DIPLOMAT PHARMACY, INC., 10-Q filed on 11/7/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Nov. 05, 2018
Document and Entity Information    
Entity Registrant Name Diplomat Pharmacy, Inc.  
Entity Central Index Key 0001610092  
Document Type 10-Q  
Document Period End Date Sep. 30, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   74,474,677
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
v3.10.0.1
Condensed Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and equivalents $ 8,214 $ 84,251
Receivables, net 358,158 332,091
Inventories 169,863 206,603
Prepaid expenses and other current assets 13,491 11,125
Total current assets 549,726 634,070
Property and equipment, net 40,924 38,990
Capitalized software for internal use, net 29,842 36,520
Goodwill 834,580 832,624
Definite-lived intangible assets, net 340,651 392,011
Other noncurrent assets 4,938 6,208
Total assets 1,800,661 1,940,423
Current liabilities:    
Accounts payable 315,268 384,719
Rebates payable 29,954 28,744
Borrowings on line of credit 178,250 188,250
Short-term debt, including current portion of long-term debt 11,500 11,500
Accrued expenses:    
Compensation and benefits 16,771 9,584
Contingent consideration 5,200 8,100
Other 21,542 20,560
Total current liabilities 578,485 651,457
Long-term debt, less current portion 440,552 521,098
Deferred income taxes 12,423 14,367
Contingent consideration 4,050 4,000
Other 295  
Total liabilities 1,035,805 1,190,922
Commitments and contingencies (Note 12)
Shareholders' equity:    
Preferred stock (10,000,000 shares authorized; none issued and outstanding)
Common stock (no par value; 590,000,000 shares authorized; 74,448,430 and 73,871,424 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively) 629,283 619,235
Additional paid-in capital 48,172 38,450
Retained earnings 87,445 91,816
Accumulated other comprehensive loss (44)  
Total shareholders' equity 764,856 749,501
Total liabilities and shareholders' equity $ 1,800,661 $ 1,940,423
v3.10.0.1
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares
Sep. 30, 2018
Dec. 31, 2017
Condensed Consolidated Balance Sheets    
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common shares, par value (in dollars per share) $ 0 $ 0
Common shares, authorized shares 590,000,000 590,000,000
Common shares, issued shares 74,448,430 73,871,424
Common shares, outstanding shares 74,448,430 73,871,424
v3.10.0.1
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income        
Net sales $ 1,373,334 $ 1,124,957 $ 4,131,896 $ 3,330,161
Cost of sales (1,279,976) (1,059,867) (3,849,743) (3,128,595)
Gross profit 93,358 65,090 282,153 201,566
Selling, general and administrative expenses (83,419) (62,782) (255,705) (185,867)
Income from operations 9,939 2,308 26,448 15,699
Other (expense) income:        
Interest expense (10,179) (2,054) (30,998) (6,034)
Impairment of non-consolidated entities (286)   (329)  
Other 574 45 1,385 111
Total other expense (9,891) (2,009) (29,942) (5,923)
Income (loss) before income taxes 48 299 (3,494) 9,776
Income tax benefit (expense) 121 662 (750) (1,101)
Net income (loss) 169 961 (4,244) 8,675
Less net loss attributable to noncontrolling interest   (55)   (299)
Net income (loss) attributable to Diplomat Pharmacy, Inc. 169 1,016 (4,244) 8,974
Other comprehensive income (loss), net of tax 918   (44)  
Total comprehensive income (loss) $ 1,087 $ 1,016 $ (4,288) $ 8,974
Net income (loss) per common share:        
Basic (in dollars per share) $ 0.00 $ 0.01 $ (0.06) $ 0.13
Diluted (in dollars per share) $ 0.00 $ 0.01 $ (0.06) $ 0.13
Weighted average common shares outstanding:        
Basic (in shares) 74,386,386 68,371,429 74,181,869 67,600,920
Diluted (in shares) 74,741,511 68,769,618 74,181,869 68,259,416
v3.10.0.1
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities:    
Net (loss) income $ (4,244) $ 8,675
Adjustments to reconcile net (loss) income to net cash provided by operating activities:    
Depreciation and amortization 72,547 48,813
Share-based compensation expense 15,771 5,487
Net provision for doubtful accounts 5,862 7,523
Amortization of debt issuance costs 3,703 892
Changes in fair values of contingent consideration 2,419 1,965
Contingent consideration payments (3,181)  
Deferred income tax benefit (2,034) (637)
Impairment of non-consolidated entities 329  
Other (43) 1
Changes in operating assets and liabilities, net of business acquisitions:    
Accounts receivable (31,090) 4,117
Inventories 36,717 22,379
Accounts payable (72,018) (3,055)
Other assets and liabilities 8,469 (2,514)
Net cash provided by operating activities 33,207 93,646
Cash flows from investing activities:    
Expenditures for capitalized software for internal use (8,736) (3,252)
Expenditures for property and equipment (7,880) (3,414)
Net payments to acquire businesses, net of cash acquired (1,139) (76,646)
Other 46 (38)
Net cash used in investing activities (17,709) (83,350)
Cash flows from financing activities:    
Net payments on line of credit (10,000) (17,663)
Payments on long-term debt (82,625) (6,031)
Proceeds from long-term debt   25,000
Proceeds from issuance of stock upon stock option exercises 3,999 7,597
Contingent consideration payments (2,088)  
Payments of debt issuance costs (821)  
Net cash (used in) provided by financing activities (91,535) 8,903
Net (decrease) increase in cash and equivalents (76,037) 19,199
Cash and equivalents at beginning of period 84,251 7,953
Cash and equivalents at end of period 8,214 27,152
Supplemental disclosures of cash flow information:    
Cash paid for interest 27,707 5,125
Cash paid for income taxes $ 2,142 $ 4,716
v3.10.0.1
Condensed Consolidated Statement of Changes in Shareholders' Equity (Unaudited) - USD ($)
$ in Thousands
WRB Communications, LLC
Common Stock
WRB Communications, LLC
Diplomat Pharmacy, Inc. Shareholders' Equity
WRB Communications, LLC
Accurate Rx Pharmacy Consulting, LLC
Common Stock
Accurate Rx Pharmacy Consulting, LLC
Diplomat Pharmacy, Inc. Shareholders' Equity
Accurate Rx Pharmacy Consulting, LLC
Focus Rx Pharmacy Services Inc. and Focus Rx Inc.
Common Stock
Focus Rx Pharmacy Services Inc. and Focus Rx Inc.
Diplomat Pharmacy, Inc. Shareholders' Equity
Focus Rx Pharmacy Services Inc. and Focus Rx Inc.
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Diplomat Pharmacy, Inc. Shareholders' Equity
Noncontrolling Interest
Total
Balance at Dec. 31, 2016                   $ 503,828 $ 33,268 $ 76,306   $ 613,402 $ 322 $ 613,724
Balance (in shares) at Dec. 31, 2016                   66,764,999            
Changes in Shareholders' Equity                                
