PharMerica Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 8.13 | About: PharMerica Corporation (PMC)

PharMerica (NYSE:PMC)

Q4 2012 Earnings Call

February 08, 2013 10:00 am ET

Executives

Dennis Humble

Gregory S. Weishar - Chief Executive Officer, President and Director

Michael J. Culotta - Chief Financial Officer and Executive Vice President

Analysts

Glen J. Santangelo - Crédit Suisse AG, Research Division

Brendan Strong - Barclays Capital, Research Division

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Michael John Petusky - Noble Financial Group, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 PharMerica Corporation Earnings Conference Call. My name is Matthew, and I will be your operator for today. [Operator Instructions] We will conduct a question-and-answer session toward the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I'd like to turn the call over to Mr. Dennis Humble, Vice President, Finance. Please proceed, sir.

Dennis Humble

Thank you, Matthew. Good morning, and thank you for joining us for the fourth quarter and year end conference call. On the call with me today are Greg Weishar, Chief Executive Officer; Mike Culotta, Executive Vice President and Chief Financial Officer; and Berard Tomassetti, Senior Vice President and Chief Accounting Officer.

Before beginning our remarks regarding the fourth quarter and year end results, I would like to make a cautionary statement. During the call today, we will make forward-looking statements about our business prospects and financial expectations. We want to remind you that there are many risks and uncertainties that could cause our actual results to differ materially from our current expectations.

In addition to the risks and uncertainties discussed in yesterday's press release and in the comments made during this conference call, more detailed information about additional risks and uncertainties may be found on our SEC filings, including our annual report on Form 10-K. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. PharMerica assumes no obligation to update the matters discussed on this call.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release and in our Form 10-K. We have made available to you our press release and our 10-K filed with the SEC. In addition, this webcast will be on our website, along with a transcript from this call.

And now, I would like to turn the presentation over to Greg.

Gregory S. Weishar

Thanks, Dennis. Welcome, everyone. We appreciate your attendance. Trust there were no surprises in the results released last night. For the fourth quarter and year end, Mike will discuss guidance later. But from an operations viewpoint, we continue to focus on the company's 3 core strategies: organic growth through outstanding customer and client service, capturing scale to enhance operating margins and disciplined acquisitions to increase market share. We made substantial progress in all 3 of these areas in 2012, and I'm optimistic this will translate into overall growth.

The company's conversion to a consolidated operating platform continues to yield benefit. We are seeing consistent service across all pharmacies, and core pharmacy service improves daily. Better service translates into better client retention, and we're seeing this. Service-related bed losses continued to decline in 2012, and we saw a 39% improvement as compared to 2011.

With the continued rollout of new products and services throughout 2012 and with the new sales and client retention team in place, we anticipate further progress in sales and client retention in 2013. We will continue to invest in customer-centric technologies that drive superior service, and we are betting that as we differentiate PharMerica's service platform, we will strengthen our market presence.

Now let me discuss scale. Purchasing is a key area where we can drive scale. As you know, we are one of the largest purchasers of generics in the industry. We recently amended and extended the prime vendor agreement with AmerisourceBergen and achieved the goals we set out to accomplish in our negotiations, namely: improved purchasing terms and greater purchasing flexibility. With the freedom to buy on a direct basis, we will develop a direct purchasing program primarily focused on generic drugs, and we anticipate seeing the fruits of that effort in 2014.

Generic dispensing now stands at about 85% for skilled nursing facilities. As we have indicated in the past, increased generic utilization benefits the company and our clients. For PharMerica, generics positively impact margins. We finished the year with the highest quarterly EBITDA and gross margin in the company's history. Fourth quarter EBITDA margin of 6.3% represents an increase of 70 basis points versus 2011 fourth quarter. For the year, we ended a full 100 basis points higher as compared to 2011. From a gross margin perspective, the fourth quarter institutional gross margin of 17.6% represents an increase of 210 basis points over the fourth quarter of 2011. For the year, we ended 230 basis points higher as compared to 2011.

