Company Quick10K Filing
Quick10K
Diplomat Pharmacy
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$5.85 75 $437
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
8-K 2019-08-06 Enter Agreement, Earnings, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-07-22 Sale of Shares
8-K 2019-06-19 Officers
8-K 2019-06-03 Shareholder Vote
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-05-02 Officers, Exhibits
8-K 2019-04-08 Other Events, Exhibits
8-K 2019-03-14 Earnings, Officers, Exhibits
8-K 2019-03-07 Officers, Exhibits
8-K 2019-02-22 Earnings, Regulation FD, Exhibits
8-K 2019-01-04 Earnings, Officers, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-07-24 Officers, Exhibits
8-K 2018-06-12 Shareholder Vote
8-K 2018-05-09 Officers, Regulation FD, Exhibits
8-K 2018-04-06 Other Events, Exhibits
8-K 2018-03-27 Officers, Exhibits
8-K 2018-02-26 Earnings, Exhibits
8-K 2018-01-04 Officers, Amend Bylaw, Regulation FD, Exhibits
CSGP Costar Group 18,080
CAH Cardinal Health 14,940
JBLU Jetblue Airways 5,520
PNM PNM Resources 3,710
CCNE CNB Financial 430
ATLO AMES National 262
SES Synthesis Energy Systems 5
ONS Oncobiologics 0
ZDPY Zoned Properties 0
ACET Aceto 0
DPLO 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6.Exhibits
EX-10.1 dplo-20190630ex1018d0009.htm
EX-31.1 dplo-20190630ex311badbc0.htm
EX-31.2 dplo-20190630ex31260fde2.htm
EX-32.1 dplo-20190630ex321f5dcdb.htm
EX-32.2 dplo-20190630ex32268dd8b.htm

Diplomat Pharmacy Earnings 2019-06-30

DPLO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                  

Commission File Number:  001-36677

DIPLOMAT PHARMACY, INC.

(Exact name of Registrant as specified in its charter)

Michigan

38-2063100

(State or other jurisdiction of
incorporation or organization)

(IRS employer
identification number)

4100 S. Saginaw Street, Flint, Michigan

48507

(Address of principal executive offices)

(Zip Code)

(888) 720-4450

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    No 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, no par value per share

DPLO

New York Stock Exchange

As of August 2, 2019, there were 75,830,397 outstanding shares of the registrant’s no par value common stock.

Table of Contents

DIPLOMAT PHARMACY, INC.

Form 10-Q

INDEX

    

Page No.

Part I — Financial Information

3

Item 1 — Financial Statements

3

Condensed Consolidated Balance Sheets (Unaudited)

3

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

4

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

6

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3 — Qualitative and Quantitative Disclosures about Market Risk

33

Item 4 — Controls and Procedures

34

Part II — Other Information

36

Item 1 — Legal Proceedings

36

Item 1A — Risk Factors

37

Item 6 — Exhibits

38

Signatures

39

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIPLOMAT PHARMACY, INC.

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

June 30, 

December 31, 

    

2019

    

2018

ASSETS

Current assets:

Cash and equivalents

$

5,771

$

9,485

Receivables, net

 

329,595

 

326,602

Inventories

 

179,083

 

210,573

Prepaid expenses and other current assets

 

27,007

 

9,596

Total current assets

541,456

556,256

Property and equipment

54,246

55,929

Accumulated depreciation

(24,682)

(21,404)

Property and equipment, net

 

29,564

 

34,525

Capitalized software for internal use, net

28,354

30,506

Operating lease right-of-use assets

 

26,329

 

Goodwill

 

486,563

 

609,592

Definite-lived intangible assets, net

 

195,273

 

240,810

Assets held for sale

3,450

Other noncurrent assets

 

4,121

 

4,670

Total assets

$

1,315,110

$

1,476,359

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

326,544

$

308,084

Rebates payable to PBM customers

20,964

23,264

Borrowings on revolving line of credit

125,000

176,300

Current portion of long-term debt

 

11,500

 

11,500

Current portion of operating lease liabilities

4,255

Accrued expenses:

Compensation and benefits

11,184

13,348

Contingent consideration

 

6,838

 

5,075

Other

 

39,012

 

21,014

Total current liabilities

 

545,297

 

