CVS Health Reports First Quarter Results; Confirms 2016 Adjusted EPS Guidance

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

March 31,

In millions, except per share amounts

2016

2015

Net revenues

$

43,215

$

36,332

Cost of revenues

36,471

30,168

Gross profit

6,744

6,164

Operating expenses

4,568

4,032

Operating profit

2,176

2,132

Interest expense, net

283

134

Income before income tax provision

1,893

1,998

Income tax provision

746

777

Net income

1,147

1,221

Net income attributable to noncontrolling interest

(1)

—

Net income attributable to CVS Health

$

1,146

$

1,221

Net income per share attributable to CVS Health:

Basic

$

1.04

$

1.08

Diluted

$

1.04

$

1.07

Weighted average shares outstanding:

Basic

1,092

1,128

Diluted

1,099

1,136

Dividends declared per share

$

0.425

$

0.350

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

March 31,

December 31,

In millions, except per share amounts

2016

2015

Assets:

Cash and cash equivalents

$

1,779

$

2,459

Short-term investments

85

88

Accounts receivable, net

13,025

11,888

Inventories

13,912

14,001

Other current assets

612

722

Total current assets

29,413

29,158

Property and equipment, net

9,862

9,855

Goodwill

38,115

38,106

Intangible assets, net

13,750

13,878

Other assets

1,494

1,440

Total assets

$

92,634

$

92,437

Liabilities:

Accounts payable

$

7,361

$

7,490

Claims and discounts payable

8,530

7,653

Accrued expenses

7,444

6,829

Current portion of long-term debt

1,202

1,197

Total current liabilities

24,537

23,169

Long-term debt

26,267

26,267

Deferred income taxes

4,232

4,217

Other long-term liabilities

1,567

1,542

Commitments and contingencies

—

—

Redeemable noncontrolling interest

—

39

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; 1,701 shares issued and 1,081

  shares outstanding at March 31, 2016 and 1,699 shares issued and 1,101 shares

  outstanding at December 31, 2015

17

17

  Treasury stock, at cost: 619 shares at March 31, 2016 and 597 shares at December 31,
    2015

(31,058)

(28,886)

  Shares held in trust: 1 share at March 31, 2016 and December 31, 2015

(31)

(31)

  Capital surplus

31,254

30,948

  Retained earnings

36,182

35,506

  Accumulated other comprehensive income (loss)

(339)

(358)

  Total CVS Health shareholders' equity

36,025

37,196

Noncontrolling interest

6

7

  Total shareholders' equity

36,031

37,203

Total liabilities and shareholders' equity

$

92,634

$

92,437

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended

March 31,

In millions

2016

2015

Cash flows from operating activities:

Cash receipts from customers

$

41,482

$

34,570

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(35,575)

(28,276)

Cash paid to other suppliers and employees

(2,961)

(4,162)

Interest received

5

3

Interest paid

(378)

(87)

Income taxes paid

(161)

(64)

Net cash provided by operating activities

2,412

1,984

Cash flows from investing activities:

Purchases of property and equipment

(598)

(419)

Proceeds from sale-leaseback transactions

—

25

Proceeds from sale of property and equipment and other assets

2

8

Acquisitions (net of cash acquired) and other investments

(51)

(61)

Purchase of available-for-sale investments

(36)

(113)

Sale or maturity of available-for-sale investments

50

16

Net cash used in investing activities

(633)

(544)

Cash flows from financing activities:

Decrease in short-term debt

—

(185)

Purchase of noncontrolling interest in subsidiary

(39)

—

Dividends paid

(470)

(399)

Proceeds from exercise of stock options

92

126

Excess tax benefits from stock-based compensation

27

59

Repurchase of common stock

(2,066)

(2,007)

Other

(4)

—

Net cash used in financing activities

(2,460)

(2,406)

Effect of exchange rates on cash and cash equivalents

1

3

Net decrease in cash and cash equivalents

(680)

(963)

Cash and cash equivalents at the beginning of the period

2,459

2,481

Cash and cash equivalents at the end of the period

$

1,779

$

1,518

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

Net income

$

1,147

$

1,221

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

Depreciation and amortization

617

490

Stock-based compensation

57

44

Deferred income taxes and other non-cash items

17

(31)