From the client's viewpoint, it's a win as well. Increased generic usage had resulted in continued declines in pharmacy costs. They are seeing measurable savings year-over-year. This is best evidenced by the fact that their cost per prescription declined by more than 7% in 2012 versus 2011.

Let me move to acquisitions. During the quarter, we acquired Amerita Inc., a specialty infusion services provider that operates in 12 states. Amerita expands our product line into the home. We view this as significant. As the health care landscape transforms, the Amerita acquisition supports the efforts of our long-term care clients to serve the noninstitutional senior market. We are confident we can leverage existing pharmacy services to drive Amerita's business and provide complementary services to our existing clients. Amerita will be accretive to earnings in 2013. And we will seek acquisitions in the home infusion market, as well as continue to seek acquisitions in the LTC market.

So with that, I'll turn it over to Mike, who will walk you through the financials.

Michael J. Culotta

Thank you, Greg, and good morning. Let's spend a few minutes on the results of operations. Please note PharMerica's 10-K contains 3 sections in the MD&A. The first section is based on 2012's fiscal year results compared to the historical fiscal year of 2011. This section also includes the 2011 and 2010 comparisons. The other sections of MD&A are comparisons of the fourth quarter of 2012 to the fourth quarter of 2011 and comparisons of fourth quarter 2012 to the third quarter of 2012, a sequential quarter comparison. We will, for discussion purposes, concentrate predominantly on quarterly results and comparisons.

Let's now discuss company's revenue trends and metrics. Fourth quarter revenues were $433.2 million. This is a decrease of $62.4 million from the fourth quarter of 2011 and a decrease of $8.8 million from the sequential third quarter. Prescription dispensed were 9,537,000 this quarter compared to 9,944,000 in the fourth quarter of 2011 and 9,711,000 in the third quarter of 2012. Customer-licensed beds under contract at the end of the quarter were 307,008. Net bed losses were 13,001 compared to net bed losses of 12,227 beds in the fourth quarter of 2011 and net bed losses of 3,515 in the sequential third quarter. During the fourth quarter, we lost 4,923 beds due to Hurricane Sandy, and 3,519 beds from Golden Living. Net bed losses, exclusive of Golden Living and Hurricane Sandy, were 4,559 for the quarter. Factoring out these 2 items, our retention rate was 97%. Remember we were impacted by the tender offer in the fourth quarter of 2011.

Institutional pharmacy revenues per script were $43.31 this quarter compared to $48.27 and $43.89 for the fourth quarter of 2011 and third quarter of 2012, respectively. The decrease in revenue per script of $4.96 from the fourth quarter of 2011 as a result of the newly introduced generics and the impact of reduced generic reimbursement offset by brand inflation. The generic dispensing rate for the quarter was 84.8% compared to 80% for the fourth quarter of 2011 and 84.4% for the third quarter of 2012.

Let's discuss cost of goods sold and gross margin. Institutional pharmacy cost of goods sold decreased $65.2 million compared to the fourth quarter of 2011 and was due to the decrease in the number of prescription dispensed and the 480 basis points increase in generic dispensing rate. The lower institutional pharmacy cost of goods sold of $11.5 million from the third quarter of 2012 was due primarily to the decrease in the number of prescription dispensed and the 40 basis points increase in generic drug dispensing rate. Total drug costs as a percent of revenue decreased 432 basis points on a fourth quarter 2011 comparison and 58 basis points on a sequential quarter comparison.

Institutional gross profit was $72.6 million or $7.61 per prescription dispensed compared to $74.4 million or $7.48 per prescription dispensed in the fourth quarter of 2011 and $74.3 million or $7.65 per prescription dispensed in the third quarter of 2012. Gross profit continue to benefit from higher margins on certain brand name drugs, which recently went generic.

