CVS Health Reports Record First Quarter Results

Friday, May 1, 2015

WOONSOCKET, R.I.May 1, 2015 /PRNewswire/ -- 

First Quarter Year-over-year Highlights:
  • Net revenues increased 11.1% to $36.3 billion

  • Operating profit increased 5.3% to $2.1 billion

  • Adjusted EPS of $1.14, an increase of 12.2%; GAAP diluted EPS from continuing operations of $1.07

  • Generated free cash flow of approximately $1.6 billion; cash flow from operations of approximately $2.0 billion

2015 Guidance:

  • Full year Adjusted EPS narrowed to $5.08 to $5.19; GAAP diluted EPS from continuing operations narrowed to $4.80 to $4.91

  • Provided second quarter Adjusted EPS guidance of $1.17 to $1.20 and GAAP diluted EPS from continuing operations guidance of $1.10 to $1.13

  • Confirmed full year free cash flow of $5.9 to $6.2 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, 2015.

Revenues

Net revenues for the three months ended March 31, 2015, increased 11.1%, or $3.6 billion, to $36.3 billion compared to the three months ended March 31, 2014.

Revenues in the Pharmacy Services Segment increased 18.2%, or $3.7 billion, to $23.9 billion in the three months ended March 31, 2015. The increase was primarily driven by growth in specialty pharmacy and pharmacy network claims. Pharmacy network claims processed during the three months ended March 31, 2015, increased 11.0% to 230.8 million compared to 208.0 million in the prior year. The increase in the pharmacy network claim volume was primarily due to net new business as well as growth in Managed Medicaid and public exchanges. Mail choice claims processed during the three months ended March 31, 2015, increased 2.7% to 20.3 million, compared to 19.8 million in the prior year. The increase in mail choice claims was driven by specialty claim volume and increased claims associated with the continued adoption of our Maintenance Choice® offerings.

Revenues in the Retail Pharmacy Segment increased 2.9%, or $471 million, to $17.0 billion in the three months ended March 31, 2015. Same store sales increased 1.2% over the first quarter of last year, with pharmacy same store sales up 4.2% and front store same store sales down 6.1%. On a comparable basis, front store same store sales would have been approximately 800 basis points higher if tobacco and the estimated associated basket sales were excluded from the three months ended March 31, 2014. Front stores same store sales were impacted by softer customer traffic, partially offset by an increase in basket size. Pharmacy same store prescription volumes rose 5.1% on a 30-day equivalent basis, partially driven by strong seasonal volume. Pharmacy same store sales were negatively impacted by approximately 280 basis points from recent generic drug introductions and by approximately 190 basis points from the implementation of Specialty Connect®. The implementation of Specialty Connect had a greater effect on revenues than prescription volumes due to the higher dollar value of specialty products.

For the three months ended March 31, 2015, the generic dispensing rate increased approximately 150 basis points from the prior year in both segments, rising to 83.5% in the Pharmacy Services Segment and 84.4% in the Retail Pharmacy Segment.

Net Income

Net income for the three months ended March 31, 2015, increased 8.1%, or $92 million, to $1.2 billion, compared with approximately$1.1 billion during the three months ended March 31, 2014. The Pharmacy Services and Retail Pharmacy segments both benefited from the impact of increased generic drugs dispensed. The Pharmacy Services Segment was positively impacted by growth in specialty pharmacy as well as favorable purchasing and rebate economics, partially offset by price compression. The Retail Pharmacy Segment was positively impacted by increased sales, an improved front store margin rate largely driven by the removal of tobacco products and favorable purchasing economics, partially offset by reimbursement pressure. Adjusted earnings per share (Adjusted EPS) for the three months ended March 31, 2015 and 2014, was $1.14 and $1.02, respectively, an increase of 12.2%. Adjusted EPS in the three months ended March 31, excludes $129 million and $131 million in 2015 and 2014, respectively, of intangible asset amortization related to acquisition activity. GAAP earnings per diluted share for the three months ended March 31, 2015 and 2014, was $1.07 and $0.95, respectively, an increase of 12.7%.

President and Chief Executive Officer Larry Merlo stated, "We delivered better-than-expected results this quarter, primarily driven by stronger-than-expected prescription volumes as well as favorable purchasing and rebate economics in the PBM.  Adjusted EPS increased 12.2%, to $1.14five cents above the high end of our guidance range, with operating profit in the retail business in line with our expectations and operating profit in the PBM exceeding our expectations.  We also generated approximately $1.6 billion in free cash flow, and we continued to return significant value to our shareholders through our disciplined capital allocation practices."

