CVS Health Corporation (NYSE: CVS) announced operating results for the three months ended March 31, 2018.
WOONSOCKET, R.I., May 2, 2018 /PRNewswire/ --
First Quarter Year-over-Year Highlights:
- Net revenues increased 2.6% to $45.7 billion
- Retail/LTC same store prescription volume growth of 8.5%
- GAAP diluted EPS from continuing operations of $0.98
- Adjusted EPS of $1.48, which reflects an additional adjustment for net interest expense from the proposed Aetna acquisition
2018 Full Year Guidance:
- GAAP operating profit growth of down 0.25% to up 2.75%
- Adjusted operating profit growth of down 1.5% to up 1.5%
- GAAP diluted EPS from continuing operations of $5.11 to $5.32
- Adjusted EPS of $6.87 to $7.08, which reflects an additional adjustment for net interest expense from the proposed Aetna acquisition
CVS Health Corporation (NYSE: CVS) today announced operating results for the three months ended March 31, 2018.
President and Chief Executive Officer Larry Merlo stated, "We generated solid results in the quarter, benefiting from higher prescription volumes within our retail pharmacy business and a lower effective income tax rate. At the same time, we continue to focus on long-term growth initiatives and to invest in process improvements and technology enhancements that will position us well to expand our reach in providing access to high-quality and more affordable care.
"We continue to innovate in the health care market. Recently, we introduced "Real-time Benefits," a process to share plan design in real-time at the point of prescribing with the physician. During the first quarter, we also launched an initiative, "Rx Savings Finder," to combat rising drug prices. This initiative provides improved visibility into drug costs at the pharmacy counter. These initiatives have benefitted consumers by improving transparency and lowering costs.
Mr. Merlo added, "Looking forward, the Aetna transaction will provide us the means to further lower health care costs for consumers and payors. In March, the transaction was approved by shareholders of both companies. We are moving forward on both the regulatory and integration planning fronts in support of a close in the second half of this year and a smooth, efficient integration of operations."
Revenues
Net revenues for the three months ended March 31, 2018, increased 2.6%, or $1.2 billion, to approximately $45.7 billion, up from $44.5 billion in the three months ended March 31, 2017.
Revenues in the Pharmacy Services Segment increased 3.2% to approximately $32.2 billion in the three months ended March 31, 2018. This increase was primarily driven by growth in pharmacy network and specialty claim volume as well as brand inflation, partially offset by continued price compression and increased generic dispensing. Pharmacy network claims processed during the three months ended March 31, 2018, increased 6.0%, on a 30-day equivalent basis, to 399.5 million, compared to 376.8 million in the prior year period. The increase in pharmacy network claim volume was primarily due to an increase in net new business. On a 30-day equivalent basis, mail choice claims processed during the three months ended March 31, 2018, increased 8.9% to 69.3 million, compared to 63.7 million in the prior year. The increase in mail choice claim volume was driven by continued adoption of our Maintenance Choice® offerings.
Revenues in the Retail/LTC Segment increased 5.6% to approximately $20.4 billion in the three months ended March 31, 2018. The increase was primarily due to an increase in same store prescription volume of 8.5%, on a 30-day equivalent basis, due to continued adoption of our Patient Care Programs, partnerships with PBM's and health plans, and our inclusion in a number of additional Medicare Part D networks this year, as well as brand inflation. This increase was partially offset by continued reimbursement pressure and the impact of recent generic introductions.
Same store sales increased 5.8% and pharmacy same store sales increased 7.3% in the three months ended March 31, 2018. The increase in pharmacy same store sales was principally driven by the increase in pharmacy same store prescription volumes described above, partially offset by a negative impact of approximately 280 basis points due to recent generic introductions.
Front store same store sales increased 1.6% in the three months ended March 31, 2018, compared to the prior year. The increase in front store same store sales was driven by a favorable impact of approximately 90 basis points as a result of the shift of sales associated with the Easter holiday to the first quarter of 2018 from the second quarter of 2017. The impact of seasonal cough and cold accounted for approximately 70 basis points of additional favorability as compared to the same quarter in the prior year. This favorability was partially offset by softer customer traffic.
