CVS Health Reports Third Quarter Results

Tuesday, November 4, 2014

WOONSOCKET, R.I., Nov. 4, 2014 /PRNewswire/ -- CVS Health Corporation (NYSE: CVS) today announced operating results for the three months ended September30, 2014.

Third Quarter Year-over-year Highlights:

  • Net revenues increased 9.7% to $35.0 billion
  • Operating profit increased 4.3% to $2.2 billion
  • Adjusted EPS of $0.88 and GAAP diluted EPS from continuing operations of $0.81, both of which include a $0.27 per share loss on early extinguishment of debt
  • Adjusted EPS increased 9.0% to $1.15, excluding the loss on early extinguishment of debt in 2014 and a legal settlement gain in 2013

 

Year-to-date Highlights:

  • Generated free cash flow of $3.6 billion
  • Cash flow from operations of $4.7 billion

2014 Guidance:

  • Full-year Adjusted EPS range narrowed to $4.47 to $4.50; excluding the $0.27 per share loss on early extinguishment of debt
  • GAAP diluted EPS from continuing operations of $3.93 to $3.96
  • Provided fourth quarter Adjusted EPS guidance of $1.18 to $1.21 and GAAP diluted EPS from continuing operations guidance of $1.12 to $1.15
  • Full year free cash flow range raised to $5.7 to $6.0 billion; cash flow from operations raised to $7.4 to $7.7 billion

Revenues

Net revenues for the three months ended September30, 2014, increased 9.7%, or approximately $3.1 billion, to $35.0 billion compared to the three months ended September30, 2013.

Revenues in the Pharmacy Services Segment increased 15.7%, or $3.1 billion, to $22.5 billion in the three months ended September30, 2014. The increase was driven by growth in specialty pharmacy including the acquisition of Coram and the impact of Specialty Connect, as well as increased volume in pharmacy network claims. Pharmacy network claims processed during the three months ended September30, 2014 increased 4.3% to 209.6 million compared to 200.9 million in the prior year. The increase in the pharmacy network claim volume was primarily due to net new business and growth in Managed Medicaid, partially offset by a decrease in Medicare Part D claims. Mail choice claims processed during the three months ended September30, 2014 decreased 1.3% to 20.7 million, compared to 21.0 million in the prior year. The decrease in mail choice claims was driven by a decline in traditional mail volumes, which was partially offset by growth in our Maintenance Choice program.

Revenues in the Retail Pharmacy Segment increased 3.1%, or $501 million, to $16.7 billion in the three months ended September 30, 2014. Same store sales increased 2.0% versus the third quarter of last year, with pharmacy same store sales up 4.8% and front store same store sales down 4.5%. Front store same store sales would have been approximately 480 basis points higher if tobacco and the estimated associated basket sales were excluded from the three months ended September 30, 2014 and 2013. Front store same store sales were negatively 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. Pharmacy same store sales were negatively impacted by approximately 190 basis points from recent generic drug introductions and by approximately 190 basis points from the implementation of Specialty Connect. Specialty Connect transitioned all specialty prescriptions to the Pharmacy Services Segment, as they are being processed through the Company's specialty mail order pharmacies. 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 September30, 2014, the generic dispensing rate increased approximately 180 basis points in both the Pharmacy Services Segment and Retail Pharmacy Segment, to 82.5% and 83.3%, respectively, compared to the prior year.

Operating Profit and Net Income

Operating profit for the Pharmacy Services and Retail Pharmacy segments for the three months ended September 30, 2014, increased 7.3% and 4.3%, respectively. Both segments benefited from the impact of increased generic drugs dispensed, which improved operating margins. The Pharmacy Services Segment was also positively impacted by growth in specialty pharmacy and favorable purchasing economics, partially offset by price compression. The Retail Pharmacy Segment was also positively impacted by growth of prescription volumes combined with an improved pharmacy margin rate, partially offset by the loss of sales from tobacco and the associated basket as well as incremental store operating costs associated with operating more stores.