Net income (loss)                       4,367   4,367 (142) 4,225
Stock issued upon stock option exercises                   $ 3,553 (754)     2,799   2,799
Stock issued upon stock option exercises (in shares)                   391,965            
Share-based compensation expense                     972     972   972
Restricted stock award activity (in shares)                   7,642            
Balance at Mar. 31, 2017                   $ 507,381 33,486 80,673   621,540 180 621,720
Balance (in shares) at Mar. 31, 2017                   67,164,606            
Balance at Dec. 31, 2016                   $ 503,828 33,268 76,306   613,402 322 613,724
Balance (in shares) at Dec. 31, 2016                   66,764,999            
Changes in Shareholders' Equity                                
Net income (loss)                               8,675
Balance at Sep. 30, 2017                   $ 525,172 36,718 85,280   647,170 23 647,193
Balance (in shares) at Sep. 30, 2017                   68,764,301            
Balance at Mar. 31, 2017                   $ 507,381 33,486 80,673   621,540 180 621,720
Balance (in shares) at Mar. 31, 2017                   67,164,606            
Changes in Shareholders' Equity                                
Net income (loss)                       3,591   3,591 (102) 3,489
Issuance of stock as partial consideration $ 4,291 $ 4,291 $ 4,291                          
Issuance of stock as partial consideration (in shares) 299,325                              
Stock issued upon stock option exercises                   $ 3,926 (718)     3,208   3,208
Stock issued upon stock option exercises (in shares)                   524,127            
Share-based compensation expense                     2,826     2,826   2,826
Restricted stock award activity                   $ 222 (222)          
Restricted stock award activity (in shares)                   29,172            
Balance at Jun. 30, 2017                   $ 515,820 35,372 84,264   635,456 78 635,534
Balance (in shares) at Jun. 30, 2017                   68,017,230            
Changes in Shareholders' Equity                                
Net income (loss)                       1,016   1,016 (55) 961
Issuance of stock as partial consideration       $ 1,776 $ 1,776 $ 1,776 $ 5,643 $ 5,643 $ 5,643              
Issuance of stock as partial consideration (in shares)       131,108     374,297                  
Stock issued upon stock option exercises                   $ 1,933 (343)     1,590   1,590
Stock issued upon stock option exercises (in shares)                   241,666            
Share-based compensation expense                     1,689     1,689   1,689
Balance at Sep. 30, 2017                   $ 525,172 36,718 85,280   $ 647,170 $ 23 647,193
Balance (in shares) at Sep. 30, 2017                   68,764,301            
Balance at Dec. 31, 2017                   $ 619,235 38,450 91,816       $ 749,501
Balance (in shares) at Dec. 31, 2017                   73,871,424           73,871,424
Balance at Dec. 31, 2017                   $ 619,235 38,450 91,816       $ 749,501
Balance (in shares) at Dec. 31, 2017                   73,871,424           73,871,424
Changes in Shareholders' Equity                                
Adoption of ASC Topic 606 (Note 3)                       (126)       $ (126)
Net income (loss)                       (450)       (450)
Stock issued upon stock option exercises                   $ 2,461 (552)         1,909
Stock issued upon stock option exercises (in shares)                   200,677            
Share-based compensation expense                     3,161         3,161
Stock issued upon vesting of restricted stock units                   $ 157 (157)          
Stock issued upon vesting of restricted stock units (in shares)                   10,705            
Balance at Mar. 31, 2018                   $ 621,853 40,902 91,240       753,995
Balance (in shares) at Mar. 31, 2018                   74,082,806            
Balance at Dec. 31, 2017                   $ 619,235 38,450 91,816       $ 749,501
Balance (in shares) at Dec. 31, 2017                   73,871,424           73,871,424
Changes in Shareholders' Equity                                
Net income (loss)                               $ (4,244)
Other comprehensive income (loss), net of tax                               (44)
Balance at Sep. 30, 2018                   $ 629,283 48,172 87,445 $ (44)     $ 764,856
Balance (in shares) at Sep. 30, 2018                   74,448,430           74,448,430
Balance at Mar. 31, 2018                   $ 621,853 40,902 91,240       $ 753,995
Balance (in shares) at Mar. 31, 2018                   74,082,806            
Changes in Shareholders' Equity                                
Net income (loss)                       (3,964)       (3,964)
Other comprehensive income (loss), net of tax                         (962)     (962)
Stock issued upon stock option exercises                   $ 1,831 (389)         1,442
Stock issued upon stock option exercises (in shares)                   129,722            
Share-based compensation expense                     6,961         6,961
Stock issued upon vesting of restricted stock units                   $ 1,109 (1,109)          
Stock issued upon vesting of restricted stock units (in shares)                   47,683            
Restricted stock award activity                   $ 561 (561)          
Restricted stock award activity (in shares)                   21,924            
Balance at Jun. 30, 2018                   $ 625,354 45,804 87,276 (962)     757,472
Balance (in shares) at Jun. 30, 2018                   74,282,135            
Changes in Shareholders' Equity                                
Net income (loss)                       169       169
Other comprehensive income (loss), net of tax                         918     918
Stock issued upon stock option exercises                   $ 896 (248)         648
Stock issued upon stock option exercises (in shares)                   41,420            
Share-based compensation expense                     5,649         5,649
Stock issued upon vesting of restricted stock units                   $ 3,033 (3,033)          
Stock issued upon vesting of restricted stock units (in shares)                   124,875            
Balance at Sep. 30, 2018                   $ 629,283 $ 48,172 $ 87,445 $ (44)     $ 764,856
Balance (in shares) at Sep. 30, 2018                   74,448,430           74,448,430
v3.10.0.1
DESCRIPTION OF BUSINESS
9 Months Ended
Sep. 30, 2018
DESCRIPTION OF BUSINESS  
DESCRIPTION OF BUSINESS