For the three months ended March 31, 2018, the generic dispensing rate increased approximately 65 basis points to 87.6% in our Pharmacy Services Segment and increased approximately 60 basis points to 88.1% in our Retail/LTC Segment, compared to the same quarter in the prior year.
Operating Profit
Consolidated operating profit for the three months ended March 31, 2018, increased $153 million, or 8.5%, to $1.9 billion. The improvements in operating profit were driven by a $199 million decrease in store rationalization costs as compared to the same quarter in the prior year, offset by an $86 million loss on the divestiture of our RxCrossroads subsidiary, and a $28 million increase in acquisition-related transaction and integration costs. The resulting increase in consolidated operating profit was principally driven by improvement in gross profit dollars in the Retail/LTC Segment, largely driven by improvements in pharmacy gross profit dollars. These improvements were partially offset by increases in operating expenses associated with growth in the business.
Net Income and Earnings Per Share
Net income for the three months ended March 31, 2018, increased $45 million or 4.7%, to $998 million. The increase is primarily due to the $153 million increase in operating profit discussed above, less a $221 million increase in interest expense primarily due to the net interest expense on the financing associated with the proposed acquisition of Aetna Inc. ("Aetna"). The resulting decline in pre-tax income of $64 million was more than offset by a $100 million decrease in the income tax provision compared to the prior period. The effective income tax rate in 2018 was lower than in 2017 primarily due to the enactment of the Tax Cuts and Jobs Act, which lowered the federal corporate income tax rate from 35% to 21%. This was partially offset by the impact of the disposition of the Company's RxCrossroads subsidiary.
GAAP earnings per diluted share from continuing operations ("GAAP diluted EPS") for the three months ended March 31, 2018, was $0.98, compared to $0.92 in the first quarter of the prior year. Adjusted earnings per share ("Adjusted EPS") for the three months ended March 31, 2018 and 2017, was $1.48 and $1.17, respectively. Adjusted EPS reflects an additional adjustment for net interest expense from the proposed Aetna acquisition. Further detail is shown in the Adjusted EPS reconciliation later in this release.
Guidance
The Company expects full year GAAP operating profit growth of down 0.25% to up 2.75% and confirmed its previous adjusted consolidated operating profit growth guidance for the full year of down 1.5% to up 1.5%. The Company also expects to deliver GAAP diluted EPS of $5.11 to $5.32 and Adjusted EPS of $6.87 to $7.08 for the full year 2018.
The Company also provided guidance for the second quarter of 2018. The Company expects GAAP operating profit growth of 5.25% to 8.5% and adjusted consolidated operating profit growth of flat to up 3.25%. Additionally, the Company expects to deliver GAAP diluted EPS of $1.21 to $1.26 and Adjusted EPS of $1.59 to $1.64.
Non-GAAP Financial Information
Adjusted EPS, Free Cash Flow and Adjusted Operating Profit are non-GAAP financial measures. Reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP financial measure are presented in the tables at the end of this press release.
Aetna Transaction Progress
The previously announced acquisition of Aetna by CVS Health was approved by shareholders of both companies on March 13, 2018. The regulatory approval process is proceeding within a timeframe consistent with expectations. The companies received a second request for information from the U.S. Department of Justice on February 1, 2018 and are working cooperatively and productively with the Justice Department on the approval process. All of the required Form A filings were submitted to 28 state Departments of Insurance in January. In addition, states that require hearings are starting to schedule and hold those hearings. We are making good progress in the states and have also begun to receive approvals from states. The transaction is still expected to close during the second half of 2018.
To assure a smooth and successful integration, the companies are working together closely under an Integration Management Office ("IMO") led by senior executives of both companies. A steering committee comprised of the executive leadership from both CVS Health and Aetna has also been established to oversee the work of the IMO and provide guidance and strategic direction to integration leaders, while also participating in the decision-making processes.