Selling, general and administrative expenses includes functions, such as pharmacy, regional and operations management, IT, billing and collections function, legal, HR, finance and others. It also includes certain costs, such as provision for doubtful accounts. SG&A costs were $52.9 million or 12.2% of revenues for the fourth quarter of 2012 compared to $53.8 million or 10.9% of revenues in the fourth quarter of 2011 and $54.5 million or 12.3% of revenues for the third quarter of 2012. The decline in SG&A was due to an increase in collections on older receivables and lower legal fees. Provisions for doubtful accounts were as follows: $5.5 million or 1.3% of revenues this quarter, $7.2 million or 1.5% of revenues in the fourth quarter of 2011 and $7.3 million or 1.7% of revenues in the third quarter of 2012. Again, the decline in the provision for doubtful accounts was due to collections on aged receivables. You can see this improvement in the quarterly cash flow statement in the 10-K.

The company's adjusted EBITDA this quarter was $27.4 million compared to $27.6 million and $26.2 million in the fourth quarter of 2011 and third quarter of 2012, respectively. The company's adjusted EBITDA margin this quarter was 6.3% compared to 5.6% and 5.9% in the fourth quarter of 2011 and third quarter of 2012, respectively. This is exclusive of the merger acquisition integration costs and other charges and Hurricane Sandy disaster costs.

As Greg mentioned earlier, the adjusted EBITDA margin of 6.3% in the fourth quarter of 2012 is the highest margin ever achieved by the company. As you are aware, we did incur damages from Hurricane Sandy in our Chem Rx pharmacy on Long Island. It was fully operational in late November. As of December 31, 2012, we incurred costs associated with the damage to be $6.9 million. We have received or have been approved to receive $2.4 million from the insurance carrier. Of the $6.9 million incurred in the fourth quarter, $1.4 million represented excess operating cost based on post-Sandy volumes compared to pre-Sandy and $1 million representing additional bad debts and contractuals due to customer losses related to businesses that may not be financially viable post-Sandy. We estimate that through December 31, 2012, we were down approximately 171,000 scripts or $8.6 million in lost revenues or $1.2 million lost profits due to business interruption. Through today, our estimated claims will exceed $9 million.

GAAP diluted earnings per share for the quarter were $0.12. Excluding the merger, acquisition, integration costs and other charges, Hurricane Sandy disaster cost and tax-related matters, the company's adjusted diluted earnings per share for the quarter were $0.33 compared to $0.35 in the fourth quarter of 2011 and $0.33 in the third quarter of 2012.

Turning to the balance sheet and cash flows. The company's DSOs were 44.1 days compared to 42.8 days in the fourth quarter of 2011 and 44.1 days in the third quarter of 2012. We continually evaluate the net realizable value of the company's receivables and the client payment patterns. Cash flows used in operations for the quarter were $17.5 million. And the cash balance at December 31, 2012, was $12.3 million. The cash flows used in operations were all related to strategic inventory purchasing and payment on taxes. Cash flows from operations for the fourth quarter of 2011 were $14.5 million and for the sequential third quarter were $51.4 million. On a 12-month basis, cash flows from operations were $85.7 million compared to $26.8 million a year ago.

We have provided our 2013 guidance. We would like to point out that we are redefining our adjusted EBITDA and adjusted diluted earnings per share. In addition to adding back net income, interest expense, provision for income taxes, depreciation expense, amortization expense, the impact of Hurricane Sandy disaster costs, merger acquisition integration costs and other charges and impairment of intangibles, we will also be adding back the noncash impact of stock based and deferred compensation. We believe this new definition of adjusted EBITDA reflects a better measurement of overall operational performance. In addition, we will also redefine our adjusted EBITDA earnings per share to be consistent with adjusted EBITDA. The adjusted diluted earnings per share will be exclusive of the impact of merger, acquisition, integration costs and other charges, Hurricane Sandy disaster costs, impairment of intangible costs, noncash stock based and deferred compensation and tax accounting matters. We have included supplemental information on our press release, which calculates the quarterly amounts and reconciles to our old definition.

So with that, our 2013 guidance is as follows: We estimate revenues to be between $1,567,000,000 and $1,694,000,000. Our 2013 adjusted EBITDA guidance range, as redefined, is $113.2 million to $121.2 million. Our estimate for stock based and deferred compensation, which is not included in adjusted EBITDA, is $7.2 million. If you are comparing to the old definition, you would subtract the $7.2 million from the above adjusted EBITDA range previously mentioned.