Net income for the three months ended September30, 2014, decreased 24.1%, or approximately $301 million, to approximately $0.9 billion, primarily due to a $521 million pre-tax loss ($0.27 per share) on the early extinguishment of debt. Excluding the loss on early extinguishment of debt and a $72 million pre-tax gain ($0.04 per share) from a legal settlement in 2013, net income increased 5.0%(1). Adjusted earnings per share (Adjusted EPS) for the three months ended September30, 2014 and 2013, was $0.88 and $1.09, respectively. Excluding the 2014 loss on early extinguishment of debt and the 2013 gain from the legal settlement, Adjusted EPS increased 9.0% to $1.15. Adjusted EPS in the three months ended September 30, 2014 and 2013, excludes $126 million and $124 million, respectively, of intangible asset amortization related to acquisition activity. GAAP earnings per diluted share for the three months ended September30, 2014 and 2013, was $0.81 and $1.02, respectively.

President and Chief Executive Officer LarryMerlo stated, "I'm very pleased with our strong results in the third quarter, which reflect better-than-expected revenue growth across the enterprise and expanding retail gross margins. The 2015 PBM selling season continued to be highly successful with a significant number of new business wins across all lines of business. We also continued to deliver substantial free cash flow, enabling us to return more than $3.7 billion to our shareholders year to date. We are well on track to return more than $5 billion to our shareholders through dividends and share repurchases for the full year 2014."

Guidance

The Company narrowed its earnings guidance range for the full year 2014. The Company now expects to deliver Adjusted EPS of $4.47 to $4.50, from $4.43 to $4.51, excluding the $0.27 per share loss on early extinguishment of debt. GAAP diluted EPS from continuing operations is expected to be $3.93 to $3.96, including the loss on the early extinguishment of debt.The Company raised its 2014 free cash flow guidance range to $5.7 billion to $6.0 billion, from $5.5 billion to $5.8 billion, and raised the 2014 cash flow from operations range to $7.4 billion to $7.7 billion, from $7.2 billion to $7.5 billion. The Company expects to deliver Adjusted EPS of $1.18 to $1.21 and GAAP diluted EPS from continuing operations of $1.12 to $1.15 in the fourth quarter of 2014.

 

Real Estate Program

During the three months ended September30, 2014, the Company opened 45 new and acquired 33 retail drugstores, and closed four retail drugstores. In addition, the Company relocated 13 retail drugstores. As of September30, 2014, the Company operated 7,935 locations in 47 states, the District of Columbia, Puerto Rico and Brazil. These locations included 7,779 retail drugstores, 936 health care clinics, 17 onsite pharmacies, 26 retail specialty pharmacy stores, 11 specialty mail order pharmacies, four mail service dispensing pharmacies, and 84 branches and six centers of excellence for infusion and enteral services.

Teleconference and Webcast

The Company will be holding a conference call today for the investment community at 8:30 am (EST) 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://info.cvshealth.com/investors.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 dedicated to helping people on their path to better health as the largest integrated pharmacy company in the United States. Through the Company's 7,800 retail pharmacies, more than 900 walk-in medical clinics, a leading pharmacy benefit manager serving approximately 65 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 CVS Health at http://info.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 in our Annual Report on Form10-K for the year ended December31, 2013 and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Quarterly Report on Form 10-Q.

(1)Excluding the $72 million pre-tax ($44 million after-tax) gain on a legal settlement for the three months ended September 30, 2013 and the $521 million pre-tax ($315 million after-tax) loss on early extinguishment of debt for the three months ended September 30, 2014, net income increased $61 million or 5.0% from $1,205 million to $1,266 million.