Teleconference and Webcast
The Company will be holding a conference call today for the investment community at 8:30 am (EDT) to discuss its quarterly results. An audio webcast of the call will be broadcast simultaneously for all interested parties through the Investor Relations section of the CVS Health website at http://investors.cvshealth.com. This webcast will be archived and available on the website for a one-year period following the conference call.
About the Company
CVS Health is a pharmacy innovation company helping people on their path to better health. Through its more than 9,800 retail locations, more than 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 94 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year, expanding specialty pharmacy services, and a leading stand-alone Medicare Part D prescription drug plan, the Company enables people, businesses and communities to manage health in more affordable and effective ways. This unique integrated model increases access to quality care, delivers better health outcomes and lowers overall health care costs. Find more information about how CVS Health is shaping the future of health at https://www.cvshealth.com.
No Offer or Solicitation
This communication is for informational purposes only and not intended to and does not constitute an offer to subscribe for, buy or sell, the solicitation of an offer to subscribe for, buy or sell or an invitation to subscribe for, buy or sell any securities or the solicitation of any vote or approval in any jurisdiction pursuant to or in connection with the proposed transaction or otherwise, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in contravention of applicable law. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended, and otherwise in accordance with applicable law.
Additional Information and Where to Find It
In connection with the proposed transaction between CVS Health Corporation ("CVS Health") and Aetna Inc. ("Aetna"), filed a registration statement on Form S-4 with the Securities and Exchange Commission (the "SEC"), which includes a joint proxy statement of CVS Health and Aetna that also constitutes a prospectus of CVS Health. The registration statement was declared effective by the SEC on February 9, 2018, and CVS Health and Aetna commenced mailing the definitive joint proxy statement/prospectus to stockholders of CVS Health and shareholders of Aetna on or about February 12, 2018, and the special meeting of the stockholders of CVS Health and the shareholders of Aetna was held on March 13, 2018. INVESTORS AND SECURITY HOLDERS OF CVS HEALTH AND AETNA ARE URGED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED OR THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain free copies of the registration statement and the definitive joint proxy statement/prospectus and other documents filed with the SEC by CVS Health or Aetna through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with the SEC by CVS Health are available free of charge within the Investors section of CVS Health's Web site at http://www.cvshealth.com/investors or by contacting CVS Health's Investor Relations Department at 800-201-0938. Copies of the documents filed with the SEC by Aetna are available free of charge on Aetna's internet website at http://www.Aetna.com or by contacting Aetna's Investor Relations Department at 860-273-0896.
Cautionary Statement Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a safe harbor for forward-looking statements made by or on behalf of CVS Health or Aetna. This communication may contain forward-looking statements within the meaning of the Reform Act. You can generally identify forward-looking statements by the use of forward-looking terminology such as "anticipate," "believe," "can," "continue," "could," "estimate," "evaluate," "expect," "explore," "forecast," "guidance," "intend," "likely," "may," "might," "outlook," "plan," "potential," "predict," "probable," "project," "seek," "should," "view," or "will," or the negative thereof or other variations thereon or comparable terminology. These forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond CVS Health's and Aetna's control.
