Express Scripts Reports First Quarter Results

 EXPRESS SCRIPTS 

 Unaudited Consolidated Statement of Operations 

 Three Months Ended
March 31, 

  (in millions, except per share data) 

2012

2011

Revenues(1)

$ 12,132.6

$ 11,094.5

Cost of revenues(1)

11,300.6

10,349.0

    Gross profit 

832.0

745.5

Selling, general and administrative

267.5

193.1

Operating income

564.5

552.4

Other (expense) income:

    Interest income  

2.3

0.4

    Interest expense 

(132.0)

(39.7)

(129.7)

(39.3)

Income before income taxes

434.8

513.1

Provision for income taxes

167.0

186.6

Net income 

$      267.8

$      326.5

Weighted average number of common shares

 outstanding during the period: 

    Basic 

485.3

529.0

    Diluted 

489.7

533.9

Basic earnings per share

$        0.55

$        0.62

Diluted earnings per share:

$        0.55

$        0.61

(1) Includes retail pharmacy co-payments of $1,496.6 million and $1,526.5 million for the three months ended March 31, 2012 and 2011, respectively. 

 EXPRESS SCRIPTS 

 Unaudited Consolidated Balance Sheet 

 March 31,  

   December 31, 

 (in millions) 

2012

2011

 Assets 

 Current assets: 

 Cash and cash equivalents 

$     9,577.7

$            5,620.1

 Restricted cash and investments 

30.0

17.8

 Receivables, net 

2,008.4

1,915.7

 Inventories 

385.4

374.4

 Deferred taxes 

52.2

45.8

 Prepaid expenses and other current assets 

50.4

84.2

    Total current assets 

12,104.1

8,058.0

 Property and equipment, net 

405.5

416.2

 Goodwill 

5,486.3

5,485.7

 Other intangible assets, net 

1,587.2

1,620.9

 Other assets 

25.1

26.2

    Total assets 

$   19,608.2

$          15,607.0

 Liabilities and Stockholders' Equity 

 Current liabilities: 

 Claims and rebates payable 

$     2,650.3

$            2,874.1

 Accounts payable 

1,117.8

928.1

 Accrued expenses 

899.2

656.0

 Current maturities of long-term debt 

1,000.0

999.9

    Total current liabilities 

5,667.3

5,458.1

 Long-term debt 

10,537.1

7,076.4

 Other liabilities 

628.3

598.8

    Total liabilities 

16,832.7

13,133.3

 Stockholders' Equity: 

 Preferred stock, 5.0 shares authorized, $0.01 par value per share;   

 and no shares issued and outstanding 

-

-

 Common stock, 1,000.0 shares authorized, $0.01 par value per share;  

 shares issued: 690.4 and 690.7, respectively; 

 shares outstanding: 485.7 and 484.6, respectively 

6.9

6.9

 Additional paid-in capital 

2,457.4

2,438.2

 Accumulated other comprehensive income 

18.6

17.0

 Retained earnings 

6,913.4

6,645.6

9,396.3

9,107.7

 Common stock in treasury at cost, 204.7 and 206.1 shares, respectively 

(6,620.8)

(6,634.0)

    Total stockholders' equity 

2,775.5

2,473.7

    Total liabilities and stockholders' equity 

$   19,608.2

$          15,607.0

 EXPRESS SCRIPTS 

 Unaudited Consolidated Statement of Cash Flows 

 Three Months Ended
March 31, 

 (in millions) 

2012

2011

 Cash flows from operating activities: 

 Net income  

$    267.8

$ 326.5

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

 Depreciation and amortization 

65.0

62.9

 Non-cash adjustments to net income 

37.2

54.6

 Deferred financing fees 

18.1

1.0

 Changes in operating assets and liabilities:  

 Accounts receivable 

(96.4)

(189.3)

 Claims and rebates payable 

(223.7)

(166.5)

 Other net changes in operating assets and liabilities 

462.1

155.2

 Net cash provided by operating activities 

530.1

244.4

 Cash flows from investing activities: 

 Purchases of property and equipment 

(18.7)

(19.5)

 Other 

(10.3)

1.7

 Net cash used in investing activities 

(29.0)

(17.8)

 Cash flows from financing activities: 

 Proceeds from long-term debt, net of discounts 

3,458.9

-

 Deferred financing fees 

(19.8)

-

 Tax benefit relating to employee stock compensation 

13.9

13.0

 Net proceeds from employee stock plans 

2.1

2.6

 Net cash provided by financing activities 

3,455.1

15.6

 Effect of foreign currency translation adjustment 

1.4

0.2

 Net increase in cash and cash equivalents 

3,957.6

242.4

 Cash and cash equivalents at beginning of period 

5,620.1

523.7

 Cash and cash equivalents at end of period 

$ 9,577.7

$ 766.1

 Table 1 

  Express Scripts Unaudited Consolidated Selected Information 

 (in millions) 

