CVS Health Reports Second Quarter Results

Tuesday, August 2, 2016

FULL YEAR GAAP DILUTED EPS GUIDANCE REVISED TO REFLECT
DEBT EXTINGUISHMENT AND INTEGRATION COSTS
FULL YEAR ADJUSTED EPS GUIDANCE RAISED AND NARROWED

 

WOONSOCKET, R.I., Aug. 2, 2016 /PRNewswire/ --

Second Quarter Year-over-year Highlights:

  • Net revenues increased 17.6% to $43.7 billion
  • GAAP operating profit increased 3.9% to $2.4 billion; operating profit excluding acquisition-related transaction and integration costs increased 6.5%
  • GAAP diluted EPS decreased from $1.12 to $0.86, primarily driven by a loss on early extinguishment of debt and acquisition-related integration costs
  • Adjusted EPS increased 8.3% to $1.32

Year-to-date Highlights:

  • Cash flow from operations of $4.0 billion
  • Generated free cash flow of $2.9 billion

2016 Guidance:

  • Full year GAAP diluted EPS revised to $4.92 to $5.00 from $5.24 to $5.39, to reflect the impact of the loss on early extinguishment of debt and second quarter acquisition-related integration costs
  • Full year Adjusted EPS raised and narrowed to $5.81 to $5.89 from $5.73 to $5.88
  • Provided third quarter GAAP diluted EPS of $1.38 to $1.41, including a loss on early extinguishment of debt and excluding acquisition-related integration costs
  • Provided third quarter Adjusted EPS of $1.55 to $1.58
  • Raised full year cash flow from operations to $8.8 to $9.1 billion from $7.6 to $7.9 billion; free cash flow raised to $6.3 to $6.6 billion from $5.3 to $5.6 billion

CVS Health Corporation (NYSE: CVS) today announced operating results for the three months ended June 30, 2016.

Revenues

Net revenues for the three months ended June 30, 2016 increased 17.6%, or $6.6 billion, to $43.7 billion, compared to the three months ended June 30, 2015. Revenues in the Pharmacy Services Segment increased 20.7%, or $5.1 billion, to $29.5 billion in the three months ended June 30, 2016. The increase was primarily driven by increased pharmacy network claim volume and growth in specialty pharmacy. Pharmacy network claims processed during the three months ended June 30, 2016 increased 22.6% to 280.5 million, compared to 228.8 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 June 30, 2016, increased 3.9%, to 22.2 million, compared to 21.3 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 16.0%, or $2.8 billion, to approximately $20.0 billion, in the three months ended June 30, 2016. The increase was primarily driven by the addition of the long-term care ("LTC") pharmacy 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 2.1% versus the second quarter of 2015. Pharmacy same store sales rose 3.9% and pharmacy same store prescription volumes rose 3.5% on a 30-day equivalent basis. Pharmacy same store sales were negatively affected by approximately 355 basis points from recent generic drug introductions. Front store same store sales decreased 2.5%, including the effect of the shift of Easter from April in 2015 to March in 2016, which resulted in a decrease in front store same store sales of approximately 80 basis points. Front store same store sales were also negatively affected by softer customer traffic, partially offset by an increase in basket size.

For the three months ended June 30, 2016, the generic dispensing rate increased approximately 155 basis points to 85.4% in the Pharmacy Services Segment and increased approximately 110 basis points to 86.1% in the Retail/LTC Segment.

Operating Profit

For the three months ended June 30, 2016, consolidated operating profit increased $88 million, or 3.9%. Excluding acquisition-related integration costs of $81 million in 2016 and acquisition-related transaction costs of $21 million in 2015, consolidated operating profit increased $148 million, or 6.5%, from $2,283 million for the three months ended June 30, 2015 to $2,431 million for the three months ended June 30, 2016. For the three months ended June 30, 2016, operating profit increased by $98 million, or 10.4%, in the Pharmacy Services Segment and by $24 million, or 1.4%, in the Retail/LTC Segment. Excluding acquisition-related integration costs of $81 million, the Retail/LTC Segment operating profit grew $105 million, or 6.2%, from $1,681 million for the three months ended June 30, 2015 to $1,786 million for the three months ended June 30, 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, growth in Medicare Part D lives and favorable purchasing economics. The Retail/LTC Segment was also positively affected by the acquisition of the pharmacies and clinics of Target and an improved front store margin rate. These positive factors for both segments were partially offset by continued pricing and reimbursement pressure.

Net Income and Earnings Per Share

Net income for the three months ended June 30, 2016 was $0.9 billion, a decrease of $348 million or 27.3%. The decrease was primarily driven by a loss on early extinguishment of debt of $542 million, an increase in interest expense of $114 million and $81 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.