Statements in this communication regarding CVS Health and Aetna that are forward-looking, including CVS Health's and Aetna's projections as to the closing date for the pending acquisition of Aetna (the "transaction"), the extent of, and the time necessary to obtain, the regulatory approvals required for the transaction, the anticipated benefits of the transaction, the impact of the transaction on CVS Health's and Aetna's businesses, the expected terms and scope of the expected financing for the transaction, the ownership percentages of CVS Health's common stock of CVS Health stockholders and Aetna shareholders at closing, the aggregate amount of indebtedness of CVS Health following the closing of the transaction, CVS Health's expectations regarding debt repayment and its debt to capital ratio following the closing of the transaction, CVS Health's and Aetna's respective share repurchase programs and ability and intent to declare future dividend payments, the number of prescriptions used by people served by the combined companies' pharmacy benefit business, the synergies from the transaction, and CVS Health's, Aetna's and/or the combined company's future operating results, are based on CVS Health's and Aetna's managements' estimates, assumptions and projections, and are subject to significant uncertainties and other factors, many of which are beyond their control. In particular, projected financial information for the combined businesses of CVS Health and Aetna is based on estimates, assumptions and projections and has not been prepared in conformance with the applicable accounting requirements of Regulation S-X relating to pro forma financial information, and the required pro forma adjustments have not been applied and are not reflected therein. None of this information should be considered in isolation from, or as a substitute for, the historical financial statements of CVS Health and Aetna. Important risk factors related to the transaction could cause actual future results and other future events to differ materially from those currently estimated by management, including, but not limited to: the timing to consummate the proposed transaction; the risk that a regulatory approval that may be required for the proposed transaction is delayed, is not obtained or is obtained subject to conditions that are not anticipated; the risk that a condition to the closing of the proposed transaction may not be satisfied; the outcome of litigation related to the transaction; the ability to achieve the synergies and value creation contemplated; CVS Health's ability to promptly and effectively integrate Aetna's businesses; and the diversion of and attention of management of both CVS Health and Aetna on transaction-related issues.
In addition, this communication may contain forward-looking statements regarding CVS Health's or Aetna's respective businesses, financial condition and results of operations. These forward-looking statements also involve risks, uncertainties and assumptions, some of which may not be presently known to CVS Health or Aetna or that they currently believe to be immaterial also may cause CVS Health's or Aetna's actual results to differ materially from those expressed in the forward-looking statements, adversely impact their respective businesses, CVS Health's ability to complete the transaction and/or CVS Health's ability to realize the expected benefits from the transaction. Should any risks and uncertainties develop into actual events, these developments could have a material adverse effect on the transaction and/or CVS Health or Aetna, CVS Health's ability to successfully complete the transaction and/or realize the expected benefits from the transaction. Additional information concerning these risks, uncertainties and assumptions can be found in CVS Health's and Aetna's respective filings with the SEC, including the risk factors discussed in "Item 1.A. Risk Factors" in CVS Health's and Aetna's most recent Annual Reports on Form 10-K, as updated by their Quarterly Reports on Form 10-Q and future filings with the SEC.
You are cautioned not to place undue reliance on CVS Health's and Aetna's forward-looking statements. These forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Neither CVS Health nor Aetna assumes any duty to update or revise forward-looking statements, whether as a result of new information, future events or otherwise, as of any future date.
-- Tables Follow --
CVS HEALTH CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
---------
In millions, except per share amounts 2018 2017 (1)
------------------------------------- ---- -------
Net revenues $45,693 $44,514
Cost of revenues 38,834 37,943
------ ------
Gross profit 6,859 6,571
Operating expenses 4,913 4,778
----- -----
Operating profit 1,946 1,793
Interest expense, net 473 252
Other expense 3 7
--- ---
Income before income tax provision 1,470 1,534
Income tax provision 472 572
--- ---
Income from continuing operations 998 962
Loss from discontinued operations, net of tax - (9)
--- ---
Net income 998 953
Net income attributable to noncontrolling interest - (1)
--- ---
Net income attributable to CVS Health $998 $952
==== ====
Basic earnings per share:
Income from continuing operations attributable to CVS Health $0.98 $0.93
Loss from discontinued operations attributable to CVS Health $ - $(0.01)
Net income attributable to CVS Health $0.98 $0.92
Weighted average shares outstanding 1,016 1,030
Diluted earnings per share:
Income from continuing operations attributable to CVS Health $0.98 $0.92
Loss from discontinued operations attributable to CVS Health $ - $(0.01)
Net income attributable to CVS Health $0.98 $0.92
Weighted average shares outstanding 1,019 1,035
Dividends declared per share $0.50 $0.50
(1) The condensed
consolidated
statement of
income for
the three
months ended
March 31,
2017 has been
retrospectively
adjusted to
reflect a
change to the
Company's
cost
allocation
methodology
effective
January 1,
2018. See
supplemental
information
later in this
press release
for further
discussion.