558,585

Long-term debt, less current portion

 

434,005

 

438,369

Noncurrent operating lease liabilities

23,017

Deferred income taxes

3,553

2,781

Contingent consideration

1,820

Derivative liability

9,777

4,292

Deferred gain

5,175

Other

 

 

253

Total liabilities

1,015,649

1,011,275

Shareholders’ equity:

Preferred stock (10,000,000 shares authorized; none issued and outstanding)

Common stock (no par value; 590,000,000 shares authorized; 74,993,966 and 74,474,677 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively)

636,331

629,411

Additional paid-in capital

 

51,597

 

50,544

Accumulated deficit

 

(378,690)

 

(210,579)

Accumulated other comprehensive loss

(9,777)

(4,292)

Total shareholders' equity

 

299,461

 

465,084

Total liabilities and shareholders' equity

$

1,315,110

$

1,476,359

See accompanying Notes to Condensed Consolidated Financial Statements.

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DIPLOMAT PHARMACY, INC.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(Dollars in thousands, except per share amounts)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Net sales

$

1,287,624

$

1,416,078

$

2,544,432

$

2,758,562

Cost of sales

 

(1,214,897)

 

(1,317,662)

 

(2,392,485)

 

(2,569,768)

Gross profit

 

72,727

98,416

 

151,947

 

188,794

Selling, general and administrative expenses

 

(80,816)

 

(90,642)

 

(163,684)

 

(172,329)

Goodwill impairments

(122,891)

(122,891)

Impairments of definite-lived intangible assets

(17,979)

(17,979)

(Loss) income from operations

 

(148,959)

 

7,774

 

(152,607)

 

16,465

Other (expense) income:

Interest expense

 

(10,170)

 

(10,392)

 

(20,385)

 

(20,819)

Other

 

101

 

394

 

282

 

811

Total other expense

(10,069)

(9,998)

(20,103)

(20,008)

Loss before income taxes

(159,028)

(2,224)

(172,710)

(3,543)

Income tax expense

(434)

(1,740)

(1,053)

(871)

Net loss

$

(159,462)

$

(3,964)

$

(173,763)

$

(4,414)

Other comprehensive loss, net of tax

(3,358)

(962)

(5,485)

(962)

Total comprehensive loss

$

(162,820)

$

(4,926)

$

(179,248)

$

(5,376)

Loss per common share, basic and diluted

$

(2.13)

$

(0.05)

$

(2.33)

$

(0.06)

Weighted average common shares outstanding, basic and diluted

74,730,823

74,158,622

74,595,906

74,077,916

See accompanying Notes to Condensed Consolidated Financial Statements.

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DIPLOMAT PHARMACY, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

Six Months Ended

June 30, 

    

2019

    

2018

Cash flows from operating activities:

Net loss

$

(173,763)

$

(4,414)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

 

41,459

 

48,170

Goodwill impairments

122,891

Impairments of definite-lived intangible assets

17,979

Share-based compensation expense

7,855

10,122

Net provision for doubtful accounts

5,567

3,919

Amortization of debt issuance costs

1,921

2,742

Net realizable value loss on assets held for sale

1,654

Changes in fair value of contingent consideration

 

(57)

 

2,339

Contingent consideration payment

 

 

(2,704)

Deferred income tax expense (benefit)

772

(632)

Changes in operating assets and liabilities:

Accounts receivable

 

(8,560)

 

(22,732)

Inventories

 

31,490

 

36,407

Accounts payable

 

18,460

 

(4,526)

Rebates payable

(2,300)

(3,487)

Other assets and liabilities

 

1,382

 

1,448

Net cash provided by operating activities

 

66,750

 

66,652

Cash flows from investing activities:

Expenditures for property and equipment

 

(2,845)

 

(5,487)

Expenditures for capitalized software for internal use

 

(10,707)

 

(5,878)

Net payments to acquire businesses, net of cash acquired

(1,289)

Other

21

46

Net cash used in investing activities

 

(13,531)

 

(12,608)

Cash flows from financing activities:

Net payments on revolving line of credit

 

(51,300)

 

(53,150)

Payments on long-term debt

 

(5,751)

 

(79,750)

Payments of debt issuance costs

(821)

Proceeds from issuance of stock upon stock option exercises

118

3,351

Contingent consideration payment

(565)

Net cash used in financing activities

 

(56,933)

 

(130,935)

Net decrease in cash and equivalents

 

(3,714)

 

(76,891)

Cash and equivalents at beginning of period

 

9,485

 

84,251

Cash and equivalents at end of period

$

5,771

$

7,360

Supplemental disclosures of cash flow information:

Cash paid for interest

$

18,464

$

18,589

Cash (refunded) paid for income taxes

$

(713)

$

1,741

See accompanying Notes to Condensed Consolidated Financial Statements.