 

1.DESCRIPTION OF BUSINESS

 

Diplomat Pharmacy, Inc. and its consolidated subsidiaries (the “Company”) is the largest independent provider of specialty pharmacy services in the United States of America (“U.S.”). The Company is focused on improving the lives of patients with complex chronic diseases while also delivering unique solutions for manufacturers, hospitals, payers and providers. The Company’s patient-centric approach positions it at the center of the healthcare continuum for treatment of complex chronic disease states, including oncology, specialty infusion therapy, immunology, hepatitis, multiple sclerosis and many other serious or long-term conditions. The Company operates as two reporting segments. The Specialty segment offers a broad range of innovative solutions to address the dispensing, delivery, dosing and reimbursement of clinically intensive, high-cost specialty drugs and a wide range of applications and the Pharmacy Benefit Management (“PBM”) segment provides services designed to help the Company’s customers reduce the cost and manage the complexity of their prescription drug programs. The Company dispenses to patients in all U.S. states and territories through its advanced distribution centers and manages centralized clinical call centers to deliver localized services on a national scale.

 

v3.10.0.1
BASIS OF PRESENTATION
9 Months Ended
Sep. 30, 2018
BASIS OF PRESENTATION  
BASIS OF PRESENTATION

 

2.BASIS OF PRESENTATION

 

Interim Unaudited Condensed Consolidated Financial Statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations, cash flows and changes in shareholders’ equity. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 1, 2018.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Diplomat Pharmacy, Inc., its wholly-owned subsidiaries, and a 51 percent owned subsidiary, formed in August 2014, which the Company controlled until it was dissolved during the fourth quarter of 2017.

 

All intercompany transactions and balances have been eliminated in consolidation.

 

Reclassifications

 

During the second quarter of 2018, the Company changed its accounting policy to reclassify shipping and handling costs incurred at its dispensing pharmacies from “Selling, general and administrative expenses” (“SG&A”) to “Cost of sales” in its condensed consolidated statements of operations. The amounts reclassified for the three and nine months ended September 30, 2017 were $15,408 and $39,794, respectively, due to this accounting policy change. For comparability purposes, shipping and handling costs incurred at our dispensing pharmacies for the three and nine months ended September 30, 2018 were $15,713 and $46,979, respectively.

 

The Company has historically classified the cost of its nursing support services within SG&A as these amounts were not considered significant in relation to total cost of sales. During the second quarter of 2018, the Company reclassified these nursing support service costs from SG&A to cost of sales. The amounts reclassified for the three and nine months ended September 30, 2017 were $4,805 and $13,826, respectively. For comparability purposes, nursing support service costs for the three and nine months ended September 30, 2018 were $6,370 and $17,736, respectively.

 

These reclassifications had no impact on “Income from operations” for any of the periods presented.

 

v3.10.0.1
NEW ACCOUNTING STANDARDS
9 Months Ended
Sep. 30, 2018
NEW ACCOUNTING STANDARDS  
NEW ACCOUNTING STANDARDS

 

3.NEW ACCOUNTING STANDARDS

 

Adoption of New Accounting Standards

 

Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), which supersedes the previous revenue recognition guidance under U.S. GAAP. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for a company to recognize revenue when it transfers the promised goods or services to its customers for an amount that represents what the company expects to be entitled to in exchange for those goods or services. Topic 606 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 (modified retrospective transition method). The new standard also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers.

 

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective transition method. Therefore, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company recognized the cumulative effect of initially applying the new revenue recognition standard on January 1, 2018 and recorded an after-tax adjustment of $126 to reduce beginning retained earnings. This cumulative adjustment relates to a shift in the timing of revenue recognition of dispensing prescription drugs for home delivery from the date the drugs are shipped under the Company’s previous accounting policy to the date the drugs are physically delivered (which better reflects when control transfers) under the new accounting policy adopted in connection with Topic 606. The effect of this change is not significant as there is a very short timeframe from the shipment date to the physical delivery date of the prescription drugs. Additionally, in the PBM segment, prior to the adoption of Topic 606, revenue related to certain contracts was previously recognized on a net basis as the Company was considered to be acting as an agent in the transactions. The Company reassessed the principal versus agent criteria under Topic 606 and determined under the new guidance that the Company is considered to be acting as principal in these transactions and, effective January 1, 2018, began to recognize revenue on a gross basis.

 

As a result of applying the modified retrospective transition method, the following condensed consolidated balance sheet line items were adjusted as of January 1, 2018:

 

 

 

As Reported

 

 

 

As Adjusted

 

 

 

December 31, 2017

 

Adjustment

 

January 1, 2018

 

Receivables, net

 

$

332,091

 

$

(6,483

)

$

325,608

 

Inventories

 

206,603

 

6,313

 

212,916

 

Total current assets

 

634,070

 

(170

)

633,900

 

Total assets

 

1,940,423

 

(170

)

1,940,253

 

Accrued expenses — Other

 

20,560

 

(44

)

20,516

 

Total current liabilities

 

651,457

 

(44

)

651,413

 

Total liabilities

 

1,190,922

 

(44

)

1,190,878

 

Retained earnings

 

91,816

 

(126

)

91,690

 

Total shareholders’ equity

 

749,501

 

(126

)

749,375

 

Total liabilities and shareholders’ equity

 

1,940,423

 

(170

)

1,940,253

 

 

The following table compares the reported condensed consolidated statement of operations and comprehensive loss for the three months ended September 30, 2018 to the as adjusted amounts had the previous revenue accounting guidance remained in effect:

 

 

 

As Reported
For the Three
Months Ended

 

 

 

As Adjusted
For the Three
Months Ended

 

 

 

September 30, 2018

 

Adjustment

 

September 30, 2018

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,373,334

 

$

(86,483

)

$

1,286,851

 

Cost of sales

 

(1,279,976

)

86,446

 

(1,193,530

)

Gross profit

 

93,358

 

(37

)

93,321

 

Income from operations

 

9,939

 

(37

)

9,902

 

Income before income taxes

 

48

 

(37

)

11

 

Income tax benefit

 

121

 

10

 

131

 

Net income

 

169

 

(27

)

142

 

Net income attributable to Diplomat Pharmacy, Inc.

