CVS Health Reports Strong Fourth Quarter And Full Year Profit Growth For 2015; Confirms 2016 Guidance

— Tables Follow —

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

December 31,

Year Ended

December 31,

In millions, except per share amounts

2015

2014

2015

2014

Net revenues

$

41,145

$

37,055

$

153,290

$

139,367

Cost of revenues

33,844

30,422

126,762

114,000

Gross profit

7,301

6,633

26,528

25,367

Operating expenses

4,572

4,312

17,074

16,568

Operating profit

2,729

2,321

9,454

8,799

Interest expense, net

276

131

838

600

Loss on early extinguishment of debt

—

—

—

521

Income before income tax provision

2,453

2,190

8,616

7,678

Income tax provision

953

868

3,386

3,033

Income from continuing operations

1,500

1,322

5,230

4,645

Income (loss) from discontinued operations, net of tax

(1)

(1)

9

(1)

Net income

1,499

1,321

5,239

4,644

Net income attributable to noncontrolling interest

(1)

—

(2)

—

Net income attributable to CVS Health

$

1,498

$

1,321

$

5,237

$

4,644

Income from continuing operations attributable to CVS Health:

Income from continuing operations

$

1,500

$

1,322

$

5,230

$

4,645

Net income attributable to noncontrolling interest

(1)

—

(2)

—

Income from continuing operations attributable to CVS Health

$

1,499

$

1,322

$

5,228

$

4,645

Basic earnings per share:

Income from continuing operations attributable to CVS Health

$

1.35

$

1.15

$

4.65

$

3.98

Income from discontinued operations attributable to CVS Health

$

—

$

—

$

0.01

$

—

Net income attributable to CVS Health

$

1.35

$

1.15

$

4.66

$

3.98

Weighted average basic shares outstanding

1,107

1,143

1,118

1,161

Diluted earnings per share:

Income from continuing operations attributable to CVS Health

$

1.34

$

1.14

$

4.62

$

3.96

Income from discontinued operations attributable to CVS Health

$

—

$

—

$

0.01

$

—

Net income attributable to CVS Health

$

1.34

$

1.14

$

4.63

$

3.96

Weighted average diluted shares outstanding

1,114

1,152

1,126

1,169

Dividends declared per share

$

0.35

$

0.275

$

1.40

$

1.10

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

In millions, except per share amounts

2015

2014

Assets:

Cash and cash equivalents

$

2,459

$

2,481

Short-term investments

88

34

Accounts receivable, net

11,888

9,687

Inventories

14,001

11,930

Deferred income taxes

1,220

985

Other current assets

722

866

Total current assets

30,378

25,983

Property and equipment, net

9,855

8,843

Goodwill

38,106

28,142

Intangible assets, net

13,878

9,774

Other assets

1,440

1,445

Total assets

$

93,657

$

74,187

Liabilities:

Accounts payable

$

7,490

$

6,547

Claims and discounts payable

7,653

5,404

Accrued expenses

6,829

5,816

Short-term debt

—

685

Current portion of long-term debt

1,197

575

Total current liabilities

23,169

19,027

Long-term debt

26,267

11,630

Deferred income taxes

5,437

4,036

Other long-term liabilities

1,542

1,531

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; 1,699 shares issued and

1,101 shares outstanding at December 31, 2015 and 1,691 shares issued and 1,140

shares outstanding at December 31, 2014

17

17

Treasury stock, at cost: 597 shares at December 31, 2015 and 550 shares

at December 31, 2014

(28,886)

(24,078)

Shares held in trust: 1 share at December 31, 2015 and 2014

(31)

(31)

Capital surplus

30,948

30,418

Retained earnings

35,506

31,849

Accumulated other comprehensive income (loss)

(358)

(217)

Total CVS Health shareholders' equity

37,196

37,958

Noncontrolling interest

7

5

Total shareholders' equity

37,203

37,963

Total liabilities and shareholders' equity

$

93,657

$

74,187

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Year Ended

December 31,

In millions

2015

2014

Cash flows from operating activities:

Cash receipts from customers

$

148,954

$

132,406

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(122,498)

(105,362)

Cash paid to other suppliers and employees

(14,162)

(15,344)

Interest received

21

15

Interest paid

(629)

(647)

Income taxes paid

(3,274)

(2,931)

Net cash provided by operating activities

8,412

8,137

Cash flows from investing activities:

Purchases of property and equipment

(2,367)

(2,136)

Proceeds from sale-leaseback transactions

411

515

Proceeds from sale of property and equipment and other assets

35

11

Acquisitions (net of cash acquired) and other investments

(11,475)

(2,439)

Purchase of available-for-sale investments

(267)

(157)

Maturity of available-for-sale investments

243

161

Net cash used in investing activities

(13,420)

(4,045)

Cash flows from financing activities:

(Decrease) increase in short-term debt

(685)

685

Proceeds from issuance of long-term debt

14,805

1,483

Repayments of long-term debt

(2,902)