Depreciation and amortization expense is estimated to be approximately $32 million. Interest expense is estimated to be approximately $11.8 million. Our tax rate is expected to be approximately 40.1%. Our net income range is expected to be between $37.3 million and $42 million. Our adjusted diluted earnings per share range, under the new definition, is $1.39 to $1.55.

Note that impact on stock based and deferred compensation is $0.14. If you are comparing to the old definition, you would subtract the $0.14 from the above adjusted diluted earnings per share range previously mentioned.

As a reminder, it is the company's policy to only update guidance in the quarterly press releases. Also effective January 1, 2013, the company will be reporting bed months in our statistic as a replacement of customer-licensed beds. Bed month would be more in line with revenue trends. So for example, if we are servicing the beds of a customer, each bed would represent 3 bed months for a quarter and 12 bed months for a year.

We will file an 8-K to disclose these previous periods as we near our first quarter earnings release. Greg?

Gregory S. Weishar

Thanks, Mike. Before we go to Q&A, let me get on a few items. Recall the requirement to dispense prescriptions for 14 days or less for certain brand drugs as required under the Affordable Care Act, the short cycle dispensing mandate as it's called, went into effect on January 1 of this year. And we're in full compliance with this requirement. Overall, the net financial effect of this mandate will be minimal, given we were able to offset additional dispensing costs through contractual adjustments with the Medicare Part D programs.

We previously discussed this, Golden Living has been transitioning their pharmacy business to an in-house pharmacy. In our plan this year, we anticipate substantial loss of the Golden business. I want to assure everyone there's minimal risk in our guidance, to our guidance related to the Golden business, as we have factored in a conservative view of the Golden losses.

Also recall that in April of last year 2012, Kindred announced they would be exiting approximately 50 nursing facilities. We remain optimistic we can retain a portion of this business as it transitions to the new operators. However, we know we're going to lose some of that business, but it's still too early to estimate the final tally. Again, I want to assure everyone there is minimal risk to the guidance related to Kindred in our budget as well and our guidance as well.

Finally, it wouldn't be a quarterly earnings call if I didn't discuss AMP. Based on the most recent posting at the White House Office of Management and Budget, the current thinking is the final AMP rule may come out in August of 2013. I'm not sure I believe that, but that's what we're being told. For those of you who have been following this, it's been a long road. At the point we are in right now, we're just going to have to wait and see how this unfolds. We always felt this could be a positive for the industry. But as we look at it today, it probably will be something of a neutral effect on our business.

So on summary, we're making progress. We believe we're heading in the right direction, and we're optimistic that we'll show further improvement in 2013.

So with that, I'll turn it over to our operator for Q&A to begin. Q&A. Matthew?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Glen Santangelo from Credit Suisse.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Greg, just want to talk to you about Golden Living. Obviously, they're transitioning to an in-house pharmacy. I think everyone's aware of that. Are you seeing this trend anywhere else in the industry? Are any of the other major players sort of considering a move like this? And then if you can kind of update us on the Kindred contract, I know you guys were in discussions. Is there any sort of commentary you can provide there?

Gregory S. Weishar

Let's first talk about the movement that the Golden is moving towards Alixa, their in-house pharmacy. There has been folks moving in and out of the pharmacy business for as long as, I think, most of us have been in this business. And there has been that constant roll sometimes -- we've bought some of those captive pharmacies over the years. Typically they'll operate for a couple of years and then recognize it as very difficult to sustain their business because of service levels and so forth. It's a very difficult business, but we'll see them come in and come out of the market. I don't know that it's accelerating or decelerating. It seems to come in cycles, and I know there's clearly a lot of interest right now given the challenging nature of the nursing home industry. But I'm not sitting here thinking that it's a major trend that it's going to envelop the whole industry because we've seen it in the past, and we'll see it in the future. But it's only a certain number of operators that could even attempt to do it. So we'll see some of it, but we don't think it's anything to get overly concerned about at this moment. As far as the Kindred contract, I think it's inappropriate for me to be talking about that at this moment in time.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Okay. Maybe if I can just ask one follow-up then on your new prime vendor agreement. It's my understanding in the contract that it gives you greater flexibility to purchase generics on your own, which you maybe weren't doing so previously. And I'm kind of curious, I mean, do you have any type of infrastructure in place currently to be able to purchase generics on your own? And if not, what will it take to kind of put that infrastructure in place? And over time, what percentage of the generic drugs you think you can actually purchase yourself?