 

169

 

(27

)

142

 

Total comprehensive income

 

1,087

 

(27

)

1,060

 

 

The following table compares the reported condensed consolidated balance sheet, statement of operations and statement of cash flows as of and for the nine months ended September 30, 2018 to the as adjusted amounts had the previous revenue accounting guidance remained in effect:

 

 

 

As Reported As of
and For the Nine
Months Ended

 

 

 

As Adjusted As of
and For the Nine
Months Ended

 

 

 

September 30, 2018

 

Adjustment

 

September 30, 2018

 

Condensed Consolidated Balance Sheet:

 

 

 

 

 

 

 

Receivables, net

 

$

358,158

 

$

7,590

 

$

365,748

 

Inventories

 

169,863

 

(7,323

)

162,540

 

Total current assets

 

549,726

 

267

 

549,993

 

Total assets

 

1,800,661

 

267

 

1,800,928

 

Accrued expenses — Other

 

21,542

 

69

 

21,611

 

Total current liabilities

 

578,485

 

69

 

578,554

 

Total liabilities

 

1,035,805

 

69

 

1,035,874

 

Retained earnings

 

87,445

 

198

 

87,643

 

Total shareholders’ equity

 

764,856

 

198

 

765,054

 

Total liabilities and shareholders’ equity

 

1,800,661

 

267

 

1,800,928

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations and Comprehensive Loss:

 

 

 

 

 

 

 

Net sales

 

$

4,131,896

 

$

(278,919

)

$

3,852,977

 

Cost of sales

 

(3,849,743

)

279,016

 

(3,570,727

)

Gross profit

 

282,153

 

97

 

282,250

 

Income from operations

 

26,448

 

97

 

26,545

 

Loss before income taxes

 

(3,494

)

97

 

(3,397

)

Income tax expense

 

(750

)

(25

)

(775

)

Net loss

 

(4,244

)

72

 

(4,172

)

Net loss attributable to Diplomat Pharmacy, Inc.

 

(4,244

)

72

 

(4,172

)

Total comprehensive loss

 

(4,288

)

72

 

(4,216

)

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows:

 

 

 

 

 

 

 

Net loss

 

$

(4,244

)

$

72

 

$

(4,172

)

Accounts receivable (change)

 

(31,090

)

(7,590

)

(38,680

)

Inventories (change)

 

36,717

 

7,323

 

44,040

 

Other assets and liabilities (change)

 

8,469

 

195

 

8,664

 

 

See the Revenue section in Note 4 for additional disclosures required under Topic 606.

 

Derivatives and Hedging

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 aligns hedge accounting with risk management activities and simplifies the requirement to qualify for hedge accounting. ASU 2017-12 is effective for annual periods beginning on or after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted.

 

Effective January 1, 2018, the Company early adopted ASU 2017-12. There was no impact to the Company at the time of adoption.

 

Accounting Standards Issued But Not Yet Adopted

 

Leases

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“Topic 842”), requiring lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) at lease commencement date. Topic 842 is effective for annual periods beginning on or after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. The Company is substantially complete with the inventorying of its lease population and is continuing to evaluate the impact that adopting Topic 842 will have on its consolidated financial statements and/or notes thereto. The Company plans to adopt Topic 842 using the modified retrospective transition method, which means that comparative financial information will not be restated and will continue to be reported under the accounting standards in effect for those periods.

 

v3.10.0.1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Sep. 30, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

4.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

 

Receivables, net

 

Receivables, net consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

Trade receivables, net of allowances of $(23,039) and $(22,050), respectively

 

$

322,072

 

$

317,004

 

Rebate receivables

 

30,768

 

12,847

 

Other receivables

 

5,318

 

2,240

 

 

 

 

 

 

 

 

 

$

358,158

 

$

332,091

 

 

 

 

 

 

 

 

 

 

Trade receivables are stated at the invoiced amount. Trade receivables primarily include amounts due from clients, third-party pharmacy benefit managers and insurance providers and are based on contracted prices. Trade receivables are unsecured and require no collateral. Trade receivable terms vary by payer, but generally are due within 30 days after the sale of the product or performance of the service.

 

Rebate receivables are amounts due from pharmaceutical manufacturers related to drug purchases by participants of the various pharmacy benefit plans that the Company manages, a portion of which, depending on contract terms, are paid back to the Company’s customers.

 

Inventories

 

Inventories consist of prescription and over-the-counter drugs and are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Prescription drugs are returnable to the Company’s vendors and fully refundable before six months of expiration, and any remaining expired drugs are relieved from inventory on a quarterly basis.

 

Revenue

 

The following table disaggregates the Company’s net sales by major source:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Oncology (Specialty)

 

$

701,205

 

$

648,700

 

$

2,094,394

 

$

1,895,611

 

Specialty Infusion (Specialty)

 

178,890

 

158,467

 

525,857

 

443,338

 

Immunology (Specialty)

 

135,397

 

139,670

 

413,948

 

420,126

 

Other (Specialty)

 

196,806

 

178,120

 

564,824

 

571,086

 

PBM

 

169,933

 

 

550,148

 

 

Inter-segment eliminations

 

(8,897

)

 

(17,275

)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,373,334

 

$

1,124,957

 

$

4,131,896

 

$

3,330,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Segment

 

The Company recognizes revenue from dispensing prescription drugs for home delivery at the time the drugs are physically delivered (when control transfers). Revenue from dispensing prescription drugs that are picked up by patients at an open-door or retail pharmacy location are recorded at prescription adjudication, which approximates the fill date. Each prescription claim is considered its own arrangement with the customer and is a performance obligation.

 

The Company accrues an estimate of fees, including direct and indirect remuneration fees (“DIR fees”), which are assessed or expected to be assessed by payers at some point after adjudication of a claim, as a reduction at the time revenue is recognized. Changes in the Company’s estimate of such fees are recorded as an adjustment to revenue when the change becomes known.