(3,100)

Payment of contingent consideration

(58)

—

Dividends paid

(1,576)

(1,288)

Proceeds from exercise of stock options

299

421

Excess tax benefits from stock-based compensation

127

106

Repurchase of common stock

(5,001)

(4,001)

Other

(3)

—

Net cash provided by (used in) financing activities

5,006

(5,694)

Effect of exchange rates on cash

(20)

(6)

Net decrease in cash and cash equivalents

(22)

(1,608)

Cash and cash equivalents at the beginning of the year

2,481

4,089

Cash and cash equivalents at the end of the year

$

2,459

$

2,481

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

Net income

$

5,239

$

4,644

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

Depreciation and amortization

2,092

1,931

Stock-based compensation

230

165

Loss on early extinguishment of debt

—

521

Deferred income taxes and other non-cash items

(266)

(58)

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

Accounts receivable, net

(1,594)

(737)

Inventories

(1,141)

(770)

Other current assets

355

(383)

Other assets

2

9

Accounts payable and claims and discounts payable

2,834

1,742

Accrued expenses

765

1,060

Other long-term liabilities

(104)

13

Net cash provided by operating activities

$

8,412

$

8,137

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 earnings per share:

Three Months Ended

December 31,

Year Ended

December 31,

In millions, except per share amounts

Income before income tax provision

$

2,453

$

2,190

$

8,616

$

7,678

Non-GAAP adjustments:

Amortization of intangible assets

191

128

611

518

Acquisition-related bridge financing costs⁽¹⁾

—

—

52

—

Acquisition-related transaction and integration costs⁽¹⁾

72

—

220

—

Charge related to a disputed 1999 legal settlement

90

—

90

—

Loss on early extinguishment of debt

—

—

—

521

Adjusted income before income tax provision

2,806

2,318

9,589

8,717

Adjusted income tax provision

1,093

919

3,750

3,444

Adjusted income from continuing operations

1,713

1,399

5,839

5,273

Net income attributable to noncontrolling interest

(1)

—

(2)

—

Income allocable to participating securities

(8)

(6)

(27)

(19)

Adjusted income from continuing operations attributable to CVS Health

$

1,704

$

1,393

$

5,810

$

5,254

Weighted average diluted shares outstanding

1,114

1,152

1,126

1,169

Adjusted earnings per share

$

1.53

$

1.21

$

5.16

$

4.49

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

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:

Year Ended

December 31,

In millions

Net cash provided by operating activities⁽¹⁾

$

8,412

$

8,137

Subtract: Additions to property and equipment

(2,367)

(2,136)

Add: Proceeds from sale-leaseback transactions

411

515

Free cash flow

$

6,456

$

6,516

(1)       Cash provided by operating activities for the year ended December 31, 2015 includes $52 million of pre-tax acquisition-related bridge financing costs and $220 million of pre-tax acquisition-related transaction and integration costs.

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:

In millions

Pharmacy

Services

Segment⁽¹⁾

Retail/LTC

Segment

Corporate

Segment

Intersegment

Eliminations⁽²⁾

Consolidated

Totals

Three Months Ended

December 31, 2015:

Net revenues

$

26,514

$

19,903

$

—

$

(5,272)

$

41,145

Gross profit

1,492

6,002

—

(193)

7,301

Operating profit (loss)⁽³⁾

1,152

2,079

(325)

(177)

2,729

December 31, 2014:

Net revenues

23,874

17,698

—

(4,517)

37,055

Gross profit

1,238

5,558

—

(163)

6,633

Operating profit (loss)

909

1,780

(205)

(163)

2,321

Year Ended

December 31, 2015:

Net revenues

100,363

72,007

—

(19,080)

153,290

Gross profit

5,227

21,992

—

(691)

26,528

Operating profit (loss)⁽³⁾

3,989

7,130

(1,037)

(628)

9,454

December 31, 2014:

Net revenues

88,440

67,798

—

(16,871)

139,367

Gross profit

4,771

21,277

—

(681)

25,367

Operating profit (loss)⁽³⁾

3,514

6,762

(796)

(681)

8,799

(1)   Net revenues of the Pharmacy Services Segment include approximately $2.1 billion and $1.9 billion of retail co-payments for the three months ended December 31, 2015 and 2014, respectively, as well as $8.9 billion and $8.1 billion of retail co-payments for the year ended December 31, 2015 and 2014, 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 retail stores to purchase covered products, when members enrolled in programs such as Maintenance Choice^® elect to pick up maintenance prescriptions at a retail drugstore instead of receiving them through the mail, or when members have prescriptions filled at long-term care facilities. 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 Corporate Segment includes $20 million and $156 million of acquisition-related transaction and integration costs related to the acquisition of Omnicare and the pharmacy and clinics of target for the three months and year ended December 31, 2015, respectively. For the three months and year ended December 31, 2015, the Corporate Segment also included a $90 million charge related to a legacy lawsuit challenging the 1999 legal settlement by MedPartners of various securities class actions and a related derivative claim.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

