CVS Health Reports First Quarter Results; Confirms 2017 EPS Guidance

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

March 31,

In millions, except per share amounts

2017

2016 ⁽¹⁾

Net revenues

$

44,514

$

43,215

Cost of revenues

37,934

36,471

Gross profit

6,580

6,744

Operating expenses

4,787

4,559

Operating profit

1,793

2,185

Interest expense, net

252

283

Other expense

7

9

Income before income tax provision

1,534

1,893

Income tax provision

572

746

Income from continuing operations

962

1,147

Loss from discontinued operations, net of tax

(9)

—

Net income

953

1,147

Net income attributable to noncontrolling interest

(1)

(1)

Net income attributable to CVS Health

$

952

$

1,146

Basic earnings per share:

Income from continuing operations attributable to CVS Health

$

0.93

$

1.04

Loss from discontinued operations attributable to CVS Health

$

(0.01)

$

—

Net income attributable to CVS Health

$

0.92

$

1.04

Weighted average shares outstanding

1,030

1,092

Diluted earnings per share:

Income from continuing operations attributable to CVS Health

$

0.92

$

1.04

Loss from discontinued operations attributable to CVS Health

$

(0.01)

$

—

Net income attributable to CVS Health

$

0.92

$

1.04

Weighted average shares outstanding

1,035

1,099

Dividends declared per share

$

0.50

$

0.425

________________________

(1)

During the three months ended March 31, 2017, the Company adopted Accounting Standards Update ("ASU") 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which resulted in a retrospective reclassification of $9 million of net benefit costs from operating expenses to other expense in the three months ended March 31, 2016.

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

March 31,

December 31,

In millions, except per share amounts

2017

2016

Assets:

Cash and cash equivalents

$

2,217

$

3,371

Short-term investments

85

87

Accounts receivable, net

12,114

12,164

Inventories

14,306

14,760

Other current assets

735

660

 Total current assets

29,457

31,042

Property and equipment, net

10,057

10,175

Goodwill

38,263

38,249

Intangible assets, net

13,390

13,511

Other assets

1,503

1,485

Total assets

$

92,670

$

94,462

Liabilities:

Accounts payable

$

7,344

$

7,946

Claims and discounts payable

9,453

9,451

Accrued expenses

8,680

6,937

Short-term debt

1,768

1,874

Current portion of long-term debt

43

42

 Total current liabilities

27,288

26,250

Long-term debt

25,622

25,615

Deferred income taxes

4,214

4,214

Other long-term liabilities

1,704

1,549

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; 1,707 shares issued and 1,027 shares outstanding at March 31, 2017 and 1,705 shares issued and 1,061 shares outstanding at December 31, 2016

17

17

Treasury stock, at cost: 679 shares at March 31, 2017 and 643 shares at December 31, 2016

(36,306)

(33,452)

Shares held in trust: 1 share at March 31, 2017 and December 31, 2016

(31)

(31)

Capital surplus

31,034

31,618

Retained earnings

39,419

38,983

Accumulated other comprehensive income (loss)

(296)

(305)

Total CVS Health shareholders' equity

33,837

36,830

Noncontrolling interest

5

4

 Total shareholders' equity

33,842

36,834

Total liabilities and shareholders' equity

$

92,670

$

94,462

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended

March 31,

In millions

2017

2016 ⁽¹⁾

Cash flows from operating activities:

Cash receipts from customers

$

43,913

$

41,482

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(36,178)

(35,575)

Cash paid to other suppliers and employees

(3,823)

(2,934)

Interest received

6

5

Interest paid

(328)

(378)

Income taxes paid

(57)

(161)

Net cash provided by operating activities

3,533

2,439

Cash flows from investing activities:

Purchases of property and equipment

(457)

(598)

Proceeds from sale of property and equipment and other assets

5

2

Acquisitions (net of cash acquired) and other investments

(110)

(51)

Purchase of available-for-sale investments

—

(36)

Maturity of available-for-sale investments

8

50

Net cash used in investing activities

(554)

(633)

Cash flows from financing activities:

Decrease in short-term debt

(106)

—

Purchase of noncontrolling interest in subsidiary

—

(39)

Dividends paid

(516)

(470)

Proceeds from exercise of stock options

121

104

Payments for taxes related to net share settlement of equity awards

(11)

(12)

Repurchase of common stock

(3,621)

(2,066)

Other

—

(4)

Net cash used in financing activities

(4,133)

(2,487)

Effect of exchange rate changes on cash and cash equivalents

—

1

Net decrease in cash and cash equivalents

(1,154)

(680)

Cash and cash equivalents at the beginning of the period

3,371

2,459

Cash and cash equivalents at the end of the period

$

2,217

$

1,779

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

Net income

$

953

$

1,147

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

Depreciation and amortization

619

617

Stock-based compensation

55

57

Deferred income taxes and other noncash items

14

17

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

Accounts receivable, net

48

(1,131)

Inventories

456

89

Other current assets

(74)

106

Other assets

(1)

(52)

Accounts payable and claims and discounts payable

(539)

798

Accrued expenses

1,848

768

Other long-term liabilities

154

23

Net cash provided by operating activities

$

3,533

$

2,439

________________________

(1)

During the three months ended March 31, 2017, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which resulted in a retrospective reclassification of $27 million of excess tax benefits from financing activities to operating activities which increased net cash provided by operating activities and increased cash used in financing activities for the three months ended March 31, 2016.

