds under the Prior Plan), and shares withheld for taxes upon exercise or vesting of an award other than a full value award (or an award other than a full value award under the Prior Plan), will not again be available for issuance under the Omnibus Plan. In addition, if a stock appreciation right ("SAR") (or SAR under the Prior Plan) is exercised and settled in shares, all of the shares underlying the SAR will be counted against the Omnibus Plan limit regardless of the number of shares used to settle the SAR. The Omnibus Plan provides for certain limits on issuances of certain types of awards and awards to certain recipients. The Omnibus Plan prohibits share recycling for stock options and stock appreciation rights, meaning that shares used to pay the exercise price or tax withholding for those awards are not added back to the share reserve.
The Corporation's Compensation Committee administers the Omnibus Plan and has the authority to determine the recipient of the awards, the types of awards, the number of shares covered, and the terms and conditions of the awards. The Omnibus Plan allows for grants of incentive stock options, non-qualified stock options, stock appreciation rights, restricted share and restricted stock units, deferred shares, performance awards, including cash bonus awards, and other stock-based awards. The Corporation's Compensation Committee may condition the vesting, exercise or settlement of any award upon the achievement of one or more performance objectives.
Stock options granted to officers and employees under the Omnibus Plan generally vest in four equal annual installments and have a term of seven years. The restricted stock units granted to officers generally vest in three equal annual installments. The restricted stock units granted to members of the Board of Directors vest in one annual installment. The performance share units granted under the Omnibus Plan vest based upon the achievement of a target amount of the Corporation's adjusted earnings before interest, income taxes, depreciation and amortization, which reinforces the importance of achieving the Corporation's profitability objectives. The performance is generally measured over a three-year period.
As of December 31, 2016, total shares available for grants of stock-based awards pursuant to the Omnibus Plan were 1,530,617 shares.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10—COMMON STOCK, PREFERRED STOCK, TREASURY STOCK, STOCK-BASED COMPENSATION AND OTHER BENEFITS (Continued)
Stock-Based Compensation Expense
The following is a summary of stock-based compensation incurred by the Corporation (dollars in millions, except per share amounts):
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Stock option compensation expense
|
|
$
|
0.6
|
|
|
$
|
0.1
|
|
|
$
|
-
|
|
Nonvested stock compensation expense
|
|
|
6.8
|
|
|
|
7.5
|
|
|
|
6.5
|
|
Total Stock Compensation Expense
|
|
$
|
7.4
|
|
|
$
|
7.6
|
|
|
$
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, there was $10.2 million of total unrecognized compensation cost related to the Corporation's stock compensation arrangements. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Stock Option Activity
The Corporation did not issue stock options during the years ended December 31, 2015 or December 31, 2016.
The following table summarizes option activity for the periods presented:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
Weighted-
Average
Remaining
Term
|
|
Aggregate
Intrinsic Value
(in millions)
|
|
Outstanding options at December 31, 2015
|
|
|
639,145
|
|
|
$
|
14.34
|
|
2.1 years
|
|
$
|
14.6
|
|
Exercised
|
|
|
(106,956
|
)
|
|
|
15.00
|
|
|
|
|
|
|
Canceled
|
|
|
(116,208
|
)
|
|
|
15.19
|
|
|
|
|
|
|
Expired
|
|
|
(2,635
|
)
|
|
|
13.60
|
|
|
|
|
|
|
Outstanding options at December 31, 2016
|
|
|
413,346
|
|
|
$
|
13.99
|
|
0.8 years
|
|
$
|
4.6
|
|
Exercisable options at December 31, 2016
|
|
|
413,346
|
|
|
$
|
13.99
|
|
0.8 years
|
|
$
|
4.6
|
|
The total intrinsic value of stock options exercised for the years ended December 31, 2014, 2015 and 2016 was $1.6 million, $1.3 million, and $1.6 million, respectively. Cash received from stock option exercises during the year ended December 31, 2016 was $0.2 million. The total fair value of options vested for the years ended December 31, 2014, 2015 and 2016 was $0.9 million, $0.4 million, and $1.5 million, respectively. The Corporation fully recognized stock-based compensation expense for all stock options awarded.