Tables Follow

 

CVS HEALTH CORPORATION

(formerly CVS Caremark Corporation)

Condensed Consolidated Statements of Income

(Unaudited)

         
   

ThreeMonthsEnded

September30,

 

Nine MonthsEnded

September30,

Inmillions,exceptpershareamounts

 

2014

   

2013

   

2014

   

2013

 
                         

Net revenues

 

$

35,021

   

$

31,932

   

$

102,312

   

$

93,931

 

Cost of revenues

 

28,553

   

25,905

   

83,578

   

76,487

 

Gross profit

 

6,468

   

6,027

   

18,734

   

17,444

 

Operating expenses

 

4,222

   

3,873

   

12,256

   

11,624

 

Operating profit

 

2,246

   

2,154

   

6,478

   

5,820

 

Interest expense, net

 

153

   

122

   

469

   

374

 

Loss on early extinguishment of debt

 

521

   

 

   

521

   

 

 

Income before income tax provision

 

1,572

   

2,032

   

5,488

   

5,446

 

Income tax provision

 

624

   

777

   

2,165

   

2,112

 

Income from continuing operations

 

948

   

1,255

   

3,323

   

3,334

 

Loss from discontinued operations, net of tax

 

 

   

(6)

   

 

   

(7)

 

Net income

 

$

948

   

$

1,249

   

$

3,323

   

$

3,327

 
                         

Basic earnings per share:

                       

Income from continuing operations

 

$

0.82

   

$

1.03

   

$

2.84

   

$

2.72

 

Loss from discontinued operations

 

$

 

   

$

 

   

$

 

   

$

(0.01)

 

Net income

 

$

0.82

   

$

1.03

   

$

2.84

   

$

2.71

 

Weighted average basic shares outstanding

 

1,157

   

1,218

   

1,167

   

1,226

 
                         

Diluted earnings per share:

                       

Income from continuing operations

 

$

0.81

   

$

1.02

   

$

2.82

   

$

2.70

 

Loss from discontinued operations

 

$

 

   

$

 

   

$

 

   

$

(0.01)

 

Net income

 

$

0.81

   

$

1.02

   

$

2.82

   

$

2.70

 

Weighted average diluted shares outstanding

 

1,164

   

1,226

   

1,175

   

1,234

 
                         

Dividends declared per share

 

$

0.275

   

$

0.225

   

$

0.825

   

$

0.675

 

 

 

CVS HEALTH CORPORATION

(formerly CVS Caremark Corporation)

Condensed Consolidated Balance Sheets

(Unaudited)

         
   

September 30,

 

December 31,

Inmillions,exceptpershareamounts

 

2014

 

2013

Assets:

           

Cash and cash equivalents

 

$

1,132

   

$

4,089

 

Short-term investments

 

78

   

88

 

Accounts receivable, net

 

10,828

   

8,729

 

Inventories

 

11,613

   

11,045

 

Deferred income taxes

 

1,042

   

902

 

Other current assets

 

644

   

472

 

Total current assets

 

25,337

   

25,325

 

Property and equipment, net

 

8,694

   

8,615

 

Goodwill

 

28,151

   

26,542

 

Intangible assets, net

 

9,854

   

9,529

 

Other assets

 

1,540

   

1,515

 

Total assets

 

$

73,576

   

$

71,526

 
             

Liabilities:

           

Accounts payable

 

$

6,033

   

$

5,548

 

Claims and discounts payable

 

5,400

   

4,548

 

Accrued expenses

 

5,433

   

4,768

 

Short-term debt

 

775

   

 

 

Current portion of long-term debt

 

572

   

561

 

Total current liabilities

 

18,213

   

15,425

 

Long-term debt

 

11,709

   

12,841

 

Deferred income taxes

 

4,051

   

3,901

 

Other long-term liabilities

 

1,494

   

1,421

 

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; 1,690 shares issued and 1,153

           

shares outstanding at September 30, 2014 and 1,680 shares issued and 1,180 shares

           

outstanding at December31, 2013

 

17

   

17

 

Treasury stock, at cost: 536 shares at September30, 2014 and 500 shares at December31, 2013

           
 