Adjusted Earnings Per Share

(Unaudited)

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

2017

2016

Income before income tax provision

$

1,534

$

1,893

Non-GAAP adjustments:

Amortization of intangible assets

200

199

Acquisition-related integration costs ⁽¹⁾

15

61

Charge in connection with store rationalization ⁽²⁾

199

—

Charge related to a disputed 1999 legal settlement

—

3

Adjusted income before income tax provision

1,948

2,156

Adjusted income tax provision

734

847

Adjusted income from continuing operations

1,214

1,309

Net income attributable to noncontrolling interest

(1)

(1)

Adjusted income allocable to participating securities

(5)

(7)

Adjusted income from continuing operations attributable to CVS Health

$

1,208

$

1,301

Weighted average diluted shares outstanding

1,035

1,099

Adjusted EPS

$

1.17

$

1.18

________________________

(1)

In 2017, the integration costs relate to the acquisition of Omnicare and in 2016, the integration costs relate to the acquisitions of Omnicare and the pharmacies and clinics of Target.

(2)

Primarily represents a charge for noncancelable lease obligations associated with stores closed in connection with our enterprise streamlining initiative.

Free Cash Flow

(Unaudited)

The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:

Three Months Ended

March 31,

In millions

2017

2016 ⁽¹⁾

Net cash provided by operating activities

$

3,533

$

2,439

Subtract: Additions to property and equipment

(457)

(598)

Free cash flow

$

3,076

$

1,841

________________________

(1)

During the three months ended March 31, 2017, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which resulted in a retrospective reclassification of $27 million of excess tax benefits from financing activities to operating activities which increased net cash provided by operating activities for the three months ended March 31, 2016.

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 consolidated financial statements:

Pharmacy 

Services

Retail/LTC

Corporate

Intersegment

Consolidated

In millions

Segment⁽¹⁾

Segment

Segment

Eliminations⁽²⁾

Totals

Three Months Ended

March 31, 2017:

  Net revenues

$

31,223

$

19,341

$

—

$

(6,050)

$

44,514

  Gross profit

1,096

5,676

—

(192)

6,580

  Operating profit (loss) ⁽³⁾

784

1,411

(226)

(176)

1,793

March 31, 2016:

  Net revenues

28,765

20,112

—

(5,662)

43,215

  Gross profit ⁽⁴⁾

1,102

5,830

—

(188)

6,744

  Operating profit (loss) ⁽⁴⁾⁽⁵⁾

784

1,784

(212)

(171)

2,185

________________________

(1)

Net revenues of the Pharmacy Services Segment include approximately $3.1 billion and $3.0 billion of Retail Co‑Payments for the three months ended March 31, 2017 and 2016, respectively.

(2)

Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services Segment and the Retail/LTC Segment. These occur in the following ways: when members of Pharmacy Services Segment clients ("members") fill prescriptions at the Company's retail pharmacies to purchase covered products, when members enrolled in programs such as Maintenance Choice^® elect to pick up maintenance prescriptions at one of the Company's retail pharmacies instead of receiving them through the mail, or when members have prescriptions filled at the Company's long-term care pharmacies. When these occur, both the Pharmacy Services and Retail/LTC segments record the revenues, gross profit and operating profit on a standalone basis.

(3)

The Retail/LTC Segment operating profit for the three months ended March 31, 2017 includes a $199 million charge associated with store closures and $15 million of acquisition-related integration costs. The integration costs are related to the acquisition of Omnicare.

(4)

The Retail/LTC Segment gross profit and operating profit for the three months ended March 31, 2016 includes $4 million and $61 million, respectively, of acquisition-related integration costs. The integration costs are related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

(5)

Amounts revised to reflect the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which increased consolidated operating profit by $9 million.