CVS HEALTH CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
In millions, except per share amounts 2018 2017
------------------------------------- ---- ----
Assets:
Cash and cash equivalents $42,023 $1,696
Short-term investments 119 111
Accounts receivable, net 13,964 13,181
Inventories 14,824 15,296
Other current assets 868 945
--- ---
Total current assets 71,798 31,229
Property and equipment, net 10,144 10,292
Goodwill 38,115 38,451
Intangible assets, net 13,388 13,630
Other assets 1,694 1,529
----- -----
Total assets $135,139 $95,131
======== =======
Liabilities:
Accounts payable $7,741 $8,863
Claims and discounts payable 11,241 10,355
Accrued expenses 7,724 6,609
Short-term debt - 1,276
Current portion of long-term debt 3,542 3,545
----- -----
Total current liabilities 30,248 30,648
Long-term debt 61,552 22,181
Deferred income taxes 3,058 2,996
Other long-term liabilities 1,604 1,611
----- -----
Total liabilities 96,462 57,436
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; 1,714 shares issued and 1,016 17 17
shares outstanding at March 31, 2018 and 1,712 shares issued and 1,014 shares
outstanding at December 31, 2017
Capital surplus 32,191 32,079
Treasury stock, at cost: 697 shares at March 31, 2018 and December 31, 2017 (37,716) (37,765)
Shares held in trust: 1 share at March 31, 2018 and December 31, 2017 (31) (31)
Retained earnings 44,040 43,556
Accumulated other comprehensive income (loss) 172 (165)
--- ----
Total CVS Health shareholders' equity 38,673 37,691
Noncontrolling interest 4 4
--- ---
Total shareholders' equity 38,677 37,695
------ ------
Total liabilities and shareholders' equity $135,139 $95,131
======== =======
CVS HEALTH CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
---------
In millions 2018 2017 (1)
----------- ---- -------
Cash flows from operating activities:
Cash receipts from customers $43,369 $43,913
Cash paid for inventory and prescriptions dispensed by retail network pharmacies (36,195) (36,178)
Cash paid to other suppliers and employees (4,271) (3,823)
Interest received 50 6
Interest paid (545) (328)
Income taxes paid (53) (57)
--- ---
Net cash provided by operating activities 2,355 3,533
----- -----
Cash flows from investing activities:
Purchases of property and equipment (482) (457)
Proceeds from sale of property and equipment and other assets 2 5
Acquisitions (net of cash acquired) and other investments (368) (93)
Purchase of available-for-sale investments (18) -
Maturity of available-for-sale investments 10 8
Proceeds from sale of subsidiary 725 -
--- ---
Net cash used in investing activities (131) (537)
---- ----
Cash flows from financing activities:
Decrease in short-term debt (1,276) (106)
Proceeds from issuance of long-term debt 39,376 -
Repayments of long-term debt (1) -
Derivative settlements 446 -
Repurchase of common stock - (3,621)
Dividends paid (508) (516)
Proceeds from exercise of stock options 107 121
Payments for taxes related to net share settlement of equity awards (4) (11)
--- ---
Net cash provided by (used in) financing activities 38,140 (4,133)
------ ------
Effect of exchange rate changes on cash, cash equivalents and restricted cash - -
--- ---
Net increase (decrease) in cash, cash equivalents and restricted cash 40,364 (1,137)
Cash, cash equivalents and restricted cash at the beginning of the period 1,900 3,520
----- -----
Cash, cash equivalents and restricted cash at the end of the period $42,264 $2,383
======= ======
Reconciliation of net income to net cash provided by operating activities:
Net income $998 $953
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 644 619
Stock-based compensation 55 55
Deferred income taxes and other noncash items 62 14
Change in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net (857) 48
Inventories 464 456
Other current assets 56 (74)
Other assets (113) (1)
Accounts payable and claims and discounts payable (178) (539)
Accrued expenses 1,231 1,848
Other long-term liabilities (7) 154
--- ---
Net cash provided by operating activities $2,355 $3,533
====== ======
(1) Effective
January 1,
2018, the
Company
adopted ASU
2016-18,
Statement of
Cash Flows,
which
requires
entities to
show the
changes in
the total of
cash, cash
equivalents,
and
restricted
cash in the
statement of
cash flows.