 

PBM Segment

 

The Company provides a pharmacy benefit management service, including mail order pharmacy and specialty pharmacy services, to its clients, which include Medicare Part D Plans, regional health plans, self-insured clients and Medicaid Plans. The Company sells prescription drugs directly through its mail service dispensing pharmacy and indirectly through its contracted network of retail pharmacies. The Company recognizes revenue from the sale of prescription drugs by its mail order pharmacy service when the drugs are physically delivered (when control transfers) and by its retail pharmacy network when the claim is adjudicated. The Company’s pharmacy benefit management services are accounted for in a manner consistent with a master supply arrangement as there are no contractual minimum volumes and each prescription is considered a separate purchasing decision and distinct performance obligation transferred at a point in time. Pharmacy benefit management services performed in connection with each prescription claim are considered part of a single performance obligation which culminates in the dispensing of prescription drugs. The Company recognizes revenue using the gross method since the Company acts as principal in the arrangement, exercises pricing latitude and independently has a contractual obligation to pay its network pharmacy providers for benefits provided to its clients’ members, and assumes primary responsibility for fulfilling the promise to provide prescription drugs to its client plan members while also performing the related pharmacy benefit management services. The Company includes the total prescription price (drug ingredient cost plus dispensing fee) it has contracted with these clients as revenue, including member co-payments to pharmacies, and as cost of sales.

 

Net sales include (i) the portion of the price the client pays directly to the Company, net of any variable consideration including volume-related or other discounts paid back to the client, (ii) the price paid to the Company by client plan members for mail order prescriptions and the price paid to retail network pharmacies by client plan members for retail prescriptions and (iii) claims-based administrative fees. The Company records revenue net of manufacturer’s rebates which are earned by its clients based on their plan members’ utilization of brand-name formulary drugs. The Company estimates these rebates at period-end based on actual and estimate claims data and its estimates of manufacturers’ rebates earned by its clients. The Company adjusts against revenues its rebates payable to clients to the actual amounts paid when such adjustments become known. The Company also adjusts revenues for refunds owed to its clients resulting from pricing and performance guarantees against defined metrics.

 

Sales taxes are presented on a net basis (excluded from revenue and cost) for both segments.

 

v3.10.0.1
BUSINESS ACQUISITIONS
9 Months Ended
Sep. 30, 2018
BUSINESS ACQUISITIONS  
BUSINESS ACQUISITIONS

 

5.BUSINESS ACQUISITIONS

 

The Company accounts for its business acquisitions using the acquisition method as required by FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The Company ascribes significant value to the synergies and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly, the value of these components is included within goodwill. The Company’s business acquisitions described below, except for a portion of LDI (defined below), were treated as asset purchases for income tax purposes and the related goodwill resulting from these business acquisitions is deductible for income tax purposes. The results of operations for acquired businesses are included in the Company’s consolidated financial statements from their respective acquisition dates.

 

The assets acquired and liabilities assumed in the business combinations described below, including identifiable intangible assets, were based on their estimated fair values as of the acquisition date. The excess of purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. The allocation of the purchase price required management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These estimated fair values were based on information obtained from management of the acquired companies and historical experience and, with respect to the long-lived tangible and intangible assets, were made with the assistance of an independent valuation firm. These estimates included, but were not limited to, the cash flows that an asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset, discounted at rates commensurate with the risks and uncertainties involved. For acquisitions that involved contingent consideration, the Company recognized a liability equal to the fair value of the contingent consideration obligation as of the acquisition date. The estimate of fair value of a contingent consideration obligation required subjective assumptions regarding future business results, discount rates and probabilities assigned to various potential business result scenarios. These estimates are preliminary and subject to change up to one year following each acquired entity’s respective acquisition date.

 

LDI Holding Company LLC

 

On December 20, 2017, the Company acquired LDI Holding Company LLC, doing business as LDI Integrated Pharmacy Services (“LDI”). LDI is a full-service PBM based in St. Louis, Missouri. LDI’s service offerings include URAC-accredited mail-order and specialty pharmacies, a national network of retail pharmacies and comprehensive clinical programs. The following table summarizes the consideration transferred to acquire LDI:

 

Cash

 

$

520,157

 

4,113,188 restricted common shares

 

79,088

 

 

 

 

 

 

 

$

599,245

 

 

 

 

 

 

 

The above share consideration at closing is based on 4,113,188 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of December 19, 2017 ($20.24) and multiplied by 95 percent to account for the restricted nature of the shares.

 

Approximately $7,500 of the purchase consideration was deposited into an escrow account to satisfy any indemnification claims that may be made by the Company. Approximately $6,357 and $1,143 was released from escrow to the sellers and the Company, respectively, during the second quarter of 2018.

 

The Company incurred acquisition-related costs of $91 and $726 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2018, respectively.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

780

 

Receivables, net

 

40,673

 

Inventories

 

2,857

 

Prepaid expenses and other current assets

 

750

 

Property and equipment

 

1,930

 

Capitalized software for internal use

 

1,325

 

Definite-lived intangible assets

 

201,523

 

Other noncurrent assets

 

148

 

Accounts payable

 

(16,409

)

Rebates payable

 

(23,121

)

Accrued expenses — compensation and benefits

 

(2,329

)

Accrued expenses — other

 

(1,948

)

Deferred income taxes

 

(31,277

)

 

 

 

 

Total identifiable net assets

 

174,902

 

Goodwill

 

424,343

 

 

 

 

 

 

 

$

599,245

 

 

 

 

 

 

 

As of September 30, 2018, the Company was still in the process of finalizing its LDI valuation and, therefore, the purchase price allocation should be considered preliminary. The preliminary purchase price allocation may be subject to further refinement upon finalization of fair valuing acquisition-date working capital. The goodwill balance may be adjusted pending the completion of the valuation of the assets acquired and liabilities assumed as described above. To the extent that significant changes occur in the future, the Company will disclose such changes in the reporting period in which they occur.