Gregory S. Weishar

Well, I think, first of all, the infrastructure question is one we considered, one we understand and one we're beginning to process now that we've got the contract in place that we can execute on a direct purchasing program. We believe we can build that over the next year. So I mentioned in my comments, we think we're going to see the fruit of that labor some time in 2014. We're not going to see it this year. So that's -- more to come on that. We will not be making large capital investments in building infrastructure. There's a lot of opportunities to lease infrastructure and to outsource some of the infrastructure required to warehouse certain drugs and so forth. But we're confident that we can make that happen. As to how far we go with our direct purchasing, we do -- I think that's just yet to be determined. So I'll just leave it at that. I think at some point, we think we can buy 50% or more. But we'll wait and see what the market opportunity is there, and so, it's too early to speculate on that.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Well, Greg, what I was driving at is just really trying to gauge -- I mean in your mind, do you really think that $35 million to $40 million opportunity that you laid out a couple of quarters ago, is that still a realistic opportunity over time?

Gregory S. Weishar

Yes, it is.

Operator

Your next question comes from the line of Brendan Strong from Barclays.

Brendan Strong - Barclays Capital, Research Division

I mean, I guess my first question is somewhat similar to Glen's. On the infrastructure build-out to be able to buy generics directly, I'm just curious, not on the capital side, but on the operating cost side. Are there any material expenses that you'll be incurring this year that are dragged this year, but that will be made up for once you get out in 2014 and you're able to buy those drugs directly?

Gregory S. Weishar

I wouldn't call them material. There are some expenses that we'll incur and we have in our budget, but I don't think they rise to the level of materiality that you might be thinking of. So this is hiring people, who have the expertise, which we already begun the process of. And then it's using strategic partners, if you will, to help us get to where we want to get to, which is to engage manufacturers on a direct basis and it's not -- there's a significant infrastructure in the industry to support our efforts there. That's the good news.

Brendan Strong - Barclays Capital, Research Division

Okay. And then, I mean Golden, obviously, has been insourcing some of their business already. Can you give us -- and I know your guidance assumes that you're going to lose it. Can you just give us some sense for how much of that business you think you've already lost, just so I could have a sense for how to model it?

Gregory S. Weishar

I think -- I'm not sure that I'm prepared to talk about that right now, but let's just say that we've lost roughly 25% of it.

Brendan Strong - Barclays Capital, Research Division

Okay, perfect. Okay, and then it's somewhat of a related point. I don't know if, Greg, you want to comment on it; or if Mike, you want to comment on it. But I'm just thinking about -- I know you provide guidance for the year, you don't provide quarterly guidance. But this year, it seems like there's the potential for earnings to be maybe weighted differently than prior years. How are you thinking about that? I mean are you thinking earnings are going to be much more heavily weighted to the first half of the year because an assumption that the Golden contract is lost? Or does the price concessions or contracts flexibility in your new prime vendor agreement more than make up for that in the back half of the year?

Gregory S. Weishar

I'll answer that. To answer your question is when you look at the Golden beds, we're forecasting those -- as we've said before, we have stated that before, that those beds will go away over a period of time during the first 9 months of the year. So to answer your question, yes, there is a little bit of a waiting there in terms of the quarters relating to that. The contract with ABC, the way it relates to -- we are getting some concessions, some positive pickups in the first part of the year and then again starting in September. So you do have a little bit -- or starting in October. So you do have some pickup relating to that in the fourth quarter. So by and large, I would say most of that when you take everything in consideration, should be fairly level.