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DIPLOMAT PHARMACY, INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands)

Retained

Accumulated

Additional

Earnings

Other

Total

Common Stock

Paid-In

(Accumulated

Comprehensive

Shareholders'

    

Shares

    

Amount

    

Capital

    

Deficit)

    

Loss

    

Equity

Balance at January 1, 2018

73,871,424

$

619,235

$

38,450

$

91,816

$

$

749,501

Cumulative effect adjustment, revenue recognition standard

(126)

(126)

Net loss

(450)

(450)

Stock issued upon stock option exercises

200,677

2,461

(552)

1,909

Share-based compensation

3,161

3,161

Stock issued upon vesting of restricted stock units

10,705

157

(157)

Balance at March 31, 2018

74,082,806

621,853

40,902

91,240

753,995

Net loss

(3,964)

(3,964)

Stock issued upon stock option exercises

129,722

1,831

(389)

1,442

Share-based compensation

6,961

6,961

Stock issued upon vesting of restricted stock units

47,683

1,109

(1,109)

Restricted stock award activity

21,924

561

(561)

Other comprehensive loss, net of tax

(962)

(962)

Balance at June 30, 2018

74,282,135

$

625,354

$

45,804

$

87,276

$

(962)

$

757,472

Balance at January 1, 2019

74,474,677

$

629,411

$

50,544

$

(210,579)

$

(4,292)

$

465,084

Cumulative effect adjustment, leasing standard (Notes 2 and 13)

5,652

5,652

Net loss

(14,301)

(14,301)

Stock issued upon vesting of restricted stock units

244,948

4,766

(4,766)

Share-based compensation

3,572

3,572

Restricted stock award activity

(5,929)

37

(37)

Other comprehensive loss, net of tax

(2,127)

(2,127)

Balance at March 31, 2019

74,713,696

634,214

49,313

(219,228)

(6,419)

457,880

Net loss

(159,462)

(159,462)

Stock issued upon stock option exercises

27,313

148

(30)

118

Stock issued upon vesting of restricted stock units

65,988

1,544

(1,544)

Share-based compensation

4,283

4,283

Restricted stock award activity

186,969

425

(425)

Other comprehensive loss, net of tax

(3,358)

(3,358)

Balance at June 30, 2019

74,993,966

$

636,331

$

51,597

$

(378,690)

$

(9,777)

$

299,461

See accompanying Notes to Condensed Consolidated Financial Statements.

6

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DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands, except per share amounts)

1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Diplomat Pharmacy, Inc. and its consolidated subsidiaries (the “Company”) is the largest independent provider of specialty pharmacy and infusion 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, payors and providers. The Company’s patient-centric approach positions it at the center of the healthcare continuum for the treatment of complex chronic disease states, including oncology, specialty infusion therapies, immunology, hepatitis, multiple sclerosis and many other serious or long-term conditions. The Company operates in two reportable segments - Specialty and Pharmacy Benefit Management (“PBM”). 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. The PBM segment provides services designed to help 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.

Basis of Presentation

Unaudited Condensed Consolidated Financial Statements

These 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 unaudited Condensed Consolidated 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 for the periods presented. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any future annual or interim period. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”).

2.  NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standard

Leases

The Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) and all subsequent amendments as of January 1, 2019.  Topic 842 requires a lessee to recognize the following for all leases, except short-term leases, at the commencement date: (1) a lease liability which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Topic 842 also requires expanded disclosures.