Mr. Merlo continued, "We are already off to a solid start in the 2016 PBM selling season. Our integrated model allows us to provide differentiated products and services that generate savings for our clients while providing better health outcomes and convenience for patients. We remain very well positioned with our distinctive, channel-agnostic solutions, which are resonating strongly in the marketplace."

Guidance

The Company raised the low end of its EPS guidance range for the full year 2015. The Company now expects to deliver Adjusted EPS of $5.08 to $5.19, up from $5.05 to $5.19, and GAAP diluted EPS from continuing operations of $4.80 to $4.91, up from $4.77 to $4.91 in 2015. The Company also continues to expect to deliver 2015 free cash flow of $5.9 billion to $6.2 billion, and 2015 cash flow from operations of $7.6 billion to $7.9 billion. The Company expects to deliver Adjusted EPS of $1.17 to $1.20 and GAAP diluted EPS from continuing operations of $1.10 to $1.13 in the second quarter of 2015.

Real Estate Program

During the three months ended March 31, 2015, the Company opened 38 new retail drugstores and closed 10 retail drugstores. In addition, the Company relocated 12 retail drugstores. As of March 31, 2015, the Company operated 8,006 locations in 47 states, theDistrict of ColumbiaPuerto Rico and Brazil. These locations included 7,850 retail drugstores, 17 onsite pharmacies, 24 retail specialty pharmacy stores, 11 specialty mail order pharmacies, four mail service dispensing pharmacies, and 86 branches for infusion and enteral services, including approximately 70 ambulatory infusion suites and six centers of excellence.

Teleconference and Webcast

The Company will be holding a conference call today for the investment community at 8:30 am (EDT) 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 7,800 retail drugstores, nearly 1,000 walk-in medical clinics, a leading pharmacy benefits manager with more than 70 million plan members, and expanding specialty pharmacy services, the Company enables people, businesses and communities to manage health in more affordable, 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 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)

Three Months Ended

March 31,

In millions, except per share amounts

2015

2014

Net revenues

$

36,332

$

32,689

Cost of revenues

30,168

26,747

Gross profit

6,164

5,942

Operating expenses

4,032

3,918

Operating profit

2,132

2,024

Interest expense, net

134

158

Income before income tax provision

1,998

1,866

Income tax provision

777

737

Net income

$

1,221

$

1,129

Net income per share:

Basic

$

1.08

$

0.96

Diluted

$

1.07

$

0.95

Weighted average shares outstanding:

Basic

1,128

1,180

Diluted

1,136

1,190

Dividends declared per share

$

0.350

$

0.275

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

March 31,

December 31,

In millions, except per share amounts

2015

2014

Assets:

Cash and cash equivalents

$

1,518

$

2,481

Short-term investments

116

34

Accounts receivable, net

10,162

9,687

Inventories

12,231

11,930

Deferred income taxes

1,001

985

Other current assets

594

866

Total current assets

25,622

25,983

Property and equipment, net

8,871

8,843

Goodwill

28,123

28,142

Intangible assets, net

9,759

9,774

Other assets

1,555

1,510

Total assets

$

73,930

$

74,252

Liabilities:

Accounts payable

$

6,431

$

6,547

Claims and discounts payable

6,273

5,404

Accrued expenses

5,936

5,816

Short-term debt

500

685

Current portion of long-term debt

573

575

Total current liabilities

19,713

19,027

Long-term debt

11,689

11,695

Deferred income taxes

4,020

4,036

Other long-term liabilities

1,513

1,531

Commitments and contingencies

Shareholders' equity:

CVS Health shareholders' equity:

Preferred stock, par value $0.01: 0.1 shares authorized; none issued or outstanding

Common stock, par value $0.01: 3,200 shares authorized; 1,693 shares issued and 1,127

shares outstanding at March 31, 2015 and 1,691 shares issued and 1,140 shares

outstanding at December 31, 2014

17

17

Treasury stock, at cost: 565 shares at March 31, 2015 and 550 shares at December 31,

     2014

(25,634)

(24,078)

Shares held in trust: 1 share at March 31, 2015 and December 31, 2014

(31)

(31)

Capital surplus

30,235

30,418

Retained earnings

32,667

31,849

Accumulated other comprehensive income (loss)

(264)

(217)

Total CVS Health shareholders' equity

36,990

37,958

Noncontrolling interest

5

5

Total shareholders' equity

36,995

37,963

Total liabilities and shareholders' equity

$

73,930

$

74,252

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended

March 31,

In millions

2015

2014

Cash flows from operating activities:

Cash receipts from customers

$

34,570

$

30,505

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(28,276)

(23,966)

Cash paid to other suppliers and employees

(4,162)

(4,196)

Interest received

3

3

Interest paid

(87)

(104)

