Express Scripts Reports Third Quarter Results

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Operations 

 Three Months Ended

September 30, 

 Nine Months Ended

September 30, 

(in millions, except per share data) 

2012

2011

2012

2011

Revenues⁽¹⁾

$ 26,999.4

$ 11,571.0

$ 66,824.5

$ 34,026.9

Cost of revenues⁽¹⁾

24,864.9

10,735.2

61,745.1

31,661.5

    Gross profit 

2,134.5

835.8

5,079.4

2,365.4

Selling, general and administrative

1,336.0

230.7

3,220.7

628.6

Operating income

798.5

605.1

1,858.7

1,736.8

Other (expense) income:

    Undistributed gain from joint venture 

5.1

-

9.4

-

    Interest income  

1.4

5.9

6.0

7.8

    Interest expense and other 

(155.9)

(94.3)

(463.1)

(184.3)

(149.4)

(88.4)

(447.7)

(176.5)

Income before income taxes

649.1

516.7

1,411.0

1,560.3

Provision for income taxes

257.7

192.0

602.2

574.9

Net income 

$      391.4

$      324.7

$      808.8

$      985.4

Weighted average number of common shares

 outstanding during the period: 

    Basic 

812.9

487.2

702.4

506.1

    Diluted 

829.6

490.8

718.9

510.3

Basic earnings per share

$        0.48

$        0.67

$        1.15

$        1.95

Diluted earnings per share

$        0.47

$        0.66

$        1.13

$        1.93

⁽¹⁾ Includes retail pharmacy co-payments of $3,348.9 million and $1,390.4 million for the three months ended September 30, 2012 and 2011, respectively and $8,364.6 million and $4,374.0 million for the nine months ended September 30, 2012 and 2011, respectively. 

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Balance Sheet 

 September 30,  

   December 31, 

 (in millions) 

2012

2011

 Assets 

 Current assets: 

 Cash and cash equivalents 

$          1,248.4

$       5,620.1

 Restricted cash and investments 

47.3

17.8

 Receivables, net 

5,720.3

1,915.7

 Inventories 

1,561.4

374.4

 Deferred taxes 

417.3

45.8

 Prepaid expenses and other current assets 

437.8

84.2

    Total current assets 

9,432.5

8,058.0

 Property and equipment, net 

1,710.2

416.2

 Goodwill 

29,367.5

5,485.7

 Other intangible assets, net 

16,735.9

1,620.9

 Other assets 

61.6

26.2

    Total assets 

$        57,307.7

$     15,607.0

 Liabilities and Stockholders' Equity 

 Current liabilities: 

 Claims and rebates payable 

$          6,710.0

$       2,874.1

 Accounts payable 

2,139.4

928.1

 Accrued expenses 

1,964.9

656.0

 Short-term loan payable 

40.0

-

 Current maturities of long-term debt 

938.6

999.9

    Total current liabilities 

11,792.9

5,458.1

 Long-term debt 

16,146.3

7,076.4

 Other liabilities 

6,623.6

598.8

    Total liabilities 

34,562.8

13,133.3

 Stockholders' Equity: 

 Preferred stock, 15.0 shares authorized, $0.01 par value per share;   

 and no shares issued and outstanding 

-

-

 Common stock, 2,985.0 shares authorized, $0.01 par value per share;  

 shares issued: 809.6 and 690.7, respectively; 

 shares outstanding: 809.6 and 484.6, respectively 

8.1

6.9

 Additional paid-in capital 

21,156.1

2,438.2

 Accumulated other comprehensive income 

16.6

17.0

 Retained earnings 

1,564.1

6,645.6

22,744.9

9,107.7

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

-

(6,634.0)

    Total stockholders' equity 

22,744.9

2,473.7

    Total liabilities and stockholders' equity 

$        57,307.7

$     15,607.0

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Cash Flows 

 Nine Months Ended

September 30, 

 (in millions) 

2012

2011

 Cash flows from operating activities: 

 Net income  

$     808.8

$    985.4

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

 Depreciation and amortization 

1,292.0

187.5

 Non-cash adjustments to net income 

37.8

152.9

 Deferred financing fees 

32.1

44.9

 Changes in operating assets and liabilities, net of effects of acquisition:  

 Accounts receivable 

382.6

(58.1)

 Claims and rebates payable 

(647.2)

44.4

 Other net changes in operating assets and liabilities 

143.3

302.9

 Net cash flows provided by operating activities 

2,049.4

1,659.9

 Cash flows from investing activities: 