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

10 years

 

$

184,973

 

Trade names and trademarks

 

4 years

 

16,550

 

 

 

 

 

 

 

 

 

 

 

$

201,523

 

 

 

 

 

 

 

 

 

Pharmaceutical Technologies, Inc.

 

On November 27, 2017, the Company acquired Pharmaceuticals Technologies, Inc., doing business as National Pharmaceutical Services (“NPS”). NPS is a full-service PBM based in Omaha, Nebraska. The following table summarizes the consideration transferred to acquire NPS:

 

Cash

 

$

36,534

 

835,017 restricted common shares

 

12,753

 

 

 

 

 

 

 

$

49,287

 

 

 

 

 

 

 

The above share consideration at closing is based on 835,017 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of November 24, 2017 ($16.97) and multiplied by 90 percent to account for the restricted nature of the shares.

 

Approximately $9,005 of the purchase consideration was deposited into an escrow account to be held for 18 to 26 months after the closing date to satisfy any indemnification claims that may be made by the Company.

 

The Company incurred acquisition-related costs of $555 which were charged to “Selling, general and administrative expenses” during the nine months ended September 30, 2018.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

9,851

 

Accounts receivable

 

20,622

 

Inventories

 

200

 

Prepaid expenses and other current assets

 

650

 

Property and equipment

 

13,544

 

Capitalized software for internal use

 

1,800

 

Definite-lived intangible assets

 

6,720

 

Accounts payable

 

(14,968

)

Rebates payable

 

(7,882

)

Accrued expenses — compensation and benefits

 

(160

)

Accrued expenses — other

 

(4,891

)

 

 

 

 

Total identifiable net assets

 

25,486

 

Goodwill

 

23,801

 

 

 

 

 

 

 

$

49,287

 

 

 

 

 

 

 

As of September 30, 2018, the Company was still in the process of finalizing its NPS valuation and, therefore, the purchase price allocation should be considered preliminary. The preliminary purchase price allocation may be subject to further refinement upon finalization of fair valuing acquisition-date working capital. The goodwill balance may be adjusted pending the completion of the valuation of the assets acquired and liabilities assumed as described above. To the extent that significant changes occur in the future, the Company will disclose such changes in the reporting period in which they occur.

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

10 years

 

$

5,900

 

Trade names and trademarks

 

2 years

 

820

 

 

 

 

 

 

 

 

 

 

 

$

6,720

 

 

 

 

 

 

 

 

 

Focus Rx Pharmacy Services Inc. and Focus Rx Inc.

 

On September 1, 2017, the Company acquired Focus Rx Pharmacy Services Inc. and Focus Rx Inc. (collectively, “Focus”), a specialty pharmacy focusing on infusion services located in Ronkonkoma, New York. The following table summarizes the consideration transferred to acquire Focus:

 

Cash

 

$

17,252

 

374,297 restricted common shares

 

5,643

 

Contingent consideration at fair value

 

2,080

 

 

 

 

 

 

 

$

24,975

 

 

 

 

 

 

 

The above share consideration at closing is based on 374,297 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of August 31, 2017 ($16.75) and multiplied by 90 percent to account for the restricted nature of the shares.

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $1,500 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending September 30, 2018 and 2019. The maximum additional cash payout is $3,000. The fair value of this liability as of September 30, 2018 and December 31, 2017 was $2,900 and $2,600, respectively.

 

Approximately $1,200 of the purchase consideration was deposited into an escrow account to be held for 12 months after the closing date to satisfy any of the Company’s indemnification claims.

 

The Company incurred acquisition-related costs of $234 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2017.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,809

 

Accounts receivable

 

5,123

 

Inventories

 

261

 

Definite-lived intangible assets

 

7,100

 

Other noncurrent assets

 

22

 

Accounts payable

 

(5,122

)

Accrued expenses — compensation and benefits

 

(156

)

 

 

 

 

Total identifiable net assets

 

9,037

 

Goodwill

 

15,938

 

 

 

 

 

 

 

$

24,975

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

3,700

 

Non-compete employment agreements

 

3 years

 

2,200

 

Trade names and trademarks

 

3 years

 

1,200

 

 

 

 

 

 

 

 

 

 

 

$

7,100

 

 

 

 

 

 

 

 

 

Accurate Rx Pharmacy Consulting, LLC

 

On July 5, 2017, the Company acquired Accurate Rx Pharmacy Consulting, LLC (“Accurate”), a specialty pharmacy focusing on infusion services located in Columbia, Missouri. The following table summarizes the consideration transferred to acquire Accurate:

 

Cash

 

$

9,408

 

131,108 restricted common shares

 

1,776

 

Contingent consideration at fair value

 

1,980

 

 

 

 

 

 

 

$

13,164

 

 

 

 

 

 

 

The above share consideration at closing is based on 131,108 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of July 3, 2017 ($15.05) and multiplied by 90 percent to account for the restricted nature of the shares.

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $3,600 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending July 31, 2018 and 2019. The maximum additional cash payout is $7,200. The fair value of this liability as of September 30, 2018 and December 31, 2017 was $3,115 and $1,600, respectively. Based upon Accurate’s actual results for the 12-month period ended July 31, 2018, the Company expects to pay $1,800 in cash to Accurate’s former owners during the fourth quarter of 2018.

 

Approximately $1,000 of the purchase consideration was deposited into an escrow account to be held for 15 months after the closing date to satisfy any of the Company’s indemnification claims. The full amount was released to the sellers from escrow in October 2018.

 

The Company incurred acquisition-related costs of $134 and $217 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2017, respectively.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,295

 

Accounts receivable

 

2,196

 

Inventory

 

936

 

Prepaid expenses and other current assets

 

34

 

Definite-lived intangible assets

 

3,420

 

Other noncurrent assets

 

3

 

Accounts payable

 

(3,303

)

Accrued expenses — compensation and benefits

 

(152

)

Accrued expenses — other

 

(6

)

 

 

 

 

Total identifiable net assets

 

4,423

 

Goodwill

 

8,741

 

 

 

 

 

 

 

$

13,164

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

2,100

 

Non-compete employment agreements

 

5 years

 

670

 

Trade names and trademarks

 

3 years

 

650

 

 

 

 

 

 

 

 

 

 

 

$

3,420

 

 

 

 

 

 

 

 

 

WRB Communications, LLC

 

On May 8, 2017, the Company acquired WRB Communications, LLC (“WRB”), a communications and contact center company based in Chantilly, Virginia that specializes in relationship management programs for leading pharmaceutical manufacturers and service organizations. The following table summarizes the consideration transferred to acquire WRB:

 

Cash

 

$

26,804

 

299,325 restricted common shares

 

4,291

 

Contingent consideration at fair value

 

530

 

 

 

 

 

 

 

$

31,625

 

 

 

 

 

 

 

The above share consideration at closing is based on 299,325 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of May 5, 2017 ($15.93) and multiplied by 90 percent to account for the restricted nature of the shares.