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

2017

2016

Net revenues

$

31,223

$

28,765

Gross profit

1,096

1,102

Gross profit % of net revenues

3.5

%

3.8

%

Operating expenses ⁽¹⁾

312

318

Operating expenses % of net revenues

1.0

%

1.1

%

Operating profit ⁽¹⁾

784

784

Operating profit % of net revenues

2.5

%

2.7

%

Net revenues:

Mail choice ⁽²⁾

$

10,848

$

10,150

Pharmacy network ⁽³⁾

20,301

18,536

Other

74

79

Pharmacy claims processed (90 Day = 3 prescriptions) ⁽⁴⁾⁽⁵⁾:

Total

440.5

401.9

Mail choice ⁽²⁾

63.7

61.0

Pharmacy network ⁽³⁾

376.8

340.9

Generic dispensing rate ⁽⁴⁾:

Total ⁽⁵⁾

87.0

%

85.6

%

Mail choice ⁽²⁾

79.2

%

77.3

%

Pharmacy network ⁽³⁾⁽⁵⁾

87.7

%

86.5

%

Mail choice penetration rate ⁽⁴⁾

14.5

%

15.2

%

________________________

(1)

Amounts revised for the three months ended March 31, 2016 to reflect the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which decreased operating expenses and increased operating profit by $2 million.

(2)

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

(3)

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 retail pharmacies, including our retail pharmacies and long-term care pharmacies, but excluding Maintenance Choice activity.

(4)

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 prescription.

(5)

The pharmacy claims processed and the generic dispensing rate for the three months ended March 31, 2016 have been revised to reflect 90-day prescriptions to the equivalent of three 30-day prescriptions.

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

2017

2016

Net revenues

$

19,341

$

20,112

Gross profit ⁽¹⁾

5,676

5,830

Gross profit % of net revenues

29.3

%

29.0

%

Operating expenses ^(1)(2)(3)

4,265

4,046

Operating expenses % of net revenues

22.1

%

20.1

%

Operating profit ⁽³⁾

1,411

1,784

Operating profit % of net revenues

7.3

%

8.9

%

Prescriptions filled (90 Day = 3 prescriptions) ⁽⁴⁾

303.1

305.1

Net revenue increase (decrease):

Total

(3.8)

%

18.6

%

Pharmacy

(3.8)

%

23.7

%

Front Store

(3.9)

%

2.6

%

Total prescription volume (90 Day = 3 prescriptions) ⁽⁴⁾

(0.6)

%

16.0

%

Same store sales increase (decrease) ⁽⁵⁾:

Total

(4.7)

%

4.2

%

Pharmacy

(4.7)

%

5.5

%

Front Store

(4.9)

%

0.7

%

Prescription volume (90 Day = 3 prescriptions) ⁽⁴⁾

(1.4)

%

5.9

%

Generic dispensing rates

87.5

%

85.7

%

Pharmacy % of net revenues

74.6

%

74.7

%

________________________

(1)

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

(2)

Operating expenses for the three months ended March 31, 2017 includes a $199 million charge associated with store closures and $15 million of acquisition-related integration costs. The integration costs are related to the acquisition of Omnicare.

(3)

Amounts revised for the three months ended March 31, 2016 to reflect the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which decreased operating expenses and increased operating profit by $7 million.

(4)

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.

(5)

Same store sales and prescriptions exclude revenues from MinuteClinic, and revenue and prescriptions from stores in Brazil, LTC 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. See also previous discussion at "Non-GAAP Financial Measures" for more information on how we calculate Adjusted EPS.

Year Ending

In millions, except per share amounts

December 31, 2017

Income before income tax provision

$

8,563

$

8,806

Non-GAAP adjustments:

Amortization of intangible assets

820

820

Acquisition-related integration costs

40

40

Charge in connection with store rationalization

220

220

Loss on settlement of defined benefit pension plan

200

200

Adjusted income before income tax provision

9,843

10,086

Adjusted income tax provision

3,862

3,949

Adjusted income from continuing operations

5,981

6,137

Net income attributable to noncontrolling interest

(2)

(2)

Adjusted income allocable to participating securities

(25)

(25)

Adjusted income from continuing operations attributable to CVS Health

$

5,954

$

6,110

Weighted average diluted shares outstanding

1,031

1,031

Adjusted earnings per share

$

5.77

$

5.93

Three Months Ending

In millions, except per share amounts

 June 30, 2017

Income before income tax provision

$

1,917

$

1,994

Non-GAAP adjustments:

Amortization of intangible assets

200

200

Acquisition-related integration costs

15

15

Charge in connection with store rationalization

10

10

Adjusted income before income tax provision

2,142

2,219

Adjusted income tax provision

812

843

Adjusted income from continuing operations

1,330

1,376

Net income attributable to noncontrolling interest

—

—

Adjusted income allocable to participating securities

(5)

(5)

Adjusted income from continuing operations attributable to CVS Health

$

1,325

$

1,371

Weighted average diluted shares outstanding

1,029

1,029

Adjusted earnings per share

$

1.29

$

1.33

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.

Year Ending

In millions

December 31, 2017

Net cash provided by operating activities

$

7,700

$

8,600

Subtract: Additions to property and equipment

(2,000)

(2,400)

Add: Proceeds from sale-leaseback transactions

300

200

Free cash flow

$

6,000

$

6,400