 Acquisition of business, net of cash acquired 

(10,283.6)

-

 Purchases of property and equipment 

(106.0)

(98.1)

 Proceeds from sale of business 

31.5

-

 Other 

(16.2)

8.5

 Net cash used in investing activities 

(10,374.3)

(89.6)

 Cash flows from financing activities: 

 Proceeds from long-term debt, net of discounts 

7,458.9

1,494.0

 Repayment of long-term debt 

(2,710.6)

(0.1)

 Proceeds (repayment) of revolving credit line, net 

(1,000.0)

-

 Proceeds from accounts receivable financing facility 

600.0

-

 Repayment of accounts receivable financing facility 

(601.3)

-

 Excess tax benefit relating to employee stock compensation 

30.4

27.3

 Net proceeds from employee stock plans 

276.5

28.9

 Deferred financing fees 

(103.2)

(62.7)

 Treasury stock acquired 

-

(2,515.7)

 Net cash provided by (used in) financing activities 

3,950.7

(1,028.3)

 Effect of foreign currency translation adjustment 

2.5

(3.1)

 Net (decrease) increase in cash and cash equivalents 

(4,371.7)

538.9

 Cash and cash equivalents at beginning of period 

5,620.1

523.7

 Cash and cash equivalents at end of period 

$  1,248.4

$ 1,062.6

Table 1

Express Scripts Holding Company Unaudited Consolidated Selected Information

(in millions)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Claims Volume

2012

2011

2012

2011

Network

282.9

147.2

721.5

444.0

Home delivery and specialty⁽¹⁾

39.8

13.3

94.5

39.9

  Total claims

322.7

160.5

816.0

483.9

Total adjusted claims⁽²⁾

398.9

184.8

996.0

556.6

Depreciation and Amortization (D&A):

Revenue amortization⁽³⁾

$ 28.5

$ 28.5

$ 85.5

$ 85.5

Cost of revenues depreciation

39.4

9.6

76.5

31.2

Selling, general and administrative depreciation

47.9

13.1

121.7

40.3

Selling, general and administrative amortization

506.0

10.1

1,008.3

30.5

  Total D&A

$ 621.8

$ 61.3

$ 1,292.0

$ 187.5

Generic Fill Rate

Network

79.7%

75.3%

78.9%

75.2%

Home delivery

72.2%

63.0%

70.6%

62.5%

Overall

78.8%

74.1%

78.0%

74.0%

Note: See Appendix for footnotes.

Table 2

Calculation of Express Scripts Holding Company Adjusted Gross Profit and SG&A

(in millions)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2012

2011

2012

2011

Gross profit, as reported

$ 2,134.5

$ 835.8

$ 5,079.4

$ 2,365.4

Amortization of legacy Express Scripts intangible assets ⁽³⁾

28.5

28.5

85.5

85.5

Non-recurring transaction and integration costs ⁽⁴⁾

21.8

-

33.7

-

Adjusted gross profit

$ 2,184.8

$ 864.3

$ 5,198.6

$ 2,450.9

Selling, general and administrative, as reported

$ 1,336.0

$ 230.7

$ 3,220.7

$ 628.6

Amortization of legacy Express Scripts intangible assets ⁽³⁾

10.1

10.1

30.5

30.5

Amortization of Medco-related intangible assets ⁽⁵⁾

495.9

-

977.8

-

Non-recurring transaction and integration costs ⁽⁴⁾

179.1

20.3

586.1

20.3

Adjusted selling, general and administrative

$  650.9

$  200.3

$ 1,626.3

$  577.8

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 Holding Company 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

September 30,

Nine Months Ended

September 30,

2012

2011

2012

2011

Net income, as reported

$    391.4

$  324.7

$   808.8

$    985.4

  Provision for income taxes

257.7

192.0

602.2

574.9

  Depreciation and amortization

621.8

61.3

1,292.0

187.5

  Interest expense, net

154.5

88.4

457.1

176.5

  Undistributed gain from joint venture

(5.1)

-

(9.4)

-

EBITDA, as reported

1,420.3

666.4

3,150.7

1,924.3

Non-recurring transaction and integration costs ⁽⁴⁾

200.9

20.3

619.8

20.3

Adjusted EBITDA

$ 1,621.2

$ 686.7

$ 3,770.5

$ 1,944.6

Total adjusted claims

398.9

184.8

996.0

556.6

Adjusted EBITDA per adjusted claim

$      4.06

$   3.72

$      3.79

$      3.49

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 Holding Company Adjusted EPS

