CVS Health Reports Third Quarter Results

Monday, November 6, 2017

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Third Quarter Year-over-year Highlights:

  • Net revenues increased 3.5% to $46.2 billion

  • GAAP diluted EPS from continuing operations of $1.26

  • Adjusted EPS of $1.50

Year-to-date Highlights:

  • Generated cash flow from operations of $8.1 billion; free cash flow of $7.0 billion

2017 Guidance:

  • Narrowed and raised the mid-point of the range for full year GAAP diluted EPS from continuing operations to $4.98 to $5.02 from $4.92 to $5.02

  • Narrowed and raised the mid-point of the range for full year Adjusted EPS to $5.87 to $5.91 from $5.83 to $5.93

  • Provided fourth quarter GAAP diluted EPS from continuing operations of $1.75 to $1.79

  • Provided fourth quarter Adjusted EPS of $1.88 to $1.92

  • 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, November 6, 2017 - CVS Health Corporation (NYSE: CVS) today announced operating results for the three and nine months ended September 30, 2017.

President and Chief Executive Officer Larry Merlo stated, “The solid third quarter results we posted today keep us well on track to achieve our full-year targets. While operating profit in the Retail/LTC Segment was impacted by the devastating hurricanes, operating profit in the Pharmacy Services Segment was in line with expectations. At the same time, we continued to deliver substantial free cash flow and return significant value to our shareholders through dividends and share repurchases.”

Mr. Merlo continued, “Given our performance year-to-date and our confidence in our expectations for the remainder of this year, we are narrowing and raising the midpoint of our Adjusted EPS guidance for 2017. We remain committed to returning to healthy levels of earnings growth for the total enterprise, and the actions we have taken thus far this year, including our expanded partnerships and new PBM offerings, set us on the right track for growth.”

Revenues

Net revenues for the three months ended September 30, 2017 increased 3.5%, or $1.6 billion, to approximately $46.2 billion, up from $44.6 billion in the three months ended September 30, 2016.

Revenues in the Pharmacy Services Segment increased 8.1% to approximately $32.9 billion in the three months ended September 30, 2017. This increase was primarily driven by growth in pharmacy network claim volume, brand inflation and specialty pharmacy volume, partially offset by increased price compression and generic dispensing. Pharmacy network claims processed during the three months ended September 30, 2017 increased 8.3% on a 30-day equivalent basis, to 374.2 million, compared to 345.7 million in the prior year. The increase in pharmacy network claim volume was primarily due to an increase in net new business. On a 30-day equivalent basis, mail choice claims processed during the three months ended September 30, 2017 increased 6.1% to 66.9 million, compared to 63.0 million in the prior year. The increase in 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 2.7% to approximately $19.6 billion in the three months ended September 30, 2017. The decrease was largely driven by a 3.2% decrease in same store sales, an increase in the generic dispensing rate and continued reimbursement pressure.

Pharmacy same store sales decreased 3.4% in the three months ended September 30, 2017 and were negatively impacted by approximately 435 basis points due to recent generic introductions. On a 30-day equivalent basis, same store prescription volumes increased 0.3% in the three months ended September 30, 2017. The previously-announced restricted networks that exclude CVS Pharmacy had a negative impact of approximately 420 basis points on same store prescription volumes.

Front store same store sales declined 2.8% in the three months ended September 30, 2017. 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 September 30, 2017, the generic dispensing rate increased approximately 100 basis points to 87.0% in our Pharmacy Services Segment and increased approximately 140 basis points to 87.2% in our Retail/LTC Segment, compared to the same quarter in the prior year.

Operating Profit

Consolidated operating profit for the three months ended September 30, 2017, decreased $325 million, or 11.5%, to $2.5 billion. The decline was primarily driven by the previously-announced restricted networks that exclude CVS Pharmacy and continued reimbursement pressure in the Retail/LTC Segment, price compression in the Pharmacy Services Segment, and as expected, the timing of Medicare Part D profits between the third and fourth quarter of 2017. In addition, the Company incurred $55 million in expenses in the three months ended September 30, 2017, predominately in the Retail/LTC Segment, for the three major hurricanes that hit the southern United States and Puerto Rico. These decreases were partially offset by lower acquisition-related integration expenses of $59 million.

Net Income and Earnings Per Share

Net income for the three months ended September 30, 2017 decreased $256 million or 16.6%, to $1.3 billion. The decrease was due to the $325 million decrease in operating profit plus $187 million of losses on pension settlements included in other expense, partially offset by the absence of a $101 million loss on early extinguishment of debt that affected the prior year.

GAAP earnings per diluted share from continuing operations (“GAAP diluted EPS”) for the three months ended September 30, 2017 was $1.26, compared to $1.43 in the third quarter of the prior year. Adjusted earnings per share (“Adjusted EPS”) for the three months ended September 30, 2017 and 2016, was $1.50 and $1.64, respectively. Further detail is shown in the Adjusted Earnings Per Share reconciliation later in this release.

Guidance

The Company narrowed and raised the mid-point of the range for full year GAAP diluted EPS from continuing operations to $4.98 to $5.02 from $4.92 to $5.02. The Company narrowed and raised the mid-point of the range for full year Adjusted EPS to $5.87 to $5.91, including the charges due to hurricanes, from $5.83 to $5.93.

In the fourth quarter, the Company expects to deliver GAAP diluted EPS of $1.75 to $1.79 and Adjusted EPS of $1.88 to $1.92.

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 September 30, 2017, the Company opened 56 new retail locations, closed five retail locations and relocated five retail locations. As of September 30, 2017, the Company operated 9,751 retail locations, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.

The Company closed 68 retail stores and took a charge of $211 million in the nine months ended September 30, 2017. As previously disclosed, the Company expects to close a cumulative total of 70 retail stores during the year ending December 31, 2017 and expects the cumulative charges to total approximately $220 million. The charges are primarily associated with the remaining noncancelable lease obligations of the stores.

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 9,700 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, losses on settlements of defined benefit pension plans, charges in connection with store rationalization, goodwill impairments, losses on early extinguishments of debt, and adjustments to legal reserves in connection with certain legal settlements, and, 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