Brendan Strong - Barclays Capital, Research Division

Okay, and then just last question, how are you thinking about generic revenue per script? And again, I know you don't break it out that way. But are you thinking that generic revenue per script will come down by some sizable amount in '13 over '12?

Gregory S. Weishar

Yes.

Brendan Strong - Barclays Capital, Research Division

Any sense for what that percentage might look like?

Gregory S. Weishar

I mean from a standpoint, we continue to see -- you still have the branch generic conversion. You have some of those that were later in 2012 that are still impacting, and you're still getting some prices. So when you take a look at it, for example, last year, roughly in 2012, and we said at the beginning of the year, you're looking at last year in 2012 about $200 million, $250 million just in reduction in revenues from brand to generic, but you saw the gross profit going on. You're probably still going to see some decline, but not as heavy as that. You're probably looking at maybe $100 million, $125 million in terms of that cycle. So again, it's really hard to describe to people, and Greg said it over and over again before is you almost have to look at a gross profit number as opposed to a revenue number, particularly, as you see these brand to generic conversions taking place.

Operator

Our next question comes from the line of Ben Hendrix from RBC Capital Markets.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

It's Frank Morgan here. Just a question, other than the generic buy that you will be picking up, are there any other longer-term savings or benefits that we could see out of the newly negotiated prime vendor agreement in 2014?

Gregory S. Weishar

Other than the ability for us to drive generic purchasing, there is clearly, across the board, we've seen our terms improve, Frank. So to the extent that we were buying brands better as a result of that contract, we'll see a little bit of that. Nothing major but there is some improvement there.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Okay. And then secondly, implied in your guidance there, what is the assumption regarding the return on any of those beds related to Sandy?

Gregory S. Weishar

The ones that we said we lost, Frank? Is that what you're saying?

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Yes.

Gregory S. Weishar

The ones we had picked for losses there are basically ones that are shut down. They're nursing homes or mental homes that have not reopened, and we have no indications that they might reopen under that existing management at this point. We have others that are temporarily shut down that aren't included in that number that we know we'll be coming back, so we did not include it. But we took the position that because of the damage done to those homes, and at this point in time, we don't have any indication that they might return under that existing structure that they have.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Okay, so back to Brendan's point about kind of the progression through the year. I guess there's an implied assumption that those that you think will return to those kind of like, pro rata rollback in over the rest of this year or is it -- any kind of timing consideration there when those come back on board?

Michael J. Culotta

No. They're starting to come back on during the first and second quarter.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Okay, and then final, and I'll hop off. What's the competitive environment looking like out for acquisitions like your Ameritas in the infusion space? You think you'll be able to pull off any more of those this year?

Gregory S. Weishar

We've owned this company now 1.5 months. We went into the acquisition with the idea that we're going to buy additional properties. We know that the space is exceedingly hot right now, but we do believe there's going to be some add-on acquisitions that we'll be able to complete in 2013.

Operator

Your next question comes from the line of Steven Valiquette of UBS.

Steven Valiquette - UBS Investment Bank, Research Division

So it seemed the revenue guidance came in a little bit lower than the Street views for '13, and then can you discuss the impact of generics and Golden Living? I'm just curious is there any color, just on the overall bed count assumptions you have within the '13 guidance or even just overall prescription volume growth or decline. Any color on that would be helpful.

Gregory S. Weishar

I think it's well understood that we have challenges with bed growth given what we have in front of us with the Golden piece. But that said, I think we're comfortable that if we take away some of the uncertainties around Golden, some of the uncertainties around Chem Rx and some of the uncertainties around Kindred that we're going to have net organic growth with the remaining books of those businesses. So I think we have some headwinds, there's no about doubt about it, but we're optimistic that going forward, we're looking pretty good.

Steven Valiquette - UBS Investment Bank, Research Division

Okay, and then with the new EPS calculation methodology, just curious what led you to want to strip out the stock comp expense out of the P&L versus other noncash items that you could theoretically strip out like intangible asset amortization or other things. Just curious kind of what your thought pattern was around that?