Three Months Ended

September 30,

Nine Months Ended

September 30,

2012

2011

2012

2011

(per diluted share)

EPS, as reported

$ 0.47

$ 0.66

$ 1.13

$ 1.93

Non-recurring/transaction-related items:

Transaction and integration costs ⁽⁴⁾

0.15

0.03

0.51

0.03

Medco acquisition pre-close financing costs ⁽⁷⁾

-

0.05

0.07

0.05

Discrete tax items ⁽⁸⁾

-

-

0.06

-

Amortization of:

Legacy Express Scripts intangible assets⁽³⁾

0.03

0.05

0.10

0.14

Medco-related intangible assets⁽⁵⁾

0.37

-

0.81

-

EPS, adjusted

$ 1.02

$ 0.79

$ 2.68

$ 2.15

Note: See Appendix for footnotes.

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

Table 5

2012 Guidance Information

Estimated

Year Ended

December 31, 2012

(per diluted share)

Revised adjusted EPS guidance

$ 3.65

to

$ 3.75

GAAP items not included in guidance:

Amortization of legacy Express Scripts intangible assets

$0.12

Amortization of Medco-related intangible assets ⁽⁹⁾

$1.19

Transaction and integration costs⁽¹⁰⁾

To be determined

The guidance range assumes 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 full year 2012 adjusted effective tax rate of approximately 39.6%.  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 legacy Express Scripts 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 $17.9 million net of tax in 2012 and 2011, respectively) is included as a reduction to revenue for the three months ended September 30, 2012 and 2011.   Intangible amortization of $85.5 million ($51.2 million and $54.0 million net of tax in 2012 and 2011, respectively) is included as a reduction to revenue for the nine months ended September 30, 2012 and 2011.  

In addition, intangible amortization of $10.1 million ($6.3 million net of tax) is included in selling, general and administrative expense in the three months ended September 30, 2012 and 2011. Intangible amortization of $30.5 million ($18.3 million and $19.3 million net of tax in 2012 and 2011, respectively) is included in selling, general and administrative expense in the nine months ended September 30, 2012 and 2011.

⁽⁴⁾ Non-recurring transaction and integration costs include those directly related to the acquisition of Medco Health Solutions, Inc. ("Medco").   

Costs of $21.8 million ($13.5 million net of tax) and $33.7 million ($20.2 million net of tax) for the three months and nine months ended September 30, 2012, respectively, primarily composed of integration-related activities, are included in cost of revenues.

Costs of $158.9 million ($98.4 million net of tax) and $20.3 million ($12.8 million net of tax) primarily composed of severance costs, including stock compensation, are included in selling, general and administrative expense in the three months ended September 30, 2012 and 2011, respectively. Costs of $565.9 million ($339.0 million net of tax) and $20.3 million ($12.8 million net of tax) are included in selling, general and administrative expense in the nine months ended September 30, 2012 and 2011, respectively.

The Company recorded net charges of $20.2 million ($12.5 million and $12.1 million net of tax in the three months and nine months, respectively) within selling, general and administrative expenses for the three months and nine months ended September 30, 2012 in conjunction with the strategic decision to exit various businesses.

⁽⁵⁾ Amortization of intangible assets related to the acquisition of Medco of $495.9 million ($307.0 million net of tax) and $977.8 million ($585.7 million net of tax) for the three months and nine months ended September 30, 2012, respectively is included in selling, general and administrative expense. 

⁽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.  Costs of $42.0 million ($26.4 million net of tax) are included interest expense in the three months ended September 30, 2011.  Costs of $85.2 million ($51.0 million net of tax) and $42.0 million ($26.5 million net of tax) are included in interest expense in the nine months ended September 30, 2012 and 2011, respectively. 

⁽⁸⁾Provision for income taxes includes discrete tax items of $43.5 million for the nine months ended September 30, 2012. These items primarily relate to adjustments to prior year income tax return filings and a reversal of the deferred tax asset previously established for transaction-related costs that became nondeductible upon the consummation of the Merger.  

⁽⁹⁾ Adjusted EPS will exclude amortization of Medco-related intangible assets.  The current estimate of full year amortization based on the preliminary purchase price allocation.  The preliminary purchase price allocation may be subject to further refinement and may result in significant changes.  

⁽¹⁰⁾ Adjusted EPS will exclude Medco-related transaction and integration costs. The full-year impact of these costs have yet to be determined.