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

Three Months Ended

December 31,

Year Ended

December 31,

In millions

2015

2014

2015

2014

Net revenues

$

26,514

$

23,874

$

100,363

$

88,440

Gross profit

$

1,492

$

1,238

$

5,227

$

4,771

Gross profit % of net revenues

5.6

%

5.2

%

5.2

%

5.4

%

Operating expenses

$

340

$

329

$

1,238

$

1,257

Operating expense % of net revenues

1.3

%

1.4

%

1.2

%

1.4

%

Operating profit

$

1,152

$

909

$

3,989

$

3,514

Operating profit % of net revenues

4.3

%

3.8

%

4.0

%

4.0

%

Net revenues:

Mail choice⁽¹⁾

$

10,235

$

8,440

$

37,828

$

31,081

Pharmacy network⁽²⁾

$

16,198

$

15,374

$

62,240

$

57,122

Other

$

81

$

60

$

295

$

237

Pharmacy claims processed:

Total

259.6

242.9

1,011.9

932.0

Mail choice⁽¹⁾

22.2

21.3

85.7

82.4

Pharmacy network⁽²⁾

237.4

221.6

926.2

849.6

Generic dispensing rate:

Total

83.7

%

82.1

%

83.7

%

82.2

%

Mail choice⁽¹⁾

76.5

%

75.1

%

76.4

%

74.6

%

Pharmacy network⁽²⁾

84.4

%

82.7

%

84.4

%

83.0

%

Mail choice penetration rate

20.7

%

21.3

%

20.6

%

21.4

%

(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

December 31,

Year Ended

December 31,

In millions

Net revenues

$

19,903

$

17,698

$

72,007

$

67,798

Gross profit

$

6,002

$

5,558

$

21,992

$

21,277

Gross profit % of net revenues

30.2

%

31.4

%

30.5

%

31.4

%

Operating expenses⁽¹⁾

$

3,923

$

3,778

$

14,862

$

14,515

Operating expense % of net revenues

19.7

%

21.3

%

20.6

%

21.4

%

Operating profit

$

2,079

$

1,780

$

7,130

$

6,762

Operating profit % of net revenues

10.4

%

10.1

%

9.9

%

10.0

%

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

287.5

244.8

1,031.6

935.9

Net revenue increase (decrease):

Total

12.5

%

2.9

%

6.2

%

3.3

%

Pharmacy

16.7

%

5.5

%

9.5

%

5.1

%

Front store

1.2

%

(4.9)%

(2.5)%

(2.5)%

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

7.1

%

6.7

%

10.2

%

5.2

%

Same store increase (decrease)⁽³⁾:

Total sales

3.5

%

1.6

%

1.7

%

2.1

%

Pharmacy sales

5.0

%

5.5

%

4.5

%

4.8

%

Front store sales⁽⁴⁾

(0.5)

%

(7.2)

%

(5.0)

%

(4.0)%

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

5.0

%

5.3

%

4.8

%

4.1

%

Generic dispensing rate

84.0

%

82.4

%

84.5

%

83.1

%

Pharmacy % of total revenues

73.9

%

71.2

%

72.9

%

70.7

%

(1)   Operating expenses for the three months and year ended December 31, 2015 include $52 million and $64 million, respectively, of acquisition-related integration costs related to the acquisition of Omnicare and the pharmacies and clinics of Target.

(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.

(4)   Front store same store sales would have been approximately 520 basis points higher for the year ended December 31, 2015 if tobacco and the estimated associated basket sales were excluded from the year ended December 31, 2014.

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⁾

$

9,394

$

9,670

Non-GAAP adjustments:

Amortization of intangible assets

800

798

Adjusted income before income tax provision

10,194

10,468

Adjusted income tax provision

3,974

4,078

Adjusted income from continuing operations

6,220

6,390

Net income attributable to noncontrolling interest

(7)

(7)

Income allocable to participating securities

(30)

(30)

Adjusted income from continuing operations attributable to CVS Health

$

6,183

$

6,353

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

March 31, 2016

Income before income tax provision⁽¹⁾

$

1,883

$

1,939

Non-GAAP adjustments:

Amortization of intangible assets

202

202

Adjusted income before income tax provision

2,085

2,141

Adjusted income tax provision

824

846

Adjusted income from continuing operations

1,261

1,295

Net income attributable to noncontrolling interest

(2)

(2)

Income allocable to participating securities

(6)

(6)

Adjusted income from continuing operations attributable to CVS Health

1,253

1,287

Weighted average diluted shares outstanding

1,098

1,098

Adjusted earnings per share

$

1.14

$

1.17

(1)   Excludes acquisition-related integration costs for the acquisitions of Omnicare and the pharmacies and clinics of Target.

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. For internal comparisons, management finds it useful to assess year-to-year cash flow performance by adjusting cash provided by operating activities, by capital expenditures and proceeds from sale-leaseback transactions.

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