The Company adopted Topic 842 as of January 1, 2019 using the optional transition method, which allowed entities to apply the new guidance at the adoption date and record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, and not to restate the comparative periods presented. Therefore, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.  The adoption of the standard resulted in the recognition of net operating lease right-of-use assets of approximately $28,400 and operating lease liabilities of approximately $29,300 on the Condensed Consolidated Balance Sheet as of

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January 1, 2019 primarily related to its real estate operating leases. The operating lease right-of-use assets includes the impact of deferred rent. The Company does not have any finance leases.

Also, upon adoption, the Company recorded a cumulative-effect adjustment, after tax, of $5,652 (a valuation allowance was established against the full amount of the net deferred taxes of $1,387) to increase retained earnings for the amount of a previously deferred gain on a sale-leaseback transaction that closed in 2018. Such gain recorded on the sale-leaseback transaction would have been fully recognized under Topic 842.

The Company elected to apply the package of practical expedients upon transition, which includes no reassessment of whether existing contracts are or contain leases and allowed for the lease classification for existing leases to be retained. The Company did not elect the practical expedient to use hindsight, and accordingly the initial lease term did not differ under the new standard versus prior accounting practice.  After transition, in certain instances, the cost of renewal options will be recognized earlier in the term of the lease than under the previous lease accounting rules.  The operating lease agreements include lease and non-lease components for which the Company elected the practical expedient to not separate non-lease components from the lease components but instead to combine them and account for them as a single lease component and will continue to do so for its real estate operating leases. The Company has selected as its accounting policy to keep leases with a term of twelve months or less off the balance sheet and recognize these lease payments on a straight-line basis over the lease term.

The Company has recorded operating lease right-of-use assets and operating lease liabilities in its Condensed Consolidated Balance Sheets at June 30, 2019. The lessors’ rate implicit in the operating leases was not available to the Company and was not determinable from the terms of the lease.  Therefore, the Company used its incremental borrowing rate to determine the present value of the future lease payments. The incremental borrowing rates were not observable and therefore, the rates were estimated primarily using a methodology dependent on the Company’s financial condition, creditworthiness, and availability of certain observable data.  In particular, the Company considered its actual cost of borrowing for collateralized loans and its credit rating, along with the corporate bond yield curve in estimating its incremental borrowing rates. These estimated incremental borrowing rates were applied to future lease payments to determine the present value of the operating lease liability for each lease.    

The new standard did not have a significant impact on the timing or measurement of lease expense in the Condensed Consolidated Statements of Comprehensive Loss and had no impact on the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019. As noted above, the comparative prior period information for the six months ended June 30, 2018 has not been adjusted and continues to be reported under the Company’s historical lease recognition policies under ASC Topic 840, Leases.

The disclosure requirements of Topic 842 are included within Note 13, Leases.

Accounting Standards Issued But Not Yet Adopted

Credit Losses

In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring the recording of credit losses on financial assets, including receivables, on a more timely basis. The guidance will replace the current incurred loss accounting model with an expected loss approach. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses. ASU No. 2016-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. The effect of adoption of the standard is required as an adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU No. 2016-13 is effective. The Company has not yet determined the magnitude of any such one-time adjustment or the overall impact of ASU No. 2016-13 on its Consolidated Financial Statements.

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3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of Diplomat Pharmacy, Inc., and its wholly owned subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation.

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:

June 30, 

December 31, 

    

2019

    

2018

Trade receivables, net of allowances of $(29,166) and $(25,342), respectively

$

314,864

$

299,407

Rebate receivables

 

9,964

 

22,375

Other receivables

 

4,767

 

4,820

$

329,595

$

326,602

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 payor, 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. The Company estimates these rebates at period-end based on its contractual arrangements with its manufacturers and such rebates are recorded as a reduction of cost of sales.

Inventories

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

4. 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;

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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 should 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 liabilities that are measured and disclosed at fair value on a recurring basis:

Asset /

Valuation

Valuation

    

(Liability)

    

Level 2

    

Level 3

     

Technique

June 30, 2019:

Contingent consideration

 

$

(6,838)

 

$

$

(6,838)

 

C

Interest rate swaps (Note 7)

(9,777)

(9,777)

 

A

December 31, 2018:

Contingent consideration

 

$

(6,895)

 

$

$

(6,895)

 

C

Interest rate swaps (Note 7)

(4,292)

(4,292)

 

A

The following table sets forth the change in contingent consideration (Level 3 measurements) for the six months ended June 30, 2019:

Contingent

    

Consideration

Balance at January 1, 2019

$

(6,895)

Change in fair value

57

Payments

 

Balance at June 30, 2019

$

(6,838)

The carrying amount of the Company’s debt approximates fair value due to variable interest rates at customary terms and rates the Company could obtain in current financing.

5. GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

Goodwill

Goodwill is not subject to amortization and is reviewed at least annually in the fourth quarter of each year using data as of December 31 of that year, or earlier if an event occurs or circumstances change and there is an indication of impairment. The Company determined, due to lower than expected second quarter results and the resulting impact on future forecasts, that there was an indication of impairment for both the Specialty and PBM segments and, as a result, tested goodwill in the interim period at June 30, 2019 at the reporting unit level. The impairment test consists of comparing a reporting unit’s

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fair value to its carrying value. Based on the interim impairment test as of June 30, 2019, the Company determined that the fair value of the Diplomat Specialty Pharmacy (“DSP”) and PBM reporting units were less than their respective carrying value. As a result, the Company recorded total non-cash impairment charges of $122,891 to goodwill and $17,979 to definite-lived intangible assets.

The estimated fair value for each of the reporting units was determined using the income approach. With the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term growth rates based on our most recent views of the long-term outlook for each reporting unit. Such projections contain management’s best estimates of growth rates in revenue and costs and future expected changes in operating margins and cash expenditures, which are based on factors including our best estimates of economic and market conditions over the projected period. Our projection of estimated operating results and cash flows are discounted using a weighted average cost of capital that reflects current market conditions appropriate to each reporting unit. The discount rate is sensitive to changes in interest rates and other market rates in place at the time the assessment is performed. The discount rates used in the reporting unit valuations as of June 30, 2019 were 10.5% for the DSP reporting unit and 11.75% for the PBM reporting unit.

For the DSP reporting unit, as of and for the second quarter of 2019, the Company experienced lower than expected results, which have impacted the outlook for the remainder of 2019 and into 2020. The lowered outlook for the DSP reporting unit includes slower than anticipated brand to generic conversions and delays in the release of generic versions of certain drugs which tend to provide higher margin contribution. Additionally, anticipated cost savings are running behind forecast primarily due to delays in the implementation of ScriptMed, our new specialty operating platform and while the previous outlook assumed additional investment in the Company’s payor sales team would have resulted in new business opportunities that would offset anticipated negative impacts to volume, the Company has seen limited impacts from this investment on 2019 results through June 30, 2019. Lastly, while it was believed the business environment would stabilize, the Company continues to see volumes in our DSP reporting unit business being negatively impacted by member channel management and increased competition from larger, vertically-integrated peers and a reimbursement environment in specialty pharmacy that is driving continued downward pressure on margins. As such, these conditions resulted in downward revisions of the forecasts on current and future projected earnings and cash flows from the DSP reporting unit.

During the second quarter of 2019, the Company recorded a non-cash goodwill impairment of $68,218 for the Specialty segment, all of which was allocated solely to the DSP reporting unit. The non-cash impairment charge is not deductible for income tax purposes. The impairment loss is recorded in the caption “Goodwill impairments” in the Condensed Consolidated Statements of Comprehensive Loss. After the impairment charge, the adjusted carrying value of the Specialty segment goodwill was $272,442 at June 30, 2019, of which zero was allocated to the DSP reporting unit.

The goodwill in the PBM segment was recorded as a result of two separately acquired entities (i) Pharmaceutical Technologies, Inc. d/b/a National Pharmaceutical Services, acquired in November 27, 2017, and (ii) LDI Holding Company, LLC, acquired December 20, 2017.

For the PBM reporting unit, in the second quarter of 2019, the Company experienced lower than expected results driven by continued business losses and lower earned rebates due to drug mix and slightly lower rebate retention. These lower than expected results resulted in downward revisions of the forecasts on current and future projected earnings and cash flows of the PBM reporting unit and a more conservative outlook in 2020 and beyond.

During the second quarter of 2019, the Company recorded a non-cash goodwill impairment of $54,673 for the PBM segment, which is not deductible for income tax purposes. The impairment loss is recorded in the caption “Goodwill impairment” in the Condensed Consolidated Statements of Comprehensive Loss. After the impairment charge, the adjusted carrying value of the PBM segment goodwill was $214,121 at June 30, 2019.