(22,877)

   

(20,169)

 

Shares held in trust: 1 share at September30, 2014 and December31, 2013

 

(31)

   

(31)

 

Capital surplus

 

30,310

   

29,777

 

Retained earnings

 

30,845

   

28,493

 

Accumulated other comprehensive income (loss)

 

(160)

   

(149)

 

Total CVS Health shareholders' equity

 

38,104

   

37,938

 

Noncontrolling interest

 

5

   

 

 

Total shareholders' equity

 

38,109

   

37,938

 

Total liabilities and shareholders' equity

 

$

73,576

   

$

71,526

 

 

 

CVS HEALTH CORPORATION

(formerly CVS Caremark Corporation)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

     
   

Nine MonthsEnded

September30,

Inmillions

 

2014

   

2013

 

Cash flows from operating activities:

           

Cash receipts from customers

 

$

95,816

   

$

85,408

 

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

 

(77,067)

   

(67,826)

 

Cash paid to other suppliers and employees

 

(11,267)

   

(10,760)

 

Interest received

 

11

   

5

 

Interest paid

 

(458)

   

(369)

 

Income taxes paid

 

(2,321)

   

(2,213)

 

Net cash provided by operating activities

 

4,714

   

4,245

 
             

Cash flows from investing activities:

           

Purchases of property and equipment

 

(1,436)

   

(1,330)

 

Proceeds from sale-leaseback transactions

 

328

   

156

 

Proceeds from sale of property and equipment

 

8

   

13

 

Acquisitions (net of cash acquired) and other investments

 

(2,392)

   

(354)

 

Purchase of available-for-sale investments

 

(161)

   

(107)

 

Sale or maturity of available-for-sale investments

 

119

   

 

 

Net cash used in investing activities

 

(3,534)

   

(1,622)

 
             

Cash flows from financing activities:

           

Increase in short-term debt

 

775

   

124

 

Proceeds from issuance of long-term debt

 

1,483

   

 

 

Repayments of long-term debt

 

(3,086)

   

 

 

Dividends paid

 

(971)

   

(829)

 

Proceeds from exercise of stock options

 

378

   

431

 

Excess tax benefits from stock-based compensation

 

89

   

48

 

Repurchase of common stock

 

(2,801)

   

(2,272)

 

Net cash used in financing activities

 

(4,133)

   

(2,498)

 

Effect of exchange rates on cash

 

(4)

   

5

 

Net increase (decrease) in cash and cash equivalents

 

(2,957)

   

130

 

Cash and cash equivalents at the beginning of the period

 

4,089

   

1,375

 

Cash and cash equivalents at the end of the period

 

$

1,132

   

$

1,505

 
             

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

           

Net income

 

$

3,323

   

$

3,327

 

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

           

Depreciation and amortization

 

1,442

   

1,412

 

Stock-based compensation

 

121

   

101

 

Loss on early extinguishment of debt

 

521

   

 

 

Deferred income taxes and other non-cash items

 

(64)

   

129

 

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

           

Accounts receivable, net

 

(1,872)

   

(1,518)

 

Inventories

 

(449)

   

(79)

 

Other current assets

 

(160)

   

176

 

Other assets

 

(19)

   

(125)

 

Accounts payable and claims and discounts payable

 

1,222

   

697

 

Accrued expenses

 

676

   

76

 

Other long-term liabilities

 

(27)

   

49

 

Net cash provided by operating activities

 

$

4,714

   

$

4,245

 

 

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:

   

ThreeMonthsEnded

September30,

 

Nine MonthsEnded

September30,

Inmillions,exceptpershareamounts

 

2014

   

2013

   

2014

   

2013

 

Income before income tax provision(1)

 

$

1,572

   

$

2,032

   

$

5,488

   

$

5,446

 

Amortization

 

126

   

124

   

391

   

370

 

Adjusted income before income tax provision

 

1,698

   

2,156

   

5,879

   

5,816

 