Income taxes paid

(64)

(70)

Net cash provided by operating activities

1,984

2,172

Cash flows from investing activities:

Purchases of property and equipment

(419)

(388)

Proceeds from sale-leaseback transactions

25

5

Proceeds from sale of property and equipment and other assets

8

5

Acquisitions (net of cash acquired) and other investments

(61)

(2,194)

Purchase of available-for-sale investments

(113)

(43)

Sale or maturity of available-for-sale investments

16

55

Net cash used in investing activities

(544)

(2,560)

Cash flows from financing activities:

Decrease in short-term debt

(185)

Dividends paid

(399)

(325)

Proceeds from exercise of stock options

126

154

Excess tax benefits from stock-based compensation

59

37

Repurchase of common stock

(2,007)

(801)

Net cash used in financing activities

(2,406)

(935)

Effect of exchange rates on cash and cash equivalents

3

Net decrease in cash and cash equivalents

(963)

(1,323)

Cash and cash equivalents at the beginning of the period

2,481

4,089

Cash and cash equivalents at the end of the period

$

1,518

$

2,766

Reconciliation of net income to net cash provided by operating activities:

Net income

$

1,221

$

1,129

Adjustments required to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

490

477

Stock-based compensation

44

35

Deferred income taxes and other non-cash items

(31)

16

Change in operating assets and liabilities, net of effects of acquisitions:

Accounts receivable, net

(481)

(139)

Inventories

(313)

(64)

Other current assets

269

70

Other assets

(52)

(39)

Accounts payable and claims and discounts payable

756

339

Accrued expenses

153

362

Other long-term liabilities

(72)

(14)

Net cash provided by operating activities

$

1,984

$

2,172

Adjusted Earnings Per Share

(Unaudited)

For internal comparisons, management finds it useful to assess year-over-year performance by adjusting diluted earnings per share for amortization, which primarily relates to acquisition activities.

The Company defines adjusted earnings per share as income before income tax provision plus amortization, less adjusted income tax provision and other, which is comprised of earnings allocated to participating securities, divided by the weighted average diluted shares outstanding.

The following is a reconciliation of income before income tax provision to adjusted earnings per share:

Three Months Ended 

March 31,

In millions, except per share amounts

2015

2014

Income before income tax provision

$

1,998

$

1,866

Amortization

129

131

Adjusted income before income tax provision

2,127

1,997

Adjusted income tax provision and other(1)

833

789

Adjusted net income

$

1,294

$

1,208

Weighted average diluted shares outstanding

1,136

1,190

Adjusted earnings per share

$

1.14

$

1.02

(1)

The adjusted income tax provision is computed using the effective income tax rate computed from the condensed consolidated statement of income. "Other" includes earnings allocated to participating securities of $5 million for the three months ended March 31, 2015.

Free Cash Flow

(Unaudited)

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:

Three Months Ended 

March 31,

In millions

2015

2014

Net cash provided by operating activities

$

1,984

$

2,172

Subtract: Additions to property and equipment

(419)

(388)

Add: Proceeds from sale-leaseback transactions

25

5

Free cash flow

$

1,590

$

1,789

Supplemental Information

(Unaudited)

The Company evaluates its Pharmacy Services and Retail Pharmacy 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:

In millions

Pharmacy

Services

Segment(1)

Retail

Pharmacy

Segment

Corporate

Segment

Intersegment

Eliminations(2)

Consolidated

Totals

Three Months Ended

March 31, 2015:

Net revenues

$

23,879

$

16,951

$

$

(4,498)

$

36,332

Gross profit

1,026

5,295

(157)

6,164

Operating profit (loss)

734

1,727

(189)

(140)

2,132

March 31, 2014:

Net revenues

20,195

16,480

(3,986)

32,689

Gross profit

934

5,184

(176)

5,942

Operating profit (loss)

640

1,750

(190)

(176)

2,024

(1)

Net revenues of the Pharmacy Services Segment includes approximately $2.5 billion and $2.2 billion of retail co-payments for the three months ended March 31, 2015 and 2014, respectively.