GAAP earnings per diluted share ("GAAP diluted EPS") for the three months ended June 30, 2016 was $0.86, compared to $1.12 in the prior year. Adjusted earnings per share ("Adjusted EPS") for the three months ended June 30, 2016 and 2015, was $1.32 and $1.22, respectively. Adjusted EPS excludes $197 million and $131 million of intangible asset amortization for the three months ended June 30, 2016 and 2015, respectively. Adjusted EPS for the three months ended June 30, 2016 also excludes $81 million of acquisition-related integration costs and the loss on early extinguishment of debt of $542 million. Adjusted EPS for the three months ended June 30, 2015 also excludes $21 million of acquisition-related transaction costs and $36 million of acquisition-related bridge financing costs. Further detail is shown in the Adjusted Earnings Per Share reconciliation later in this release.

President and Chief Executive Officer Larry Merlo stated, "I'm very pleased with our solid second quarter results across the enterprise. Operating profit in the Retail/LTC Segment was in line with expectations while operating profit in the Pharmacy Services Segment exceeded expectations. At the same time, we have generated substantial free cash flow year-to-date and continued to return significant value to our shareholders through dividends and share repurchases."

Mr. Merlo continued, "With our differentiated value proposition, we see 2017 shaping up to be another very successful PBM selling season, with substantial gross and net new business to date. Given our outperformance in the second quarter and confidence in our expectations for the back half of this year, we are raising and narrowing our Adjusted EPS guidance and also raising our free cash flow guidance for 2016."

Guidance

The Company revised full year GAAP diluted EPS to $4.92 to $5.00 from $5.24 to $5.39 to reflect the impact of the loss on early extinguishment of debt and second quarter acquisition-related integration costs. 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 that are not currently included in guidance. The Company raised and narrowed full year Adjusted EPS to $5.81 to $5.89 from $5.73 to $5.88, which excludes the loss on early extinguishment of debt and acquisition-related integration costs. Further detail is shown in the Adjusted Earnings Per Share Guidance reconciliation later in this release.

In the third quarter of 2016, the Company expects to deliver GAAP diluted EPS of $1.38 to $1.41, including a loss on early extinguishment of debt from a debt redemption that was completed in July 2016 and excluding acquisition-related integration costs. The Company expects to deliver Adjusted EPS of $1.55 to $1.58, which excludes the loss on early extinguishment of debt and acquisition-related integration costs. Further detail is shown in the Adjusted Earnings Per Share Guidance reconciliation later in this release.

The Company raised cash flow guidance for 2016 and now expects to deliver cash flow from operations of $8.8 billion to $9.1 billion, up from $7.6 billion to $7.9 billion, and 2016 free cash flow of $6.3 billion to $6.6 billion, up from $5.3 billion to $5.6 billion. Further detail is shown in the Free Cash Flow Guidance reconciliation later in this release.

Real Estate Program

During the three months ended June 30, 2016, the Company opened 20 new retail stores, two onsite pharmacies and closed 10 retail stores. In addition, the Company relocated 9 retail stores. As of June 30, 2016, the Company operated 9,652 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)


Non-GAAP Financial Measures

The following provides reconciliations of certain non-GAAP financial measures presented in this press release to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company uses the non-GAAP measures "Adjusted EPS" and "Free Cash Flow" to assess and analyze underlying business performance and trends. Management believes that providing these non-GAAP measures enhances investors' understanding of the Company's performance.

Adjusted Earnings per Share, or Adjusted EPS, is net income excluding the impact of the amortization of intangible assets, acquisition-related transaction and integration costs, acquisition-related bridge financing costs, charge related to a disputed 1999 legal settlement and loss on early extinguishment of debt divided by the Company's weighted average diluted shares outstanding. The Company believes that this measure enhances investors' ability to compare the Company's past financial performance with its current performance.

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). Management uses this non-GAAP financial measure for internal comparisons and finds it useful in assessing year-over-year cash flow performance.

These non-GAAP financial measures are provided as supplemental information to the financial measures presented in this press release that are calculated and presented in accordance with GAAP. Adjusted EPS should be considered in addition to, rather than as a substitute for, income before income tax provision as a measure of our performance. Free Cash Flow should be considered in addition to, rather than as a substitute for, net cash provided by operating activities as a measure of our liquidity. The Company's definitions of Adjusted EPS and Free Cash Flow may not be comparable to similarly titled measurements reported by other companies.

Adjusted Earnings Per Share

(Unaudited)

Free Cash Flow

(Unaudited)

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. See also "Non-GAAP Financial Measures" above for more information on how we calculate Adjusted EPS.

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. See also "Non-GAAP Financial Measures" above for more information on how we calculate Free Cash Flow.

Investor contact:

Nancy Christal
Senior Vice President
Investor Relations
(914) 722-4704

Media contact:

Carolyn Castel
Vice President
Corporate Communications
(401) 770-5717

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SOURCE CVS Health Corporation