Adjusted income tax provision and other(2)

 

678

   

824

   

2,332

   

2,255

 

Adjusted net income from continuing operations

 

$

1,020

   

$

1,332

   

$

3,547

   

$

3,561

 
                         

Weighted average diluted shares outstanding

 

1,164

   

1,226

   

1,175

   

1,234

 

Adjusted earnings per share

 

$

0.88

   

$

1.09

   

$

3.02

   

$

2.88

 
                                 

(1) Includes a $521 million loss on early extinguishment of debt (approximately $0.27 per diluted share) during the three and nine months ended September 30, 2014 and a $72 million gain on a legal settlement (approximately $0.04 per diluted share) during the three and nine months ended September 30, 2013. Excluding these items, Adjusted EPS for the three months ended September 30, 2014, was $1.15, up 9.0% from $1.05 for the three months ended September 30, 2013.

 

(2) 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 $4 million and $13 million for the three and nine months ended September 30, 2014, respectively.

 

 

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:

   

Nine MonthsEnded

September30,

Inmillions

 

2014

   

2013

 
             

Net cash provided by operating activities

 

$

4,714

   

$

4,245

 

Subtract: Additions to property and equipment

 

(1,436)

   

(1,330)

 

Add: Proceeds from sale-leaseback transactions

 

328

   

156

 

Free cash flow

 

$

3,606

   

$

3,071

 

 

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 consolidated financial statements:

Inmillions

 

Pharmacy

Services

Segment(1)

 

Retail

Pharmacy

Segment

 

Corporate

Segment

 

Intersegment

Eliminations(2)

 

Consolidated

Totals

Three Months Ended

                             

September30, 2014:

                             

Net revenues

 

$

22,534

   

$

16,749

   

$

 

   

$

(4,262)

   

$

35,021

 

Gross profit

 

1,403

   

5,237

   

 

   

(172)

   

6,468

 

Operating profit (loss)

 

1,087

   

1,527

   

(196)

   

(172)

   

2,246

 

September30, 2013:

                             

Net revenues

 

19,483

   

16,248

   

 

   

(3,799)

   

31,932

 

Gross profit

 

1,294

   

4,876

   

 

   

(143)

   

6,027

 

Operating profit (loss)(3)

 

1,012

   

1,464

   

(179)

   

(143)

   

2,154

 

Nine Months Ended

                             

September30, 2014:

                             

Net revenues

 

64,566

   

50,100

   

 

   

(12,354)

   

102,312

 

Gross profit

 

3,533

   

15,719

   

 

   

(518)

   

18,734

 

Operating profit (loss)

 

2,605

   

4,982

   

(591)

   

(518)

   

6,478

 

September30, 2013:

                             

Net revenues

 

56,593

   

48,426

   

 

   

(11,088)

   

93,931

 

Gross profit

 

3,025

   

14,828

   

 

   

(409)

   

17,444

 

Operating profit (loss)(3)

 

2,186

   

4,596

   

(553)

   

(409)

   

5,820

 

Total Assets:

                             

September 30, 2014

 

42,527

   

31,197

   

1,344

   

(1,492)

   

73,576

 

December 31, 2013

 

38,343

   

30,191

   

4,420

   

(1,428)

   

71,526

 

Goodwill:

                             

September 30, 2014

 

21,234

   

6,917

   

 

   

 

   

28,151

 

December 31, 2013

 

19,658

   

6,884

   

 

   

 

   

26,542

 
                                         

(1) Net revenues of the Pharmacy Services Segment include approximately $1.9 billion of retail co-payments for both the three months ended September 30, 2014 and 2013, as well as $6.1 billion of retail co-payments for both the nine months ended September 30, 2014 and 2013.

       

(2) Intersegment eliminations relate to two types of transaction: (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 September 30, 2014 and 2013, respectively, and $3.6 billion and $3.1 billion for the nine months ended September 30, 2014 and 2013, respectively; and gross profit and operating profit of $172 million and $143 million for the three months ended September 30, 2014 and 2013, respectively, and $518 million and $409 million for the nine months ended September 30, 2014 and 2013, respectively.