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

Accounts receivable, net

(1,131)

(481)

Inventories

89

(313)

Other current assets

106

269

Other assets

(52)

(52)

Accounts payable and claims and discounts payable

798

756

Accrued expenses

741

153

Other long-term liabilities

23

(72)

Net cash provided by operating activities

$

2,412

$

1,984

Adjusted Earnings Per Share

(Unaudited)

The Company is providing non-GAAP information that excludes certain items because of the nature of these items and the impact they have on the analysis of underlying business performance and trends. Management believes that providing this information enhances investors' understanding of the Company's performance. This information should be considered in addition to, but not in lieu of, information prepared in accordance with GAAP.

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

Three Months Ended

March 31,

In millions, except per share amounts

2016

2015

Income before income tax provision

$

1,893

$

1,998

Non-GAAP adjustments:

Amortization of intangible assets

199

129

Acquisition-related integration costs⁽¹⁾

61

—

Charge related to a disputed 1999 legal settlement

3

—

Adjusted income before income tax provision

2,156

2,127

Adjusted income tax provision

847

828

Adjusted net income

1,309

1,299

Net income attributable to noncontrolling interest

(1)

—

Income allocable to participating securities

(7)

(5)

Adjusted net income attributable to CVS Health

$

1,301

$

1,294

Weighted average diluted shares outstanding

1,099

1,136

Adjusted EPS

$

1.18

$

1.14

(1)   Costs associated with the acquisitions of Omnicare and the pharmacies and clinics of Target.

Free Cash Flow

(Unaudited)

For internal comparisons, management finds it useful to assess year-over-year cash flow performance using free cash flow.

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:

Three Months Ended

March 31,

In millions

2016

2015

Net cash provided by operating activities

$

2,412

$

1,984

Subtract: Additions to property and equipment

(598)

(419)

Add: Proceeds from sale-leaseback transactions

—

25

Free cash flow

$

1,814

$

1,590

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:

In millions

Pharmacy

Services

Segment⁽¹⁾

Retail/LTC

Segment

Corporate

Segment

Intersegment

Eliminations⁽²⁾

Consolidated

Totals

Three Months Ended

March 31, 2016:

Net revenues

$

28,765

$

20,112

$

—

$

(5,662)

$

43,215

Gross profit⁽³⁾

1,102

5,830

—

(188)

6,744

Operating profit (loss)⁽³⁾

782

1,777

(212)

(171)

2,176

March 31, 2015:

Net revenues

23,879

16,951

—

(4,498)

36,332

Gross profit

1,026

5,295

—

(157)

6,164

Operating profit (loss)

734

1,727

(189)

(140)

2,132

(1)

Net revenues of the Pharmacy Services Segment include approximately $3.0 billion and $2.5 billion of retail co-payments for the three months ended March 31, 2016 and 2015, respectively.

(2)

Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services Segment and the Retail/LTC Segment. These occur when Pharmacy Services Segment members fill prescriptions at either the Company's retail pharmacies or long-term care facilities. Revenues are recorded in both segments and are eliminated in consolidation. Gross profit and operating profit related to the Company's Maintenance Choice^® programs are recorded in both segments and are also eliminated in consolidation.

(3)

The Retail/LTC Segment gross profit and operating profit for the three months ended March 31, 2016 include $4 million and $57 million, respectively, of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

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

Three Months Ended

March 31,

In millions

2016

Net revenues

$

28,765

$

23,879

Gross profit

1,102

1,026

Gross profit % of net revenues

3.8

%

4.3

%

Operating expenses

320

292

Operating expense % of net revenues

1.1

%

1.2

%

Operating profit

782

734

Operating profit % of net revenues

2.7

%

3.1

%

Net revenues:

Mail choice⁽¹⁾

$

10,150

$

8,750

Pharmacy network⁽²⁾

18,536

15,059

Other

79

70

Pharmacy claims processed:

Total

304.8

251.1

Mail choice⁽¹⁾

21.7

20.3

Pharmacy network⁽²⁾

283.1

230.8

Generic dispensing rate:

Total

85.2

%

83.5

%

Mail choice⁽¹⁾

77.3

%

76.1

%

Pharmacy network⁽²⁾

85.8

%

84.1

%

Mail choice penetration rate

17.6

%

19.8

%

(1)

Mail choice is defined as claims filled at a Pharmacy Services mail facility, which include specialty mail claims inclusive of Specialty Connect^® claims filled at retail, as well as prescriptions filled at retail under the Maintenance Choice^® program.

