CVS Health Reports Third Quarter Results

Tuesday, November 8, 2016

Lowers And Narrows 2016 Guidance, Provides 2017 Preliminary Outlook And Announces New Long-Term Adjusted EPS Target

View print friendly version.

Third Quarter Year-over-year Highlights:

  • Net revenues increased 15.5% to $44.6 billion
  • GAAP operating profit increased 20.9% to $2.8 billion
  • GAAP diluted EPS from continuing operations of $1.43
  • Adjusted EPS increased 28.0% to $1.64
  • GAAP and Adjusted EPS both include a benefit of approximately 5 cents per share related to a lower income tax rate primarily due to the resolution of tax matters previously forecasted for the fourth quarter

Year-to-date Highlights:

  • Cash flow from operations of $7.9 billion

  • Generated free cash flow of $6.6 billion

2016 Guidance:

  • Full year GAAP diluted EPS lowered and narrowed to $4.84 to $4.90 from $4.92 to $5.00, including third quarter acquisition-related integration costs

  • Full year Adjusted EPS lowered and narrowed to $5.77 to $5.83 from $5.81 to $5.89

  • Provided fourth quarter GAAP diluted EPS of $1.52 to $1.58, excluding acquisition-related integration costs

  • Provided fourth quarter Adjusted EPS of $1.64 to $1.70, up 7.00% to 10.75%

  • Raised full year cash flow from operations to $9.1 to $9.3 billion; free cash flow to $6.8 to $7.0 billion

2017 Preliminary Outlook:

  • Provided full year GAAP diluted EPS of $5.16 to $5.33

  • Provided full year Adjusted EPS of $5.77 to $5.93

  • Both include the projected loss of more than 40 million retail prescriptions related to new restricted pharmacy networks

  • GAAP diluted EPS includes impact of previously announced termination of pension plan

WOONSOCKET, RHODE ISLAND, November 8, 2016 - CVS Health Corporation (NYSE: CVS) today announced operating results for the three months ended September 30, 2016.

President and Chief Executive Officer Larry Merlo stated, “We posted a solid third quarter with the PBM exceeding our expectations and retail performing at the lower end of our expectations. However, very recent pharmacy network changes in the marketplace are expected to cause some retail prescriptions to begin migrating out of our pharmacies this quarter. In addition, we are currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business. These factors combined are leading us to reduce the mid-point of our guidance for this year by five cents per share. The network changes have more significant implications for our 2017 outlook. While we expect a healthy increase in PBM operating profit growth in 2017, we expect a decrease in retail operating profit growth.”

Mr. Merlo continued, “We remain confident in our model and we are targeting 10% growth in Adjusted EPS for the longer term, as we continue to introduce new and innovative ways to drive value for patients, payors, and providers.”

Revenues

Net revenues for the three months ended September 30, 2016 increased 15.5%, or $6.0 billion, to $44.6 billion, compared to the three months ended September 30, 2015. Revenues in the Pharmacy Services Segment increased 19.2%, or $4.9 billion, to $30.4 billion in the three months ended September 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 September 30, 2016 increased 23.3% to 282.6 million, compared to 229.1 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 September 30, 2016, increased 2.5%, to 22.4 million, compared to 21.9 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 12.5%, or $2.2 billion, to approximately $20.1 billion, in the three months ended September 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 2.3% versus the third quarter of 2015. Pharmacy same store sales rose 3.4% and pharmacy same store prescription volumes rose 3.0% on a 30-day equivalent basis. Pharmacy same store sales were negatively affected by approximately 340 basis points from recent generic drug introductions. Front store same store sales decreased 1.0%, which were negatively affected by softer customer traffic partially offset by an increase in basket size.

For the three months ended September 30, 2016, the generic dispensing rate increased approximately 160 basis points to 85.4% in the Pharmacy Services Segment and increased approximately 100 basis points to 85.8% in the Retail/LTC Segment.

Operating Profit

For the three months ended September 30, 2016, consolidated operating profit increased $486 million, or 20.9%. Excluding acquisition-related integration costs of $65 million in 2016 and acquisition-related transaction and integration costs of $127 million in 2015, consolidated operating profit increased $424 million, or 17.3%, from $2,458 million for the three months ended September 30, 2015 to $2,882 million for the three months ended September 30, 2016. For the three months ended September 30, 2016, operating profit increased $296 million, or 25.3%, to $1,458 million in the Pharmacy Services Segment and $130 million, or 7.9%, to $1,773 million in the Retail/LTC Segment. Excluding acquisition-related integration costs of $52 million and $12 million in the three months ended September 30, 2016 and 2015, respectively, the Retail/LTC Segment operating profit grew $170 million, or 10.3%, to $1,825 million for the three months ended September 30, 2016. Both segments benefited from 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 the acquisition of Omnicare's LTC business as well as an improved front store margin rate. These positive factors for both segments were partially offset by continued pricing in the Pharmacy Services Segment and reimbursement pressure in the Retail/LTC Segment.