       

(3) Consolidated operating profit for the three and nine months ended September 30, 2013 includes a $72 million gain on a legal settlement, of which, $11 million is included in the Pharmacy Services Segment and $61 million is included in the Retail Pharmacy Segment.

       

 

Supplemental Information
(Unaudited)

Pharmacy Services Segment

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

   

ThreeMonthsEnded

September30,

 

Nine MonthsEnded

September30,

Inmillions

 

2014

   

2013

   

2014

   

2013

 
                         

Net revenues

 

$

22,534

   

$

19,483

   

$

64,566

   

$

56,593

 

Gross profit

 

1,403

   

1,294

   

3,533

   

3,025

 

Gross profit % of net revenues

 

6.2

%

 

6.6

%

 

5.5

%

 

5.4

%

Operating expenses(5)

 

316

   

282

   

928

   

839

 

Operating expense % of net revenues

 

1.4

%

 

1.4

%

 

1.4

%

 

1.5

%

Operating profit

 

1,087

   

1,012

   

2,605

   

2,186

 

Operating profit % of net revenues

 

4.8

%

 

5.2

%

 

4.0

%

 

3.9

%

Net revenues(1)(4):

                       

Mail choice(2)

 

$

8,054

   

$

6,369

   

$

22,641

   

$

18,274

 

Pharmacy network(3)

 

14,420

   

13,063

   

41,748

   

38,163

 

Other

 

60

   

51

   

177

   

156

 

Pharmacy claims processed(1):

                       

Total

 

230.3

   

221.9

   

689.1

   

676.2

 

Mail choice(2)

 

20.7

   

21.0

   

61.1

   

62.3

 

Pharmacy network(3)

 

209.6

   

200.9

   

628.0

   

613.9

 

Generic dispensing rate(1):

                       

Total

 

82.5

%

 

80.7

%

 

82.3

%

 

80.4

%

Mail choice(2)

 

75.0

%

 

72.8

%

 

74.5

%

 

72.4

%

Pharmacy network(3)

 

83.2

%

 

81.5

%

 

83.1

%

 

81.2

%

Mail choice penetration rate

 

21.7

%

 

23.0

%

 

21.5

%

 

22.5

%

                         

(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.

(4) In May 2014, the Company implemented Specialty Connect, which integrates the Company's mail and retail capabilities, providing members with the choice to bring their specialty prescriptions to any CVS/pharmacy location. Whether submitted through our mail order pharmacy or at CVS/pharmacy, all prescriptions are filled through the Company's specialty mail order pharmacies, so all revenue from this specialty prescription services program is recorded within the Pharmacy Services Segment. Members then can choose to pick up their medication at their local CVS/pharmacy or have it sent to their home through the mail.

(5) Operating expenses for the three and nine months ended September 30, 2013 includes a $11 million gain on a legal settlement.

 

Supplemental Information
(Unaudited)

Retail Pharmacy Segment

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

   

ThreeMonthsEnded

September30,

 

Nine MonthsEnded

September30,

Inmillions

 

2014

   

2013

   

2014

   

2013

 
                         

Net revenues

 

$

16,749

   

$

16,248

   

$

50,100

   

$

48,426

 

Gross profit

 

5,237

   

4,876

   

15,719

   

14,828

 

Gross profit % of net revenues

 

31.3

%

 

30.0

%

 

31.4

%

 

30.6

%

Operating expenses(3)

 

3,710

   

3,412

   

10,737

   

10,232

 

Operating expense % of net revenues

 

22.1

%

 

21.0

%

 

21.4

%

 

21.1

%

Operating profit

 

1,527

   

1,464

   

4,982

   

4,596

 

Operating profit % of net revenues

 

9.1

%

 

9.0

%

 