Also, the Company in connection with the goodwill impairment analysis assessed whether the carrying amounts of the reporting units long-lived assets may not be recoverable and therefore may be impaired. To assess the recoverability at the DSP reporting unit and PBM segment asset group level, the undiscounted cash flows of the DSP and PBM businesses were analyzed over a range of potential remaining useful lives. As a result, the Company determined that certain trade

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names and trademarks, certain customer and physician relationships in the DSP and PBM reporting units and certain non-compete employment agreements in its DSP reporting unit were not recoverable and were impaired. The Company recorded an impairment loss of $16,772 to therefore fully impair the remaining intangible assets at the DSP reporting unit, which is part of the Specialty segment, and an impairment loss of $1,207 to further impair those intangible assets at the PBM reporting unit, which is the only reporting unit in the PBM segment. Refer to the additional discussion below.

Definite-lived intangible assets

Definite-lived intangible assets consisted of the following:

 

June 30, 2019

Weighted

 

Average

 

Gross

 

Net

 

Amortization

 

Carrying

 

Accumulated

 

Carrying

    

Period Remaining

    

Amount

    

Amortization

    

Amount

Customer relationships

9.5

$

88,000

$

 

$

88,000

Patient relationships

5.4

170,100

(77,025)

93,075

Trade names and trademarks

 

1.5

 

 

29,350

(23,593)

 

5,757

Non-compete employment agreements

 

1.3

 

 

51,399

(42,958)

 

8,441

Physician relationships

21,700

(21,700)

Total definite-lived intangible assets

$

360,549

$

(165,276)

 

$

195,273

December 31, 2018

Weighted

Average

 

Gross

 

Net

Amortization

 

Carrying

 

Accumulated

 

Carrying

    

Period Remaining

    

Amount

    

Amortization

    

Amount

Customer relationships

9.8

$

100,200

$

(1,238)

 

$

98,962

Patient relationships

5.9

170,100

(67,964)

102,136

Trade names and trademarks

1.8

 

30,650

(20,270)

 

10,380

Non-compete employment agreements

1.6

 

61,389

(44,100)

 

17,289

Physician relationships

4.8

21,700

(9,657)

12,043

Total definite-lived intangible assets

$

384,039

$

(143,229)

 

$

240,810

As disclosed above, certain intangible assets, consisting of certain trade names and trademarks, certain customer and physician relationships, and certain non-compete employment agreements, were impaired. The Company performed a valuation to determine the fair value of these intangible assets and as a result recorded a total non-cash impairment charge of $17,979 which is recorded in the caption “Impairments of definite-lived intangible assets” in the Condensed Consolidated Statements of Comprehensive Loss.

The Company recorded amortization expense of $13,753 and $17,160 for the three months ended June 30, 2019 and 2018, respectively, and $27,558 and $34,170 for the six months ended June 30, 2019 and 2018, respectively.

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6. DEBT

Total outstanding debt consisted of the following:

June 30, 

December 31, 

    

2019

    

2018

Short-term debt, borrowings on revolving line of credit

$

125,000

$

176,300

Long-term debt:

 

Term loan A

$

138,750

$

142,500

Term loan B

 

320,000

 

322,000

Total

 

458,750

 

464,500

Unamortized debt issuance costs

 

(13,245)

 

(14,631)

Total long-term debt

 

445,505

 

449,869

Less: current portion

 

11,500

 

11,500

Long-term debt, less current portion

$

434,005

$

438,369

The Company has a credit agreement with JP Morgan Chase Bank, N.A., and Capital One, National Association, that provides for a $250,000 revolving line of credit and a $150,000 Term Loan A and $400,000 Term Loan B (“credit facility”). The credit agreement also provides for issuances of letters of credit of up to $10,000 and swingline loans up to $20,000.  The revolving line of credit and Term Loan A mature on December 20, 2022 and Term Loan B matures on December 20, 2024. Refer to Note 16, “Subsequent Events” for information regarding the credit agreement.