Gregory S. Weishar

Well, it was sort of -- Steven, it was sort of a couple of items. One is, yes, you're right. It's a noncash item that's hitting our expense. And the other item is when you get into the details of it, some of the expense that we've been hit with is, for example, some of our option expense, the large amount of our options are not in the money, and some of those may some time expire. So when you take a look at it, we just felt like we were sort of hurting ourselves and hurting the valuation of the company by putting in some expenses that "may not materialize," so to speak, when you look at it. So for example, in an option, you've got to run the Black Scholes formula. So some of those options were expensing from the standpoint each option is probably anywhere from $5 to $8 that's being expensed.

Steven Valiquette - UBS Investment Bank, Research Division

Okay. And just one last, real quick one here. You kind of touched on this, but in relation to the revised ABC agreement. I think over the past couple of weeks, you alluded to the fact there might be a couple of different step-downs in price at different time points, maybe one in early '13, one later in '13. And to the extent that's correct, then is there any color on which one of those will be providing greater benefit to the P&L? I know you kind of touched on that earlier. But I just wanted to see if there's one that's materially more beneficial to you versus the other one when we think about those two different potential step-downs in price?

Gregory S. Weishar

Well, remember when we talked about the $30 million or $40 million, it was going to be over 18 to 24 months. So again, as there's more flexibility, and we're doing more direct purchasing with the generics that becomes a greater number.

Operator

Your next question comes from the line of Robert Willoughby of Bank of America Merrill Lynch.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Mike, would you hazard cash flow and capital expenditure guidance for this year? And then maybe a second question, any realistic deal spend that your model and credit facilities would reasonably support in 2013?

Michael J. Culotta

Okay, let me -- the cash flow, Bob, is roughly -- the free cash flow, if I'm not mistaken, is right around, probably about $50 million. CapEx is probably going to be between $25 million and $30 million maintenance CapEx, it's not acquisitions. And then relating to your second question, we still have flexibility under our revolver today. We're probably somewhere in the $35 million, $40 million range in terms into that revolver. So we still have $150 million, $160 million on that, plus we still have $100 million that we can also get in terms of an accordion feature.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

So a reasonable deal spend for the year in $100 million range. Does that sound believable?

Michael J. Culotta

We'd like very much so to be able to do that. It just depends on what's out there and what opportunities, if not higher than that.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay, and then just philosophically, Mike, you mentioned that the new adjusted EBITDA calculation. I mean the value of the company was hit with the issuance of the options not their continuing existence, in my view. Is the board exploring other vehicles of compensation for management to maybe prevent some of that dilution in earnings going forward?

Michael J. Culotta

Well, they have some -- they had done a couple of years ago where we shifted a little bit more to restricted stock, although that's lower number as opposed to the number of options outstanding. So we have shifted a little bit over into that category. But still, we still have the performance shares and all that are in there also, from that standpoint.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

But looking forward, status quo then in terms of how you compensate senior management?

Michael J. Culotta

It would be mostly with restricted stocks and performance shares.

Operator

Your next question comes from the line of Charles Rhyee of Cowen and Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

Greg, I think you mentioned or maybe it was Mike that if you net out sort of the losses from the hurricane as well as the Golden Living beds, the retention rate was 97%. Can you talk about that a little but more? And where are we in terms of sort of restructuring the selling operations and the internal service organization, and how do you feel about that progress?

