CVS Health Reports First Quarter Results; Confirms 2016 Adjusted EPS Guidance

Tuesday, May 3, 2016

WOONSOCKET, R.I., May 3, 2016 /PRNewswire/ --

First Quarter Year-over-year Highlights:

  • Net revenues increased 18.9% to $43.2 billion
  • Operating profit increased 2.0% to $2.2 billion, including the effect of acquisition-related integration costs of $61 million; operating profit increased approximately 5.0% excluding the acquisition-related integration costs
  • Adjusted EPS increased 4.0% to $1.18; GAAP diluted EPS of $1.04
  • Generated free cash flow of $1.8 billion and cash flow from operations of $2.4 billion

2016 Guidance:

  • Confirmed full year Adjusted EPS of $5.73 to $5.88
  • As expected, GAAP diluted EPS is revised, to $5.24 to $5.39 from $5.28 to $5.43, recognizing the impact in the first quarter of the acquisition-related integration costs and a charge related to a disputed 1999 legal settlement
  • Provided second quarter Adjusted EPS guidance of $1.28 to $1.31; GAAP diluted EPS of $1.17 to $1.20; both excluding acquisition-related integration costs
  • Confirmed full year free cash flow of $5.3 to $5.6 billion; cash flow from operations of $7.6 to $7.9 billion

CVS Health Corporation (NYSE: CVS) today announced operating results for the three months ended March 31, 2016.

Revenues

Net revenues for the three months ended March 31, 2016 increased 18.9%, or $6.9 billion, to $43.2 billion, compared to the three months ended March 31, 2015. Revenues in the Pharmacy Services Segment increased 20.5%, or $4.9 billion, to $28.8 billion in the three months ended March31, 2016. The increase was primarily driven by pharmacy network claim volume and growth in specialty pharmacy. Pharmacy network claims processed during the three months ended March 31, 2016 increased 22.6% to 283 million, compared to 231 million in the prior year. The increase in pharmacy network claim volume was primarily due to the growth in net new business. Mail choice claims processed during the three months ended March 31, 2016, increased 6.6%, to 21.7 million, compared to 20.3 million in the prior year. The increase in mail choice claims was primarily driven by the continued adoption of our Maintenance Choice offerings.

Revenues in the Retail/LTC Segment increased 18.6%, or $3.2 billion, to $20.1 billion, in the three months ended March 31, 2016. The increase was primarily driven by the addition of the long-term care ("LTC") operations acquired as part of the acquisition of Omnicare, Inc. ("Omnicare") in August 2015, the addition of the pharmacies and clinics of Target Corporation ("Target") acquired in December 2015 and pharmacy same store sales growth. Same store sales increased 4.2% versus the first quarter of last year. Same store sales were positively affected by approximately 125 basis points due to an additional day in 2016 related to leap year. Pharmacy same store sales rose 5.5% and pharmacy same store prescription volumes rose 5.9% on a 30-day equivalent basis. Pharmacy same store sales were negatively affected by approximately 360 basis points from recent generic drug introductions, and positively affected by approximately 130 basis points from the additional day in 2016 related to leap year. Front store same store sales increased 0.7%. Front store same store sales were negatively affected by softer customer traffic, partially offset by an increase in basket size and the shift of Easter from April in 2015 to March in 2016, which positively affected front store same store sales by approximately 80 basis points. Front store same store sales were also positively affected by approximately 105 basis points from the additional day in 2016 related to leap year.

For the three months ended March 31, 2016, the generic dispensing rate increased approximately 170 basis points to 85.2% in the Pharmacy Services Segment and increased approximately 125 basis points to 85.7% in the Retail/LTC Segment.

Operating Profit

For the three months ended March 31, 2016, consolidated operating profit increased $44 million, or 2.0%. Excluding acquisition-related integration costs of $61 million and a $3 million legal charge related to a disputed 1999 legal settlement, consolidated operating profit increased $108 million, or 5.0%, from $2,132 million for the three months ended March 31, 2015 to $2,240 million for the three months ended March 31, 2016. For the three months ended March 31, 2016, operating profit increased by $48 million, or 6.6%, in the Pharmacy Services Segment and by $50 million, or 2.9%, in the Retail/LTC Segment. Excluding acquisition-related integration costs of $61 million, the Retail/LTC Segment operating profit grew $111 million, or 6.4% from $1,727 million for the three months ended March 31, 2015 to $1,838 million for the three months ended March 31, 2016. Both segments benefited from the Omnicare acquisition and increased generic drugs dispensed. The Pharmacy Services Segment was also positively affected by growth in specialty pharmacy and favorable purchasing economics, partially offset by price compression. The Retail/LTC Segment was also positively affected by increased sales and an improved front store margin rate. These positive factors for the Retail/LTC Segment, along with the benefits from the Omnicare acquisition and generic drugs dispensed, were partially offset by continued reimbursement pressure.

Net Income and Earnings Per Share

Net income for the three months ended March 31, 2016 was $1.1 billion, a decrease of $74 million or 6.1%. The decrease is primarily driven by an increase in interest expense of $149 million and $61 million of acquisition-related integration costs, partially offset by an increase in operating profit. The increase in interest expense is primarily due to the issuance of $15 billion of long-term debt in July 2015 that was used to acquire Omnicare and the pharmacies and clinics of Target, as well as the debt assumed through the acquisition of Omnicare in August 2015.