Nonvested Shares
The following table summarizes nonvested share activity for the periods presented:
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Outstanding shares at December 31, 2015
|
|
|
901,159
|
|
|
$
|
22.26
|
|
Granted - Restricted Stock Units
|
|
|
253,625
|
|
|
|
20.69
|
|
Granted - Performance Share Units
|
|
|
212,289
|
|
|
|
20.00
|
|
Forfeited
|
|
|
(36,827
|
)
|
|
|
22.77
|
|
Vested
|
|
|
(361,412
|
)
|
|
|
18.78
|
|
Outstanding shares at December 31, 2016
|
|
|
968,834
|
|
|
$
|
22.63
|
|
The total fair value of shares vested for the years ended December 31, 2014, 2015 and 2016 was $6.0 million, $5.9 million, and $6.8 million, respectively. The weighted average remaining term and intrinsic value of nonvested shares at December 31, 2016 was 1.1 years and $24.4 million, respectively. The Corporation expects to recognize stock based compensation expense of $10.2 million for nonvested shares over a weighted average period of approximately 1.1 years.
Based upon the achievement of the performance criteria at the end of the performance cycle for the performance share units issued to date, the Corporation may issue no shares or a maximum of 724,682 shares.
401(k) Plan
The Corporation sponsors a salary reduction plan qualified under Section 401(k) of the Internal Revenue Code with a safe harbor matching contribution for all eligible employees, as defined in the plan document. Contributions to the plan are based upon employee contributions and the Corporation's matching contributions. For the years ended December 31, 2014, 2015, and 2016, the Corporation's matching contributions to the plan were $5.8 million, $6.3 million, and $6.7 million, respectively.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10—COMMON STOCK, PREFERRED STOCK, TREASURY STOCK, STOCK-BASED COMPENSATION AND OTHER BENEFITS (Continued)
Deferred Compensation Plans
The Corporation maintains a deferred compensation plan for certain management and highly compensated employees. Under the plan, a participant may elect to defer up to 50% of such participant's annual base salary and up to 100% of such participant's annual short-term incentive program cash bonus into the plan during each plan year.
The Corporation also maintains a deferred compensation plan for the directors of the Corporation. The directors of the Corporation may elect to defer up to 100% of their cash fees and their stock fees in any one year. If a director elects to defer his/her restricted share grant, the shares will be deferred as they vest until the participant elects for the deferred compensation to be a taxable event.
As of December 31, 2015 and 2016, the Corporation had $8.2 million and $8.8 million, respectively, recognized as a long-term liability related to the deferred compensation plans in the accompanying consolidated balance sheets. Deferred compensation expense was $0.7 million, $0.2 million and $0.5 million for the years ended December 31, 2014, 2015 and 2016, respectively.