Gregory S. Weishar

I think in my comments I indicated I'm very -- feeling better about that than I have in a while. And I think we've seen sequential progress with regards to our service. We started turning the corner really not last year, but the year before in terms of getting traction with regards to how we're servicing our customers and our clients. We've brought in new leadership in the sales and service arena, which I think is going to make us better. If you think about retention historically, has been a problem that we've had was where we just say, have 100 pharmacies as an example. We may have 20 of those that are really running poorly, 20 of them that are running not so good, 20 of them that are kind of middle of the road, 20 of them that are really running well. And that was the operating model that kind of existed in the industry when we walked in and put this company together back in 2007. And generally, people have accepted that. And the problem was, is that you were always losing business to service. And you have 20 or 30 pharmacies that aren't doing a good job, you're going to lose business. And so, we bit the bullet, as you all know, back in 2008 and took us 2 or 3 years to consolidate not just the operating platform, but the way we manage the business, the way we look at service. And we went through some very difficult times. In 2010, we started seeing daylight. In 2011, we turned the corner clearly. And 2012, we've seen even -- and now we're starting to really see the results in our numbers with regards to retention. And there's always going to be the one-off things like we're seeing here today, but this is what we can manage. And we're really happy that we're starting to see the results of better service, and we think we can get a lot better. So I hope that addresses your issue or your question.

Charles Rhyee - Cowen and Company, LLC, Research Division

It does. Maybe if I can follow-up on that. And it sounds things are going better. But at the end of the day, skilled nursing is a tough business. The volumes, the market itself is not really growing, specifically, in nursing homes. It was fair to think that the acquisition of Amerita here is to really branch out away from that. And is it right to think that the growth of the company is going to come from other areas other than skilled nursing at that end of the market? Even if you get things turned around, how fast can that business grow for you? And is it better to think that we should be looking for growth in other, maybe not true verticals, but in related parts of the market?

Gregory S. Weishar

Yes, I think you should be. Clearly, we're committed to diversifying our revenue streams. We did not want to stray away from pharmacy business. We're not going to be getting into medical imaging or something like that. That's not our business model. But we're going to be looking to grow our infusion business. We're going to be looking for opportunities in other specialty spaces, where we believe that we can leverage our existing assets. And then we're going to stay committed to the long-term care space as well because we think over time, some of these concerns that we see in the market today will soften. There's still 40-plus percent market share out there from competitors other than the top 2 of us. And so we think there's -- if we can take market share out of that pool, we're going to be in good shape.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay, and then maybe one last question on Amerita then. Can you -- I know you talked about a little earlier, but can you just talk maybe more about, what does the competitive landscape look like in home infusion right now? Are there -- who are the big players as you kind of move into the space?

Gregory S. Weishar

There's really 3 players that stand out. I would say there are over 500 million, if you want to look at it from that perspective. One would be Bioscrypt. They're going to be close to that. The other would be Coram, which is part of the Apria transaction. And the third one would be Option Care, I think it's called, Walgreens infusion services today, which -- Walgreens has got a large presence as well. So those 3 would represent the top 3, I think, in the industry. But yet, they represent probably less than 10% of the overall market. So it's a very, very fragmented market. And there's a lot of change going on in the industry, and we believe that we're very optimistic that we can grow that business.

Charles Rhyee - Cowen and Company, LLC, Research Division

Is home infusion -- I'm sorry, one last question about reimbursement for home infusion. Is that controlled by CMS as well? And how is that kind of reimbursement trended in that part of the market?

Gregory S. Weishar

Yes, it's -- well there is -- a part of it is Medicare Part B, but large portion of their business is dealing with commercial payers directly, Medicare Advantage programs and things like that, not necessarily directly from CMS, if you will.

Operator

[Operator Instructions] We have a question here from Mike Petusky from Noble Financial.

Michael John Petusky - Noble Financial Group, Inc., Research Division

Yes, just real quick, Mike, and if you mentioned this earlier, forgive me. But how are you guys going to break out infusion going forward? Is that going to be segmented, or is that going to be part of a kind of a hospital, pharmacy and other category? How are you going to break that out?

Michael J. Culotta

Right now, we've got it as hospital and other. We'll just have to take a look at it and see the materiality of it going forward.

Operator

I'll now like to turn the call over to Mr. Greg Weishar for the closing remarks.

Gregory S. Weishar

Nothing more here. Just thanks again for attending our call today. Hopefully, you'll evade the bad weather that's coming in the East, for those of you that are out there. And thanks again for your interest in our company. Bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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