Interest on the revolving line of credit and Term Loan A is accrued at a rate equal to (i) the monthly LIBOR plus an applicable margin or (ii) a base rate that is the highest of the U.S. prime rate, federal funds rate (plus ½ of 1 percent) and LIBOR (plus 1 percent), at the Company’s option. The applicable margin is adjusted quarterly based on the Company’s leverage ratio. At June 30, 2019, the applicable margin was 2.50 percent for LIBOR loans and 1.50 percent for base rate loans. Interest on the Term Loan B is accrued similarly to Term Loan A, except the applicable margin is fixed at 4.50 percent for LIBOR loans and 3.50 percent for base rate loans.  The Company’s Term Loan A and Term Loan B interest rates were 4.66 percent and 6.91 percent, respectively, at June 30, 2019 and 4.78 percent and 7.03 percent, respectively, at December 31, 2018. The interest rate on the revolving line of credit was 4.74 percent and 5.19 percent at June 30, 2019 and December 31, 2018, 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 revolving line of credit.

The Company had weighted average borrowings on its revolving line of credit of $130,573 and $152,229 and maximum borrowings on its revolving line of credit of $157,000 and $188,250 during the three months ended June 30, 2019 and 2018, respectively. Prior to the First Amendment to Credit Agreement (refer to Note 16, “Subsequent Events”), the Company had $125,000 and $73,700 available to borrow on its revolving line of credit at June 30, 2019 and December 31, 2018, respectively.  Revolving line of credit-related unamortized debt issuance costs of $3,711 and $4,246 as of June 30, 2019 and December 31, 2018, respectively, are classified within “Other noncurrent assets” in the Condensed Consolidated Balance Sheets.

The Term Loan A and Term Loan B requires quarterly principal payments of $1,875 and $1,000, plus accrued interest, respectively.  During the six months ended June 30, 2018, the Company made a voluntary prepayment of $74,000 on the Term Loan B.

The credit facility is collateralized by substantially all of the Company’s assets.  The credit facility contains covenants that requires the Company, among other things, to provide financial and other information reporting, and to provide notice upon certain events. These covenants also place restrictions on the Company’s ability to incur additional indebtedness, pay dividends or make other distributions, redeem or repurchase capital stock, make investments and loans, and enter into certain transactions, including selling assets, engaging in mergers or acquisitions, or engaging in transactions with affiliates. The Company was in compliance with all such covenants as of June 30, 2019. Refer to Note 16, “Subsequent Events” for additional information.

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7.  INTEREST RATE SWAPS

The Company enters into interest rate swap contracts to hedge variable interest rate risk related to certain variable rate borrowings. These interest rate swap contracts are designated as cash flow hedges for the purposes of hedge accounting treatment and any unrealized gains or losses that result from changes in the fair value of the interest rate swap contracts are reported in “Accumulated other comprehensive loss” as a component of shareholders’ equity. The Company measures hedge effectiveness on a quarterly basis. The Company does not use derivative financial instruments for speculative purposes.

In 2018, the Company entered into two pay-fixed and receive-floating interest rate swaps, which was effective on March 29, 2019 and terminates on March 31, 2022. The combined notional amount of the interest rate swaps was $290,625 at June 30, 2019 and December 31, 2018, respectively. At June 30, 2019 and December 31, 2018, the fair value of the interest rate swaps (derivative liability) was $9,777 and $4,292, respectively (a valuation allowance was established against the full amount of the net deferred tax benefit of $2,503 and $1,099, respectively). During the three months ended June 30, 2019 and 2018, the Company recognized other comprehensive loss of $3,358 and $962, respectively, and during the six months ended June 30, 2019 and 2018, the Company recognized other comprehensive loss of $5,485 and $962, respectively.

8.  REVENUE

The following table disaggregates net sales by therapeutic categories for the Specialty segment and by product and service distribution channels for the PBM segment:

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Specialty Segment:

Oncology

$

718,081

$

706,291

$

1,404,715

$

1,393,188

Specialty infusion

 

192,156

 

181,250

 

370,604

 

346,967

Immunology

 

140,836

 

142,952

 

276,528

 

278,551

Other

 

164,696

 

203,253

 

332,287

 

368,019

Total Specialty segment

1,215,769

1,233,746

2,384,134

2,386,725

PBM Segment:

Retail networks

57,784

146,127

125,196

291,288

Specialty pharmacy

18,070

23,001

34,167

45,314

Mail order

11,817