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $500 per performance period based upon the achievement of certain earnings before interest, taxes, depreciation and amortization targets in each of the 12-month periods ending May 31, 2018 and 2019. During the fourth quarter of 2017, the Company guaranteed a full payout to allow for the acceleration of certain integration activities. The formers owners received $1,000 in cash in January 2018.

 

Approximately $1,950 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.

 

The Company incurred acquisition-related costs of $28 and $255 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2017, respectively.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,018

 

Accounts receivable

 

2,593

 

Prepaid expenses and other current assets

 

179

 

Property and equipment

 

498

 

Definite-lived intangible assets

 

7,730

 

Other noncurrent assets

 

24

 

Accounts payable

 

(100

)

Accrued expenses — other

 

(498

)

 

 

 

 

Total identifiable net assets

 

11,444

 

Goodwill

 

20,181

 

 

 

 

 

 

 

$

31,625

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

7 years

 

$

5,200

 

Non-compete employment agreements

 

4 years

 

1,530

 

Trade names and trademarks

 

2 years

 

1,000

 

 

 

 

 

 

 

 

 

 

 

$

7,730

 

 

 

 

 

 

 

 

 

Comfort Infusion, Inc.

 

On March 22, 2017, the Company acquired Comfort Infusion, Inc. (“Comfort”), a specialty pharmacy and infusion services company based in Birmingham, Alabama that specializes in intravenous immune globulin therapy to support patients’ immune systems. The following table summarizes the consideration transferred to acquire Comfort:

 

Cash

 

$

10,613

 

Contingent consideration at fair value

 

3,800

 

 

 

 

 

 

 

$

14,413

 

 

 

 

 

 

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $2,000 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending March 31, 2018, 2019 and 2020. The maximum payout of contingent consideration is $6,000. The fair value of this liability as of September 30, 2018 and December 31, 2017 was $3,235 and $4,300, respectively. Based upon Comfort’s actual results for the 12-month period ended March 31, 2018, the Company paid $2,000 in cash to Comfort’s former owners in July 2018.

 

Approximately $1,050 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims. The full amount was released to the sellers from escrow in September 2018.

 

The Company incurred acquisition-related costs of $11 and $232 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2017, respectively.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

104

 

Accounts receivable

 

575

 

Inventories

 

118

 

Prepaid expenses and other current assets

 

15

 

Definite-lived intangible assets

 

2,400

 

Other noncurrent assets

 

5

 

Accounts payable

 

(372

)

Accrued expenses — other

 

(101

)

 

 

 

 

Total identifiable net assets

 

2,744

 

Goodwill

 

11,669

 

 

 

 

 

 

 

$

14,413

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

1,200

 

Non-compete employment agreements

 

5 years

 

1,200

 

 

 

 

 

 

 

 

 

 

 

$

2,400

 

 

 

 

 

 

 

 

 

Affinity Biotech, Inc.

 

On February 1, 2017, the Company acquired Affinity Biotech, Inc. (“Affinity”), a specialty pharmacy and infusion services company based in Houston, Texas that provides treatments and nursing services for patients with hemophilia. The following table summarizes the consideration transferred to acquire Affinity:

 

Cash

 

$

17,228

 

Contingent consideration at fair value

 

35

 

 

 

 

 

 

 

$

17,263

 

 

 

 

 

 

 

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners an additional cash payout based upon the achievement of a certain earnings before interest, taxes, depreciation and amortization target in the 12-month period ending February 28, 2018. The maximum payout of contingent consideration was $4,000. The fair value of this liability as of December 31, 2017 was $2,600. Based upon Affinity’s actual results for the 12-month period ended February 28, 2018, the Company paid $2,269 in cash to Affinity’s former owners in June 2018.

 

Approximately $2,000 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims. Approximately $1,851 and $149 was released from escrow to the sellers and the Company, respectively, in August 2018.

 

The Company incurred acquisition-related costs of $204 which were charged to “Selling, general and administrative expenses” during the nine months ended September 30, 2017.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,043

 

Accounts receivable

 

3,433

 

Inventories

 

79

 

Prepaid expenses and other current assets

 

74

 

Definite-lived intangible assets

 

5,100

 

Other noncurrent assets

 

5

 

Accounts payable

 

(1,075

)

Accrued expenses — compensation and benefits

 

(144

)

Accrued expenses — other

 

(25

)

 

 

 

 

Total identifiable net assets

 

8,490

 

Goodwill

 

8,773

 

 

 

 

 

 

 

$

17,263

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

4,000

 

Non-compete employment agreements

 

5 years

 

1,100

 

 

 

 

 

 

 

 

 

 

 

$

5,100

 

 

 

 

 

 

 

 

 

Pro Forma Operating Results

 

The following unaudited pro forma summary presents consolidated financial information as if the Accurate, Affinity, Comfort, Focus, LDI, NPS and WRB acquisitions had occurred on January 1, 2016. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as amortization expense resulting from intangible assets acquired and adjustments to reflect the Company’s borrowings and tax rates. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of the as if date or of results that may occur in the future.

 

 

 

Three Months
Ended

 

Nine Months
Ended

 

 

 

September 30, 2017

 

September 30, 2017

 

Net sales

 

$

1,242,227

 

$

3,704,486

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to Diplomat Pharmacy, Inc.

 

$

(3,640

)

$

3,037

 

 

 

 

 

 

 

 

 

Net (loss) income per common share — basic & diluted

 

$

(0.05

)

$

0.04

 

 

 

 

 

 

 

 

 

 

v3.10.0.1
FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 2018
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

 

6.FAIR VALUE MEASUREMENTS

 

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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, a three-tier fair value hierarchy was established, 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 in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

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).