Net Income and Earnings Per Share

Net income for the three months ended September 30, 2016 was $1.5 billion, an increase of $294 million or 23.6%. The increase in net income is primarily due to the $486 million increase in operating profit discussed above partially offset by a $101 million loss on early extinguishment of debt. Net income also benefited, by approximately $0.05 per share, from a lower income tax rate, which was primarily due to the resolution of income tax matters previously forecasted in the fourth quarter.

GAAP earnings per diluted share from continuing operations (“GAAP diluted EPS”) for the three months ended September 30, 2016 was $1.43, compared to $1.10 in the prior year. Adjusted earnings per share (“Adjusted EPS”) for the three months ended September 30, 2016 and 2015, was $1.64 and $1.28, respectively. Adjusted EPS excludes $197 million and $160 million of intangible asset amortization for the three months ended September 30, 2016 and 2015, respectively. Adjusted EPS for the three months ended September 30, 2016 also excludes $65 million of acquisition-related integration costs and the loss on early extinguishment of debt of $101 million. Adjusted EPS for the three months ended September 30, 2015 also excludes $127 million of acquisition-related transaction and integration costs and $16 million of acquisition-related bridge financing costs. Further detail is shown in the Adjusted Earnings Per Share reconciliation later in this release.

Guidance

The Company lowered and narrowed full year GAAP diluted EPS to $4.84 to $4.90 from $4.92 to $5.00, including acquisition-related integration costs recorded in the nine months ended September 30, 2016. The Company lowered and narrowed full year Adjusted EPS to $5.77 to $5.83 from $5.81 to $5.89. Estimated acquisition-related integration costs for the fourth quarter of 2016 are excluded from the 2016 guidance. Further detail is shown in the 2016 Adjusted Earnings Per Share Guidance reconciliation attached to this release.

In the fourth quarter of 2016, the Company expects to deliver GAAP diluted EPS of $1.52 to $1.58. The Company expects to deliver Adjusted EPS of $1.64 to $1.70. Further detail is shown in the 2016 Adjusted Earnings Per Share Guidance reconciliation attached to this release.

The Company raised cash flow guidance for 2016 and now expects to deliver cash flow from operations of $9.1 billion to $9.3 billion and 2016 free cash flow of $6.8 billion to $7.0 billion. Further detail is shown in the 2016 Free Cash Flow Guidance reconciliation attached to this release.

2017 Preliminary Outlook

The Company provided a preliminary outlook for 2017. GAAP diluted EPS is expected to be in the range of $5.16 to $5.33 and Adjusted EPS is expected to be in the range of $5.77 to $5.93. Included in this outlook is the impact from the projected loss of more than 40 million retail prescriptions related to marketplace changes, including new retail pharmacy networks that are excluding CVS Pharmacy drugstores. The GAAP outlook includes the expected impact of the previously-announced termination of one of the Company’s pension plans and excludes the impact of integration costs related to the acquisition of Omnicare, which will be updated as the year progresses. Further detail is shown in the 2017 Preliminary Outlook reconciliation later in this release.

New Share Repurchase Authorization

The share repurchase authorization approved in December 2014 is nearing completion with approximately $3.7 billion remaining. Reflecting the board's ongoing commitment to returning value to shareholders, the Company announced that, consistent with its practice, the board of directors approved a new share repurchase program for up to $15 billion of the Company's outstanding common stock. Combined with the approximately $3.7 billion that remains from the 2014 program, the Company has approximately $18.7 billion available for share repurchases. The share repurchase authorization, which is effective immediately and is expected to be completed over a multi-year period, permits the Company to effect the repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions.

Real Estate Program

During the three months ended September 30, 2016, the Company opened 48 new retail stores and closed 6 retail stores. In addition, the Company relocated 11 retail stores. As of September 30, 2016, the Company operated 9,694 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 more than 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.

The Company defines Adjusted Earnings per Share, or Adjusted EPS, as 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.

The Company has not provided a reconciliation of the long-term Adjusted EPS target announced today to GAAP EPS. The Company is unable to reasonably estimate the GAAP items excluded from the multi-year, long-term Adjusted EPS target.

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 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:

2016 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.

2016 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.

2017 Preliminary Outlook

Adjusted Earnings Per Share

(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.

Investor Contact:

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

Media Contact:

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