9.9

%

 

9.5

%

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

 

233.7

   

219.7

   

691.1

   

660.5

 

Net revenue increase:

                       

Total

 

3.1

%

 

4.7

%

 

3.5

%

 

2.3

%

Pharmacy

 

5.3

%

 

6.7

%

 

5.0

%

 

2.6

%

Front store

 

(3.7)

%

 

0.4

%

 

(1.6)

%

 

1.5

%

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

 

6.4

%

 

4.9

%

 

4.6

%

 

5.4

%

Same store increase (decrease)(2):

                       

Total sales

 

2.0

%

 

3.3

%

 

2.3

%

 

0.9

%

Pharmacy sales

 

4.8

%

 

5.2

%

 

4.5

%

 

1.2

%

Front store sales(4)

 

(4.5)

%

 

(1.0)

%

 

(2.9)

%

 

 

%

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

 

5.1

%

 

4.1

%

 

3.7

%

 

4.6

%

Generic dispensing rate

 

83.3

%

 

81.5

%

 

83.3

%

 

81.5

%

Pharmacy % of total revenues

 

71.8

%

 

70.4

%

 

70.5

%

 

69.5

%

Third party % of pharmacy revenue

 

98.7

%

 

97.9

%

 

98.6

%

 

97.9

%

                                 

(1) Includes the adjustment to convert 90-day 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 30-day prescription.

(2) Same store sales exclude revenues from CVS/minuteclinic and stores in Brazil.

(3) Operating expenses for the three and nine months ended September 30, 2013 includes a $61 million gain on a legal settlement.

(4) Front store same store sales would have been approximately 480 and 200 basis points higher for the three and nine months ended September 30, 2014, respectively, if tobacco and the estimated associated basket sales were excluded from both the three and nine months ended September 30, 2014 and 2013.

 

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 in our Annual Report on Form 10-K for the year ended December 31, 2013 and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed 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.

Inmillions,exceptpershareamounts

 

Year Ending

December31,2014

             

Income before income tax provision(1)

 

$

7,639

   

$

7,697

 

Amortization

 

521

   

521

 

Adjusted income before income tax provision

 

8,160

   

8,218

 

Adjusted income tax provision and other(2)

 

3,251

   

3,274

 

Adjusted income from continuing operations

 

$

4,909

   

$

4,944

 
             

Weighted average diluted shares outstanding

 

1,169

   

1,169

 

Adjusted earnings per share from continuing operations attributable to CVS Health

 

$

4.20

   

$

4.23

 

 

 

Inmillions,exceptpershareamounts

 

Three Months Ending

December31,2014

             

Income before income tax provision

 

$

2,151

   

$

2,210

 

Amortization

 

130

   

130

 

Adjusted income before income tax provision

 

2,281

   

2,340

 

Adjusted income tax provision and other(2)

 

918

   

942

 

Adjusted income from continuing operations

 

$

1,363

   

$

1,398

 
             

Weighted average diluted shares outstanding

 

1,152

   

1,151

 

Adjusted earnings per share from continuing operations attributable to CVS Health

 

$

1.18

   

$

1.21

 
                 

(1) Includes a $521 million loss on early extinguishment of debt (approximately $0.27 per diluted share) during the year ending December 31, 2014. Excluding the $0.27 loss on early extinguishment of debt, Adjusted EPS for the year ending December 31, 2014 is projected to be $4.47 to $4.50.

 

(2) 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 in our Annual Report on Form 10-K for the year ended December 31, 2013 and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed 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.

Inmillions

 

Year Ending

December31,2014

             

Net cash provided by operating activities

 

$

7,400

   

$

7,700

 

Subtract: Additions to property and equipment

 

(2,300)

   

(2,200)

 

Add: Proceeds from sale-leaseback transactions

 

600

   

500

 

Free cash flow

 

$

5,700

   

$

6,000

 

 

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SOURCE CVS Health Corporation