 Three Months Ended
March 31,  

Claims Volume

2012

2011

Network

153.0

148.8

Home delivery and specialty(1)

14.0

13.2

   Total claims 

167.0

162.0

  Total adjusted claims(2)

192.8

186.1

 Depreciation and Amortization (D&A):  

 Revenue amortization(3)

$ 28.5

$ 28.5

 Cost of revenues depreciation 

11.6

10.7

 Selling, general and administrative depreciation 

14.7

13.5

 Selling, general and administrative amortization 

10.2

10.2

      Total D&A 

$ 65.0

$ 62.9

 Generic Fill Rate 

 Network 

77.7%

75.0%

 Home delivery 

66.2%

61.8%

 Overall 

76.5%

73.8%

 Note: See Appendix for footnotes.  

Table 2

Calculation of Express Scripts Adjusted Gross Profit and SG&A

(in millions)

 Three Months Ended
March 31,  

2012

2011

Gross profit, as reported

$ 832.0

$ 745.5

Amortization of NextRx-related intangible assets (3)

28.5

28.5

Adjusted gross profit

$ 860.5

$ 774.0

Selling, general and administrative expenses, as reported

$ 267.5

$ 193.1

Amortization of legacy intangible assets (4)

8.6

8.6

Amortization of NextRx-related intangible assets (3)

1.6

1.6

Non-recurring Medco transaction-related costs (5)

26.7

-

Adjusted selling, general and administrative expenses

$ 230.6

$ 182.9

 Note: See Appendix for footnotes.  

The Company is providing adjusted gross profit and selling, general and administrative expenses excluding the impact of non-recurring charges and amortization of intangible assets in order to compare the underlying financial performance to prior periods.

 Table 3 

 Express Scripts EBITDA Reconciliation 

 (in millions, except per claim data) 

The following is a reconciliation of net income to EBITDA(6).  The Company believes net income is the most directly comparable measure calculated under U.S. GAAP. 

 Three Months Ended
March 31,   

2012

2011

Net income, as reported

$ 267.8

$ 326.5

  Provision for income taxes

167.0

186.6

  Depreciation and amortization

65.0

62.9

  Interest expense, net

129.7

39.3

EBITDA, as reported

629.5

615.3

Non-recurring Medco transaction-related costs (5)

26.7

-

Adjusted EBITDA 

$ 656.2

$ 615.3

Total adjusted claims

192.8

186.1

Adjusted EBITDA per adjusted claim

$   3.40

$   3.31

 Note: See Appendix for footnotes.  

 The Company is providing EBITDA excluding the impact of non-recurring charges in order to compare the underlying financial performance to prior periods. 

 Table 4 

 Calculation of Express Scripts Adjusted EPS  

 Three Months Ended
March 31,  

2012

2011

 (per diluted share) 

EPS, as reported

$ 0.55

$ 0.61

Non-recurring/transaction-related items: 

Medco transaction-related costs (5)

0.03

-

Medco financing costs (7)

0.10

-

Amortization of: 

Legacy intangible assets(4)

0.01

0.01

NextRx-related intangible assets(3)

0.04

0.04

EPS, adjusted

$ 0.73

$ 0.66

 Note: See Appendix for footnotes.  

 The Company is providing diluted earnings per share excluding the impact of non-recurring/transaction-related items and intangibles amortization in order to compare the underlying financial performance to prior periods. 

 Table 5 

 Calculation of Medco Adjusted EPS  

 Quarter Ended

 March 31,  

 March 26,  

2012

2011

 (per diluted share) 

Medco EPS, as reported

$       0.62

$       0.80

Non-recurring transaction-related costs (8)

0.06

-

Benefit associated with changes to the employee post retirement healthcare benefit plan and cash balance pension plans (9)

-

(0.06)

Amortization of intangible assets(10)

0.11

0.11

Medco EPS, adjusted

$       0.79

$       0.85

 Note: See Appendix for footnotes.  

 The Company is providing diluted earnings per share excluding the impact of non-recurring charges / (gains) and intangibles amortization in order to compare the underlying financial performance to prior periods. 

 Table 6 

 Medco Selected Information 

 (in millions) 

 Quarter Ended 

 March 31,  

 March 26,  

Volume Information

2012

2011

Total mail-order prescriptions

25.0

27.7

Retail prescriptions

148.3

162.0

   Total prescriptions 

173.3

189.7

  Adjusted prescriptions(11)

222.7

244.3

 Note: See Appendix for footnotes.  