(2)

Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services Segment customers use Retail Pharmacy Segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue on a stand-alone basis, and (ii) Intersegment revenues, gross profit and operating profit that occur when Pharmacy Services Segment customers, through the Company's intersegment activities (such as the Maintenance Choice® program), elect to pick-up their maintenance prescriptions at Retail Pharmacy Segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. The following amounts are eliminated in consolidation in connection with the intersegment activity described in item (ii) above: net revenues of $1.2 billion and $1.1 billion for the three months ended March 31, 2015 and 2014, respectively; gross profit of $157 million and $176 million for the three months ended March 31, 2015 and 2014, respectively; and operating profit of $140 million and $176 million for the three months ended March 31, 2015 and 2014, respectively.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

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

Three Months Ended

March 31,

In millions

2015

2014

Net revenues

$

23,879

$

20,195

Gross profit

1,026

934

Gross profit % of net revenues

4.3

%

4.6

%

Operating expenses

292

294

Operating expense % of net revenues

1.2

%

1.5

%

Operating profit

734

640

Operating profit % of net revenues

3.1

%

3.2

%

Net revenues(1):

Mail choice(2)

$

8,750

$

6,834

Pharmacy network(3)

15,059

13,302

Other

70

59

Pharmacy claims processed(1):

Total

251.1

227.8

Mail choice(2)

20.3

19.8

Pharmacy network(3)

230.8

208.0

Generic dispensing rate(1):

Total

83.5

%

82.0

%

Mail choice(2)

76.1

%

73.9

%

Pharmacy network(3)

84.1

%

82.8

%

Mail choice penetration rate

19.8

%

21.2

%

(1)

Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice, which are included within the mail choice category.

(2)

Mail choice is defined as claims filled at a Pharmacy Services mail facility, which include specialty mail claims, as well as 90-day claims filled at retail under the Maintenance Choice program.

(3)

Pharmacy network is defined as claims filled at retail pharmacies, including our retail drugstores, but excluding Maintenance Choice activity.

Supplemental Information

(Unaudited)

Retail Pharmacy Segment

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

Three Months Ended

March 31,

In millions

2015

2014

Net revenues

$

16,951

$

16,480

Gross profit

5,295

5,184

Gross profit % of net revenues

31.2

%

31.5

%

Operating expenses

3,568

3,434

Operating expense % of net revenues

21.0

%

20.8

%

Operating profit

1,727

1,750

Operating profit % of net revenues

10.2

%

10.6

%

Retail prescriptions filled (90 Day = 3 Rx) (1)

241.3

227.1

Net revenue increase:

Total

2.9

%

2.7

%

Pharmacy

5.3

%

5.1

%

Front store

(3.6)

%

(2.4)

%

Total prescription volume (90 Day = 3 Rx) (1)

6.3

%

2.7

%

Same store increase (decrease)(2):

Total sales

1.2

%

1.4

%

Pharmacy sales

4.2

%

3.8

%

Front store sales(3)

(6.1)

%

(3.8)

%

Prescription volume (90 Day = 3 Rx) (1)

5.1

%

2.1

%

Generic dispensing rate

84.4

%

82.9

%

Pharmacy % of total revenues

71.7

%

70.5

%

Third party % of pharmacy revenue

98.5

%

98.3

%

(1)

Includes the adjustment to convert 90-day, non-specialty prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

(2)

Same store sales exclude revenues from MinuteClinic and stores in Brazil.

(3)

On a comparable basis, front store same store sales would have been approximately 800 basis points higher for the three months ended March 31, 2015 if tobacco and the estimated associated basket sales were excluded from the three months ended March 31, 2014.

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. For internal comparisons, management finds it useful to assess year-over-year performance by adjusting diluted earnings per share for amortization, which primarily relates to acquisition activities.

In millions, except per share amounts

Year Ending

December 31, 2015

Income before income tax provision

$

8,942

$

9,136

Amortization

520

520

Adjusted income before income tax provision

9,462

9,656

Adjusted income tax provision and other(1)

3,751

3,818

Adjusted income from continuing operations

$

5,711

$

5,838

Weighted average diluted shares outstanding

1,124

1,124

Adjusted earnings per share from continuing operations

$

5.08

$

5.19

In millions, except per share amounts

Three Months Ending

June 30, 2015

Income before income tax provision

$

2,069

$

2,126

Amortization

130

130

Adjusted income before income tax provision

2,199

2,256

Adjusted income tax provision and other(1)

874

898

Adjusted income from continuing operations

$

1,325

$

1,358

Weighted average diluted shares outstanding

1,133

1,133

Adjusted earnings per share from continuing operations

$

1.17

$

1.20

     (1) Other includes earnings allocated to participating securities.

Free Cash Flow Guidance

(Unaudited)

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. For internal comparisons, management finds it useful to assess year-over-year cash flow performance by adjusting cash provided by operating activities, by capital expenditures and proceeds from sale-leaseback transactions.

In millions

Year Ending

December 31, 2015

Net cash provided by operating activities

$

7,550

$

7,949

Subtract: Additions to property and equipment

(2,300)

(2,200)

Add: Proceeds from sale-leaseback transactions

600

500

Free cash flow

$

5,850

$

6,249

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SOURCE CVS Health Corporation





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