Adjusted earnings per share ("Adjusted EPS") for the three months ended March 31, 2016 and 2015, was $1.18 and $1.14, respectively. Adjusted EPS excludes $199 million and $129 million of intangible asset amortization for the three months ended March 31, 2016 and 2015, respectively. Adjusted EPS for the three months ended March 31, 2016 also excludes $61 million of acquisition-related integration costs and a $3 million legal charge related to a legacy lawsuit challenging the 1999 settlement by MedPartners of various securities class actions and a related derivative claim. GAAP earnings per diluted share ("GAAP diluted EPS") for the three months ended March 31, 2016 was $1.04, compared to $1.07 in the prior year.

President and Chief Executive Officer Larry Merlo stated, "We posted solid results this quarter and are off to a strong start in 2016. Operating profit in the retail business was in line with our expectations while operating profit in the PBM exceeded our expectations, driven by strong prescription volumes. We also generated $1.8 billion of free cash during the quarter and continued to return value to our shareholders through high-return investments in our business as well as dividends and share repurchases."

Mr. Merlo continued, "Our contract wins have grown for the 2016 PBM selling season and our 2017 season is off to a solid start with some early wins. Our distinctive, channel-agnostic solutions are resonating strongly in the market as they continue to control patient and client costs while improving health outcomes. We continue to believe we have the right strategy for success in the evolving health care marketplace."

Guidance

The Company confirmed its previous Adjusted EPS guidance for the full year 2016. The Company expects to deliver Adjusted EPS of $5.73 to $5.88. The Company revised the GAAP diluted EPS to $5.24 to $5.39 from $5.28 to $5.43 to reflect the impact in the first quarter of acquisition-related integration costs and a charge related to a disputed 1999 legal settlement. When the Company reports subsequent quarters, full-year 2016 GAAP diluted EPS is expected to be revised downward to reflect the impact from future acquisition-related integration costs, which are not currently included in guidance. The Company expects to deliver Adjusted EPS of $1.28 to $1.31 and GAAP diluted EPS of $1.17 to $1.20 in the second quarter of 2016. The Company continues to expect to deliver 2016 free cash flow of $5.3 billion to $5.6 billion and 2016 cash flow from operations of $7.6 billion to $7.9 billion.

Real Estate Program

During the three months ended March 31, 2016, the Company opened 24 new retail stores and closed five retail stores. In addition, the Company relocated 14 retail stores. As of March 31, 2016, the Company operated 9,674 retail stores, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.

Teleconference and Webcast

The Company will be holding a conference call today for the investment community at 8:30 am (ET) to discuss its quarterly results. An audio webcast of the call will be broadcast simultaneously for all interested parties through the Investor Relations section of the CVS Health website at http://investors.cvshealth.com. This webcast will be archived and available on the website for a one-year period following the conference call.

About the Company

CVS Health is a pharmacy innovation company helping people on their path to better health. Through its more than 9,600 retail pharmacies, more than 1,100 walk-in medical clinics, a leading pharmacy benefits manager with nearly 80 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year, and expanding specialty pharmacy services, the Company enables people, businesses and communities to manage health in more affordable and effective ways. This unique integrated model increases access to quality care, delivers better health outcomes and lowers overall health care costs. Find more information about how CVS Health is shaping the future of health at https://www.cvshealth.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q.

Tables Follow

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Income
(Unaudited)

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets
(Unaudited)

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows
(Unaudited)

Adjusted Earnings Per Share
(Unaudited)

The Company is providing non-GAAP information that excludes certain items because of the nature of these items and the impact they have on the analysis of underlying business performance and trends. Management believes that providing this information enhances investors' understanding of the Company's performance. This information should be considered in addition to, but not in lieu of, information prepared in accordance with GAAP.

The following is a reconciliation of income before income tax provision to Adjusted EPS:

Free Cash Flow
(Unaudited)

For internal comparisons, management finds it useful to assess year-over-year cash flow performance using free cash flow.

The Company defines free cash flow as net cash provided by operating activities less net additions to properties and equipment (i.e., additions to property and equipment plus proceeds from sale-leaseback transactions).

The following is a reconciliation of net cash provided by operating activities to free cash flow:

Supplemental Information
(Unaudited)

The Company evaluates its Pharmacy Services Segment and Retail/LTC Segment performance based on net revenue, gross profit and operating profit before the effect of nonrecurring charges and gains and certain intersegment activities. The Company evaluates the performance of its Corporate Segment based on operating expenses before the effect of nonrecurring charges and gains and certain intersegment activities. The following is a reconciliation of the Company's segments to the accompanying condensed consolidated financial statements:

Supplemental Information
(Unaudited)

Pharmacy Services Segment

The following table summarizes the Pharmacy Services Segment's performance for the respective periods:

Supplemental Information
(Unaudited)

Retail/LTC Segment

The following table summarizes the Retail/LTC Segment's performance for the respective periods:

Adjusted Earnings Per Share Guidance
(Unaudited)

The following reconciliation of estimated income before income tax provision to estimated adjusted earnings per share contains forward-looking information. All forward-looking information involves risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking information for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q.

Free Cash Flow Guidance
(Unaudited)

For internal comparisons, management finds it useful to assess year-over-year cash flow performance using free cash flow. The Company defines free cash flow as net cash provided by operating activities less net additions to properties and equipment (i.e., additions to property and equipment plus proceeds from sale-leaseback transactions). The following reconciliation of net cash provided by operating activities to free cash flow contains forward-looking information. All forward-looking information involves risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking information for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q.

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SOURCE CVS Health Corporation