NOTE 11—INCOME TAXES
The provision for income taxes is based upon the Corporation's annual income or loss before income taxes for each respective accounting period. The following table summarizes the Corporation's provision for income taxes for the periods presented (dollars in millions):
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Current provision (benefit):
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10.4
|
|
|
$
|
6.7
|
|
|
$
|
(1.7
|
)
|
State
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
-
|
|
Total
|
|
|
11.7
|
|
|
|
8.1
|
|
|
|
(1.7
|
)
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2.1
|
)
|
|
|
5.1
|
|
|
|
10.1
|
|
State
|
|
|
(0.2
|
)
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
Total
|
|
|
(2.3
|
)
|
|
|
4.0
|
|
|
|
9.0
|
|
Total provision for income taxes
|
|
$
|
9.4
|
|
|
$
|
12.1
|
|
|
$
|
7.3
|
|
A reconciliation of the U.S. statutory rate to the Corporation's effective tax rate is as follows for the years ended December 31:
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
U.S. statutory rate applied to pretax income
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Differential arising from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
5.1
|
|
|
|
3.2
|
|
|
|
2.7
|
|
Non-deductible legal expenses
|
|
|
31.3
|
|
|
|
3.3
|
|
|
|
-
|
|
Deductible legal expenses
|
|
|
-
|
|
|
|
(19.4
|
)
|
|
|
-
|
|
Domestic Production Activities Deduction
|
|
|
(7.1
|
)
|
|
|
(1.0
|
)
|
|
|
-
|
|
Stock compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(3.4
|
)
|
162(m) compensation
|
|
|
1.2
|
|
|
|
1.9
|
|
|
|
2.0
|
|
Valuation allowances
|
|
|
0.2
|
|
|
|
(0.6
|
)
|
|
|
(3.9
|
)
|
Federal and state tax true-ups
|
|
|
(8.2
|
)
|
|
|
0.9
|
|
|
|
(7.1
|
)
|
Research and development credits
|
|
|
(1.5
|
)
|
|
|
(0.6
|
)
|
|
|
(0.9
|
)
|
Other
|
|
|
2.0
|
|
|
|
3.0
|
|
|
|
1.0
|
|
Effective tax rate
|
|
|
58.0
|
%
|
|
|
25.7
|
%
|
|
|
25.4
|
%
|
The effective tax rate in 2014 is higher than the federal statutory rate largely as a result of the combined impact of state and local taxes and non-deductible legal expenses. Conversely, the effective tax rate in 2015 is lower than the federal statutory rate largely as a result of the impact of deductible legal expenses. The effective tax rate in 2016 is lower than the federal statutory rate largely as a result of the impact of a partial release of the valuation allowance, federal and state tax provision-to-tax return adjustments driven by the deductibility of certain legal expenses, and the early adoption of ASU 2016-09 with regard to excess tax benefits for stock compensation.
The overall effective tax rate stayed relatively consistent from 2015 to 2016. During 2015, the deductibility of legal expenses is the primary driver of this decrease from the federal statutory rate. The deductible legal expenses relate to settlements entered into with the Department of Justice. In 2015, the settlement process was completed and the Corporation concluded the expenses were deductible.
Excluding the impact of the legal expenses, non-recurring items, and other discrete items, the provision for
income taxes as a percentage of pre-tax income for 2015 would have been 37.0%. The Corporation is expecting a taxable loss for the 2016 year driven by lower amounts of pre-tax book income and favorable timing items which negatively impact the domestic production activities deduction. In addition, there is a partial valuation allowance release on certain state net operating losses which favorably impact the 2016 effective tax rate. The 2016 effective rate was also favorably impacted by the federal and state tax provision-to-return adjustments which reflected additional amounts of deductible legal settlement payments.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11—INCOME TAXES (Continued)
The Corporation derives a current federal and state income tax benefit from the impact of deductions associated with the amortization of tax deductible goodwill acquired through business combinations. The tax basis of the Corporation's tax deductible goodwill was approximately $171.1 million and $162.7 million at December 31, 2015 and 2016, respectively.
The Corporation recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Corporation also recognizes as deferred tax assets, the future tax benefits from net operating and capital loss carryforwards. As of December 31, 2016, the Corporation had federal net operating loss carryforwards of $32.9 million ($11.5 million deferred tax asset). These net operating loss carryforwards resulted from the stock acquisitions the Corporation completed in 2013 and 2014. These net operating losses are subject to limitations under Internal Revenue Code Section 382. However, the Corporation expects that it will be able to use the recorded amount which takes into account the limitations of the carryforwards. The deferred tax asset for state net operating loss carryforwards was $6.4 million, net of federal tax impact and valuation allowances. The deferred tax asset for state net operating losses have carryforward periods ranging from 1 to 20 years depending on the taxing jurisdiction.
As a result of a corporate restructuring that was implemented on January 1, 2014, separate company state taxable income was significantly reduced. This reduction in separate company state taxable income impacted the Corporation's analysis of the realizability of separate company net operating loss carryforwards. A valuation allowance is provided for the Corporation's deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based on the Corporation's analysis of the impact of the corporate restructuring, a valuation allowance on the separate company state net operating loss carryforwards was recorded. The deferred tax asset for state net operating loss carryforwards totaled $4.1 million and $6.4 million at December 31, 2015 and 2016, respectively, net of valuation allowances of $3.8 million and $2.6 million, respectively.
