CVS Health Reports Second Quarter Results

Tuesday, August 8, 2017

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Second Quarter Year-over-year Highlights:

  • Net revenues increased 4.5% to $45.7 billion

  • GAAP diluted EPS from continuing operations of $1.07, including a $135 million, or 13 cents per share, goodwill impairment charge related to the RxCrossroads business

  • Adjusted EPS of $1.33

Year-to-date Highlights:

  • Generated cash flow from operations of $5.5 billion; free cash flow of $4.6 billion

2017 Guidance:

  • Narrowed and revised full year GAAP diluted EPS from continuing operations to $4.92 to $5.02, including the goodwill impairment charge, from $5.02 to $5.18

  • Narrowed full year Adjusted EPS to $5.83 to $5.93 from $5.77 to $5.93

  • Provided third quarter GAAP diluted EPS from continuing operations of $1.20 to $1.23

  • Provided third quarter Adjusted EPS of $1.47 to $1.50, reflecting the timing of operating profit between the third and fourth quarters related to the Medicare Part D operations

  • Confirmed full year cash flow from operations of $7.7 to $8.6 billion; free cash flow of $6.0 to $6.4 billion

WOONSOCKET, RHODE ISLAND, August 8, 2017 - CVS Health Corporation (NYSE: CVS) today announced operating results for the three and six months ended June 30, 2017.

President and Chief Executive Officer Larry Merlo stated, “The second quarter results we posted today keep us nicely on pace to achieve our full-year targets. 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. While we are pleased to report results consistent with our expectations, we won’t be satisfied until the total enterprise returns to healthy levels of earnings growth.”

Mr. Merlo continued, “Given our performance in the first half and our confidence in our expectations for the back half of this year, we are narrowing and raising the midpoint of our Adjusted EPS guidance for 2017. Additionally, our differentiated value proposition continues to resonate in the marketplace. The 2018 selling season is shaping up to be another successful one for our PBM, with solid gross and net new business achieved to date.”

Revenues

Net revenues for the three months ended June 30, 2017 increased 4.5%, or $2.0 billion, to $45.7 billion, up from $43.7 billion in the three months ended June 30, 2016.

Revenues in the Pharmacy Services Segment increased 9.5% to $32.3 billion in the three months ended June 30, 2017. This increase was primarily driven by growth in pharmacy network claim volume as well as brand inflation and specialty pharmacy volume, partially offset by increased generic dispensing and price compression. Pharmacy network claims processed during the three months ended June 30, 2017 increased 10.3% on a 30-day equivalent basis, to 376.0 million, compared to 340.9 million in the prior year. The increase in pharmacy network claim volume was primarily due to an increase in net new business. Mail choice claims processed during the three months ended June 30, 2017 increased 5.2%, on a 30-day equivalent basis, to 65.6 million, compared to 62.3 million in the prior year. The increase in the mail choice claim volume was primarily driven by continued adoption of our Maintenance Choice® offerings and an increase in specialty pharmacy claims.

Revenues in the Retail/LTC Segment decreased 2.2% to $19.6 billion in the three months ended June 30, 2017. The decrease was largely driven by a 2.6% decrease in same store sales, an increase in the generic dispensing rate and continued reimbursement pressure.

Pharmacy same store sales decreased 2.8% and were negatively impacted by approximately 410 basis points due to recent generic introductions. Same store prescription volumes remained flat, on a 30-day equivalent basis, in the three months ended June 30, 2017. The previously-announced restricted networks that exclude CVS Pharmacy had a negative impact of approximately 460 basis points on same store prescription volumes.

Front store same store sales declined 2.1% in the three months ended June 30, 2017. The shift of the Easter holiday to the second quarter in 2017 from the first quarter in 2016 had an approximately 75 basis point positive impact. Front store same store sales were negatively impacted by softer customer traffic and efforts to rationalize promotional strategies, partially offset by an increase in basket size.

For the three months ended June 30, 2017, the generic dispensing rate increased approximately 130 basis points to 87.2% in our Pharmacy Services Segment and increased approximately 150 basis points to 87.6% in our Retail/LTC Segment, compared to the prior year.