 Table 7 

 2012 Guidance Information 

 Estimated
Year Ended
December 31, 2012 

 (per diluted share) 

Adjusted EPS guidance

$ 3.36

 to 

$ 3.66

GAAP items not included in guidance:

Amortization of intangible assets(12)

TBD 

Medco-related transaction and integration costs(12)

TBD 

The guidance range assumes weighted-average shares averaging 833 million for quarters 2 through 4 and 2012 diluted weighted-average shares of 750 million.  Diluted weighted-average shares may differ due to, among other factors, the exercise of stock options and settlement of restricted stock units, and differences in the dilutive impact of awards granted under either of Express Scripts' or Medco's share-based compensation agreements.  The guidance range assumes a yearly tax rate of 39%.  Variations in assumed diluted weighted-average shares and tax rate may materially impact the guidance range. 

 Note: See Appendix for footnotes.  

 Appendix 

 Footnotes 

(1) Includes home delivery, specialty and other including:  (a) drugs distributed through patient assistance programs (b) drugs we distribute to other PBMs' clients under limited distribution contracts with pharmaceutical manufacturers and (c) FreedomFP claims. 

(2) Total adjusted claims reflect home delivery claims multiplied by 3, as home delivery claims typically cover a time period 3 times longer than retail claims. 

(3) Amortization of NextRx-related intangible assets include amounts in both revenues and selling, general and administrative expense. Revenue amortization is related to the customer contract with WellPoint which consummated upon closing of the NextRx acquisition in 2009.  Under U.S. GAAP standards, amortization of intangibles that arise in connection with consideration given to a customer by a vendor is characterized as a reduction of revenues.  Intangible amortization of $28.5 million ($17.6 million and $18.1 million net of tax in 2012 and 2011, respectively) is included as a reduction to revenue for the three months ended March 31, 2012 and 2011.  

In addition, intangible amortization of $1.6 million ($1.0 million net of tax) is included in selling, general and administrative expense in the three months ended March 31, 2012 and 2011. 

(4) This adjustment represents the effect of Express Scripts' legacy intangible amortization, prior to the acquisition of NextRx.  Intangible amortization of $8.6 million ($5.3 million and $5.5 million net of tax in 2012 and 2011, respectively) is included in selling, general and administrative expense for three months ended March 31, 2012 and 2011. 

(5) Non-recurring transaction-related costs include those directly related to the acquisition of Medco Health Solutions, Inc., and is primarily composed of professional fees.  $26.7 million ($16.4 million net of tax), is included in selling, general and administrative expense for the three months ended March 31, 2012. 

(6) EBITDA is earnings before taxes, depreciation and amortization, net interest and other income (expense); or alternatively calculated as operating income plus depreciation and amortization.  EBITDA is presented because it is a widely accepted indicator of a company's ability to service indebtedness and is frequently used to evaluate a company's performance.  EBITDA, however, should not be considered as an alternative to net income, as a measure of operating performance, as an alternative to cash flow, as a measure of liquidity or as a substitute for any other measure computed in accordance with U.S. GAAP. In addition, this definition and calculation of EBITDA may not be comparable to that used by other companies.

(7) Financing costs include fees related to the amortization of remaining bridge loan fees, commitment fees related to the new credit agreement and interest and fees on the senior notes secured in conjunction with the acquisition of Medco Health Solutions, Inc.  Costs of $79.5 million ($49.0 million net of tax) is included in interest expense in the three months ended March 31, 2012. 

(8) Non-recurring transaction-related costs incurred by Medco include those directly related to the transaction with Express Scripts, Inc., and is primarily composed of employee retention-related expenses and legal fees.  $38.7 million ($23.7 million net of tax), is included in selling, general and administrative expense for the quarter ended March 31, 2012. 

(9) This adjustment represents the benefit associated with changes to the employee postretirement healthcare benefit plan recognized by Medco in Q1 2011.  The changes to the plan resulted in a gain of $30.6 million ($18.3 million net of tax); $22.6 million of which was included in cost of product net revenues, and $8.0 million of which was included in selling, general and administrative ("SG&A") in Q1 2011.

Additionally, in Q1 2011, Medco amended its cash balance pension plans, freezing the benefit for all participants effective in the first quarter of 2011. The freeze of the cash balance pension plans resulted in a gain of $9.7 million ($5.8 million net of tax); $4.6 million of which was included in cost of product net revenues and $5.1 million of which was included in SG&A in Q1 2011. 

(10) This adjustment represents the effect of Medco's intangible amortization.  Intangible amortization was $71.0 million ($43.0 million net of tax) and $73.2 million ($44.0 million net of tax) for quarter ended March 31, 2012 and March 26, 2011, respectively. 

(11) Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three times the amount of product days supplied compared with retail prescriptions. 

(12) Adjusted EPS will exclude amortization of intangible assets and Medco-related transaction and integration costs. The full-year impact of these costs have yet to be determined.