The Corporation recognized net deferred tax assets totaling $21.1 million and $9.2 million at December 31, 2015 and 2016, respectively, net of valuation allowances of $3.8 million and $2.6 million, respectively.
Current deferred income taxes consisted of (dollars in millions):
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Accrued expenses
|
|
$
|
7.5
|
|
|
$
|
-
|
|
|
$
|
6.7
|
|
|
$
|
-
|
|
Allowance for doubtful accounts
|
|
|
18.4
|
|
|
|
-
|
|
|
|
13.1
|
|
|
|
-
|
|
Net operating losses
|
|
|
-
|
|
|
|
-
|
|
|
|
4.2
|
|
|
|
-
|
|
Other
|
|
|
19.0
|
|
|
|
0.8
|
|
|
|
14.0
|
|
|
|
0.9
|
|
Valuation allowance
|
|
|
(2.3
|
)
|
|
|
-
|
|
|
|
(1.4
|
)
|
|
|
-
|
|
Total current deferred taxes
|
|
$
|
42.6
|
|
|
$
|
0.8
|
|
|
$
|
36.6
|
|
|
$
|
0.9
|
|
Current deferred taxes, net
|
|
|
|
|
|
$
|
41.8
|
|
|
|
|
|
|
$
|
35.7
|
|
Noncurrent deferred income taxes consisted of (dollars in millions):
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Accelerated depreciation
|
|
$
|
-
|
|
|
$
|
13.1
|
|
|
$
|
-
|
|
|
$
|
15.3
|
|
Stock-based compensation
|
|
|
4.8
|
|
|
|
-
|
|
|
|
4.2
|
|
|
|
-
|
|
Goodwill and intangibles
|
|
|
-
|
|
|
|
33.9
|
|
|
|
-
|
|
|
|
40.6
|
|
Net operating losses
|
|
|
15.2
|
|
|
|
-
|
|
|
|
16.4
|
|
|
|
-
|
|
Other
|
|
|
9.7
|
|
|
|
1.9
|
|
|
|
11.9
|
|
|
|
1.9
|
|
Valuation allowances
|
|
|
(1.5
|
)
|
|
|
-
|
|
|
|
(1.2
|
)
|
|
|
-
|
|
Total noncurrent deferred taxes
|
|
$
|
28.2
|
|
|
$
|
48.9
|
|
|
$
|
31.3
|
|
|
$
|
57.8
|
|
Noncurrent deferred taxes, net
|
|
|
|
|
|
$
|
20.7
|
|
|
|
|
|
|
$
|
26.5
|
|
As of December 31, 2015 and December 31, 2016, the Corporation had no reserves recorded as a liability for unrecognized tax benefits for U.S. federal and state tax jurisdictions. There were no unrecognized tax benefits at December 31, 2016 that, if recognized, would affect the tax rate.
It is the Corporation's policy to accrue interest and penalties related to liabilities for income tax contingencies in the provision for income taxes. As of December 31, 2016, the Corporation had no accrued interest or penalties related to uncertain tax positions.
The federal statute of limitations remains open for tax years 2013 through 2015. The Corporation has not been notified of any IRS tax audits.