(2)

Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice, which are included within the mail choice category. Pharmacy network is defined as claims filled at retail and specialty pharmacies, including our retail drugstores and long-term care pharmacies, but excluding Maintenance Choice activity.

Supplemental Information

(Unaudited)

Retail/LTC Segment

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

Three Months Ended

March 31,

In millions

2016

2015

Net revenues

$

20,112

$

16,951

Gross profit⁽¹⁾

5,830

5,295

Gross profit % of net revenues

29.0

%

31.2

%

Operating expenses⁽¹⁾

4,053

3,568

Operating expense % of net revenues

20.1

%

21.0

%

Operating profit

1,777

1,727

Operating profit % of net revenues

8.8

%

10.2

%

Prescriptions filled (90 Day = 3 Rx)⁽²⁾

305.1

241.3

Net revenue increase (decrease):

Total

18.6

%

2.9

%

Pharmacy

23.7

%

5.3

%

Front store

2.6

%

(3.6)

%

Total prescription volume (90 Day = 3 Rx)⁽²⁾

16.0

%

6.3

%

Same store increase (decrease)⁽³⁾:

Total sales

4.2

%

1.2

%

Pharmacy sales

5.5

%

4.2

%

Front store sales

0.7

%

(6.1)

%

Prescription volume (90 Day = 3 Rx)⁽²⁾

5.9

%

5.1

%

Generic dispensing rate

85.7

%

84.4

%

Pharmacy % of total revenues

74.7

%

71.7

%

(1)

Gross profit includes $4 million and operating expenses include $57 million of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target for the three months ended March 31, 2016.

(2)

Includes the adjustment to convert 90-day, non-specialty 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 prescription.

(3)

Same store sales and prescriptions exclude revenues from MinuteClinic^®, and revenue and prescriptions from stores in Brazil, long-term care operations and from commercialization services.

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.

In millions, except per share amounts

Year Ending

December 31, 2016

Income before income tax provision⁽¹⁾

$

9,330

$

9,606

Non-GAAP adjustments:

Amortization of intangible assets

800

798

Acquisition-related integration costs⁽¹⁾

61

61

Charge related to a disputed 1999 legal settlement

3

3

Adjusted income before income tax provision

10,194

10,468

Adjusted income tax provision

3,974

4,082

Adjusted net income

6,220

6,386

Net income attributable to noncontrolling interest

(7)

(7)

Income allocable to participating securities

(30)

(30)

Adjusted net income attributable to CVS Health

$

6,183

$

6,349

Weighted average diluted shares outstanding

1,080

1,080

Adjusted earnings per share

$

5.73

$

5.88

In millions, except per share amounts

Three Months Ending

 June 30, 2016

Income before income tax provision⁽¹⁾

$

2,069

$

2,138

Non-GAAP adjustments:

Amortization of intangible assets

195

195

Adjusted income before income tax provision

2,264

2,333

Adjusted income tax provision

884

917

Adjusted net income

1,380

1,416

Net income attributable to noncontrolling interest

—

—

Income allocable to participating securities

(8)

(8)

Adjusted net income attributable to CVS Health

$

1,372

$

1,408

Weighted average diluted shares outstanding

1,075

1,075

Adjusted earnings per share⁽⁴⁾

$

1.28

$

1.31

(1)

Excludes anticipated acquisition-related integration costs for the acquisitions of Omnicare and the pharmacies and clinics of Target for the period from April 1, 2016 through December 31, 2016.

Free Cash Flow Guidance

(Unaudited)

For internal comparisons, management finds it useful to assess year-over-year cash flow performance using free cash flow. 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 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.

In millions

Year Ending

December 31, 2016

Net cash provided by operating activities

$

7,575

$

7,875

Subtract: Additions to property and equipment

(2,550)

(2,450)

Add: Proceeds from sale-leaseback transactions

275

175

Free cash flow

$

5,300

$

5,600