Operating Profit

Consolidated operating profit for the three months ended June 30, 2017, decreased $240 million, or 10.2%. The decrease was partially due to a goodwill impairment charge of $135 million related to the RxCrossroads reporting unit within the Retail/LTC Segment. Additionally, the previously-announced restricted networks that exclude CVS Pharmacy and continued reimbursement pressure in the Retail/LTC Segment negatively impacted operating profit. This was partially offset by growth in pharmacy network claim volume and growth in specialty pharmacy in the Pharmacy Services Segment and a $71 million decrease in acquisition-related integration costs in the three months ended June 30, 2017 versus the same quarter last year.

Net Income and Earnings Per Share

Net income for the three months ended June 30, 2017 increased $174 million or 18.8%, to $1.1 billion. The increase was primarily due to the absence of a $542 million loss on early extinguishment of debt in the current year, partially offset by the $240 million decrease in operating profit and an increase in the effective income tax rate, from 39.5% to 41.1%. The increase in the tax rate was primarily due to the nondeductible goodwill impairment charge of $135 million, or 280 basis points, partially offset by $14 million in discrete tax benefits related to the required adoption of new accounting guidance for share-based compensation on January 1, 2017.

GAAP earnings per diluted share from continuing operations (“GAAP diluted EPS”) for the three months ended June 30, 2017 was $1.07, compared to $0.86 in the prior year. Adjusted earnings per share (“Adjusted EPS”) for the three months ended June 30, 2017 and 2016, was $1.33 and $1.32, respectively. Further detail is shown in the Adjusted Earnings Per Share reconciliation later in this release.

Guidance

The Company narrowed and revised full year GAAP diluted EPS guidance to $4.92 to $5.02, including the goodwill impairment charge, from $5.02 to $5.18. The Company narrowed full year Adjusted EPS guidance to $5.83 to $5.93 from $5.77 to $5.93.

In the third quarter, the Company expects to deliver GAAP diluted EPS of $1.20 to $1.23 and Adjusted EPS of $1.47 to $1.50 which are affected by the timing of the Medicare Part D operating profit between the third and fourth quarters relative to the prior year, resulting from the variability between the quarters as members move through the risk corridor. The third quarter GAAP diluted EPS guidance also includes an estimated loss on the previously-disclosed settlement of a defined benefit pension plan.

The Company confirmed its 2017 cash flow from operations guidance of $7.7 to $8.6 billion and free cash flow guidance of $6.0 to $6.4 billion. These 2017 guidance estimates assume the completion of $5.0 billion in share repurchases.

Real Estate Program

During the three months ended June 30, 2017, the Company opened 27 new retail locations and closed three retail locations. In addition, the Company relocated 10 retail locations. As of June 30, 2017, the Company operated 9,700 retail locations, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.

As previously disclosed, the Company intends to close a total of approximately 70 retail stores during 2017 and expects to take a cumulative charge of approximately $220 million primarily associated with the remaining lease obligations of such stores. The Company closed 63 retail stores and took a charge of $205 million in the six months ended June 30, 2017. The Company expects to close approximately seven additional retail stores during the remainder of 2017.

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 9,700 retail locations, more than 1,100 walk-in medical clinics, a leading pharmacy benefits manager with nearly 90 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year, expanding specialty pharmacy services, and a leading stand-alone Medicare Part D prescription drug plan, 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

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of CVS Health Corporation. 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 Form 8-K 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.

The Company defines Adjusted Earnings per Share, or Adjusted EPS, as income from continuing operations excluding the impact of certain adjustments such as the amortization of intangible assets, acquisition-related transaction and integration costs, charges in connection with store rationalization, goodwill impairments, adjustments to legal reserves in connection with certain legal settlements, losses on early extinguishments of debt, and losses on settlements of defined benefit pension plans, 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 property 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)

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

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 and Retail/LTC segment performance based on net revenues, 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 previous discussion at “Non-GAAP Financial Measures” 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 previous discussion at “Non-GAAP Financial Measures” for more information on how we calculate Free Cash Flow.

Investor Contact:

Mike McGuire
Senior Vice President
Investor Relations
(401) 770-4050 

Media Contact:

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