State tax jurisdictions generally have statutes of limitations ranging from three to five years. The Corporation is no longer subject to state and local income tax examinations by tax authorities for years before 2011. The state income tax impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification of IRS settlement to the states. The Corporation is currently under exam by New York and Oregon. Additionally, one of the Corporation's subsidiaries is currently under exam by the state of Tennessee. The Corporation has not been notified of any other upcoming federal or state or local income tax examinations.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 12—EARNINGS PER SHARE
The following table sets forth the computation using the treasury share method of basic and diluted earnings per share (dollars in millions, except per share amounts):
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator for basic and earnings per diluted share - net income
|
|
$
|
6.8
|
|
|
$
|
35.1
|
|
|
$
|
21.6
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average shares
|
|
|
29,983,428
|
|
|
|
30,363,588
|
|
|
|
30,695,411
|
|
Effect of dilutive securities (stock options, restricted stock units and performance share units)
|
|
|
665,703
|
|
|
|
403,778
|
|
|
|
462,425
|
|
Denominator for earnings per diluted share - adjusted weighted average shares
|
|
|
30,649,131
|
|
|
|
30,767,366
|
|
|
|
31,157,836
|
|
Basic earnings per share
|
|
$
|
0.23
|
|
|
$
|
1.16
|
|
|
$
|
0.70
|
|
Earnings per diluted share
|
|
$
|
0.22
|
|
|
$
|
1.14
|
|
|
$
|
0.69
|
|
Unexercised employee stock options, unvested restricted shares and performance shares excluded from the effect of dilutive securities above (a)
|
|
|
340,291
|
|
|
|
291,679
|
|
|
|
302,992
|
|
(a)
|
These unexercised employee stock options, unvested restricted shares and performance shares that have not yet met performance conditions are not included in the computation of diluted earnings per share because to do so would be anti-dilutive for the periods presented.
|
Stock options and restricted shares and units granted by the Corporation are treated as potential common shares outstanding in computing earnings per diluted share. Performance share units are treated as potential common shares outstanding in computing earnings per diluted share only when the performance conditions are met.
Common shares repurchased by the Corporation reduce the number of basic shares used in the denominator for basic and diluted earnings per share.
NOTE 13—UNAUDITED QUARTERLY FINANCIAL INFORMATION
The quarterly interim information shown below has been prepared by the Corporation's management and is unaudited. It should be read in conjunction with the audited consolidated financial statements appearing herein (dollars in millions, except per share amounts).
|
|
2015 Quarters
|
|
|
2016 Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
511.6
|
|
|
$
|
497.5
|
|
|
$
|
498.8
|
|
|
$
|
520.6
|
|
|
$
|
524.5
|
|
|
$
|
519.6
|
|
|
$
|
512.6
|
|
|
$
|
534.4
|
|
Cost of goods sold
|
|
|
423.0
|
|
|
|
416.3
|
|
|
|
420.2
|
|
|
|
433.9
|
|
|
|
442.5
|
|
|
|
437.8
|
|
|
|
434.1
|
|
|
|
450.7
|
|
Gross profit
|
|
$
|
88.6
|
|
|
$
|
81.2
|
|
|
$
|
78.6
|
|
|
$
|
86.7
|
|
|
$
|
82.0
|
|
|
$
|
81.8
|
|
|
$
|
78.5
|
|
|
$
|
83.7
|
|
Operating income
|
|
$
|
16.8
|
|
|
$
|
8.5
|
|
|
$
|
8.5
|
|
|
$
|
20.0
|
|
|
$
|
7.9
|
|
|
$
|
7.5
|
|
|
$
|
12.0
|
|
|
$
|
11.0
|
|
Net income
|
|
$
|
9.6
|
|
|
$
|
2.3
|
|
|
$
|
3.0
|
|
|
$
|
20.2
|
|
|
$
|
4.1
|
|
|
$
|
2.5
|
|
|
$
|
7.3
|
|
|
$
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
|
$
|
0.66
|
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
$
|
0.24
|
|
|
$
|
0.25
|
|
Diluted
|
|
$
|
0.31
|
|
|
$
|
0.07
|
|
|
$
|
0.10
|
|
|
$
|
0.66
|
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30.2
|
|
|
|
30.4
|
|
|
|
30.4
|
|
|
|
30.4
|
|
|
|
30.5
|
|
|
|
30.7
|
|
|
|
30.8
|
|
|
|
30.8
|
|
Diluted
|
|
|
30.7
|
|
|
|
30.8
|
|
|
|
30.9
|
|
|
|
31.0
|
|
|
|
30.9
|
|
|
|
31.0
|
|
|
|
31.1
|
|
|
|
31.2
|
|