 

The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured and disclosed at fair value on a recurring basis:

 

 

 

Asset /

 

 

 

 

 

Valuation

 

 

 

(Liability)

 

Level 2

 

Level 3

 

Technique

 

September 30, 2018:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

(9,250

)

$

 

$

(9,250

)

C

 

Interest rate swaps (Note 9)

 

(59

)

(59

)

 

A

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

(12,100

)

$

 

$

(12,100

)

C

 

 

The following table sets forth a roll forward of the Level 3 measurements:

 

 

 

Contingent
Consideration

 

Balance at January 1, 2018

 

$

(12,100

)

Changes in fair values

 

(2,419

)

Payments

 

5,269

 

 

 

 

 

Balance at September 30, 2018

 

$

(9,250

)

 

 

 

 

 

 

The carrying amounts of the Company’s financial instruments — consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, and other liabilities — approximate their estimated fair values due to the relative short-term nature of the amounts. The carrying amount of debt approximates fair value due to variable interest rates at customary terms and rates the Company could obtain in current financing.

 

v3.10.0.1
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS
9 Months Ended
Sep. 30, 2018
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS  
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

 

7.GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

 

The following table sets forth a roll forward of goodwill for the nine months ended September 30, 2018:

 

Balance at January 1, 2018

 

$

832,624

 

Various purchase accounting adjustments

 

1,956

 

 

 

 

 

Balance at September 30, 2018

 

$

834,580

 

 

 

 

 

 

 

Goodwill by reporting segment is as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

PBM

 

$

448,144

 

$

446,740

 

Specialty

 

386,436

 

385,884

 

 

 

 

 

 

 

 

 

$

834,580

 

$

832,624

 

 

 

 

 

 

 

 

 

 

Definite-lived intangible assets consist of the following:

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Customer relationships

 

$

196,073

 

$

(17,602

)

$

178,471

 

$

196,073

 

$

(1,141

)

$

194,932

 

Patient relationships

 

170,100

 

(63,448

)

106,652

 

170,100

 

(49,643

)

120,457

 

Non-compete employment agreements

 

61,389

 

(40,603

)

20,786

 

61,389

 

(30,560

)

30,829

 

Trade names and trademarks

 

44,020

 

(22,145

)

21,875

 

44,020

 

(13,624

)

30,396

 

Physician relationships

 

21,700

 

(8,833

)

12,867

 

21,700

 

(6,303

)

15,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

493,282

 

$

(152,631

)

$

340,651

 

$

493,282

 

$

(101,271

)

$

392,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company recorded amortization expense of $17,190 and $10,379 for the three months ended September 30, 2018 and 2017, respectively, and $51,360 and $30,371 for the nine months ended September 30, 2018 and 2017, respectively.

 

v3.10.0.1
DEBT
9 Months Ended
Sep. 30, 2018
DEBT  
DEBT

 

8.DEBT

 

The Company had $467,375 and $550,000 in outstanding term loans as of September 30, 2018 and December 31, 2017, respectively. Unamortized debt issuance costs of $15,323 and $17,402 as of September 30, 2018 and December 31, 2017, respectively, are presented in the condensed consolidated balance sheets as direct deductions from the outstanding debt balances. The Company also had $178,250 and $188,250 outstanding on its line of credit as of September 30, 2018 and December 31, 2017, respectively. The Company had $71,750 and $61,750 available to borrow on its line of credit at September 30, 2018 and December 31, 2017, respectively.

 

The interest rates the Company pays under its credit facility are primarily a function of a defined margin above LIBOR. The Company’s Term Loan A and Term Loan B interest rates were 4.50 percent and 6.75 percent, respectively, at September 30, 2018 and 4.04 percent and 6.04 percent, respectively, at December 31, 2017. The Company’s line of credit interest rate was 4.59 percent and 4.04 percent at September 30, 2018 and December 31, 2017, respectively. The Company is charged a monthly unused commitment fee ranging from 0.3 percent to 0.4 percent on the average unused daily balance on its $250,000 line of credit.

 

The Company’s credit facility contains certain financial and non-financial covenants. The Company was in compliance with all such covenants as of September 30, 2018 and December 31, 2017.

 

v3.10.0.1
INTEREST RATE SWAPS
9 Months Ended
Sep. 30, 2018
INTEREST RATE SWAPS  
INTEREST RATE SWAPS

 

9.INTEREST RATE SWAPS

 

The Company entered into two interest rate swap agreements during the second quarter of 2018 to fix its interest rate payments from April 30, 2019 through March 31, 2022 on $150,000 principal balance on each of Term Loan A and Term Loan B ($300,000 principal balance in total). These cash flow derivatives are designated as hedging instruments under FASB ASC Subtopic 815-20. The Company recognized other comprehensive income (loss) of $918 ($1,228 income, net of $310 in taxes) and $(44) ($59 loss, net of $15 in taxes) during the three and nine months ended September 30, 2018, respectively. There was no impact to the condensed consolidated statements of operations. The $59 interest rate swap agreement liability is contained in “Other” noncurrent liabilities as of September 30, 2018.

 

The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedging instruments under the accounting requirements for derivatives and hedging.

 

v3.10.0.1
SHARE-BASED COMPENSATION
9 Months Ended
Sep. 30, 2018
SHARE-BASED COMPENSATION  
SHARE-BASED COMPENSATION

 

10.SHARE-BASED COMPENSATION

 

Stock Options

 

A summary of the Company’s stock option activity as of and for the nine months ended September 30, 2018 is as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

of Options

 

Price

 

Life

 

Value

 

 

 

 

 

 

 

(Years)

 

 

 

Outstanding at January 1, 2018

 

6,108,292

 

$

18.62

 

8.5

 

$

25,777

 

Granted

 

411,486

 

21.39

 

 

 

 

 

Exercised

 

(371,819

)

10.76

 

 

 

 

 

Cancelled/expired

 

(802,115

)

22.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2018

 

5,345,844

 

$

18.89

 

8.0

 

$

17,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2018

 

1,716,553

 

$

19.63

 

6.6

 

$

8,771