The adoption
of this
standard
resulted in a
retrospective
reclassification
of a $17
million
restricted
cash outflow,
which was
previously
reported in
"acquisitions
(net of cash
acquired) and
other
investments"
within cash
flows from
investing
activities on
the Company's
condensed
consolidated
statement of
cash flows to
"net decrease
in cash, cash
equivalents
and
restricted
cash."
Non-GAAP Financial Measures
The following provides reconciliations of certain non-GAAP financial measures presented in this Form 8-K to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company is also providing reconciliations of certain non-GAAP information on a prospective basis. The Company uses the non-GAAP measures "Adjusted EPS," "Free Cash Flow" and "Adjusted Operating Profit" to assess and analyze underlying business performance and trends. Management believes that providing these non-GAAP measures enhances investors' understanding of the Company's performance.
The Company defines Adjusted Operating Profit as operating profit excluding the impact of certain adjustments such as acquisition-related transaction and integration costs, net interest expense on financing associated with proposed acquisitions, gains and losses on divestitures of subsidiaries, and charges in connection with store rationalization, and any other items specifically identified herein. Management believes that this measure enhances investors' ability to compare past financial performance with its current and expected performance.
The Company defines Adjusted Earnings per Share, or Adjusted EPS, as income from continuing operations excluding the impact of certain adjustments such as the amortization of intangible assets, acquisition-related transaction and integration costs, net interest expense on financing associated with proposed acquisitions, gains and losses on divestitures of subsidiaries, and charges in connection with store rationalization, and any other items specifically identified herein, divided by the Company's weighted average diluted shares outstanding. Management believes that this measure enhances investors' ability to compare the Company's past financial performance with its current performance.
The Company defines Free Cash Flow as net cash provided by operating activities less net additions to property and equipment (i.e., additions to property and equipment plus proceeds from sale-leaseback transactions). Management uses this non-GAAP financial measure for internal comparisons and finds it useful in assessing year-over-year cash flow performance.
These non-GAAP financial measures are provided as supplemental information to the financial measures presented in this press release that are calculated and presented in accordance with GAAP. Adjusted EPS should be considered in addition to, rather than as a substitute for, income before income tax provision as a measure of our performance. Free Cash Flow should be considered in addition to, rather than as a substitute for, net cash provided by operating activities as a measure of our liquidity. Adjusted Operating Profit should be considered in addition to, rather than a substitute for, operating profit. The Company's definitions of Adjusted EPS, Free Cash Flow and Adjusted Operating Profit may not be comparable to similarly titled measurements reported by other companies.
Adjusted Operating Profit
(Unaudited)
The following is a reconciliation of operating profit to Adjusted Operating Profit:
Three Months Ended
March 31,
---------
In millions 2018 2017
----------- ---- ----
Operating profit $1,946 $1,793
Non-GAAP adjustments:
Acquisition-related transaction and integration costs (1) 43 15
Loss on divestiture of subsidiary (2) 86 -
Charges in connection with store rationalization (3) - 199
--- ---
Adjusted operating profit $2,075 $2,007
====== ======
(1) In 2018,
transaction
and
integration
costs relate
to the
proposed
acquisition
of Aetna and
the
acquisition
of Omnicare.
In 2017,
integration
costs relate
to the
acquisition
of Omnicare.
(2) Represents the
pre-tax loss
on the sale
of
RxCrossroads
subsidiary
for $725
million on
January 2,
2018.
(3) Primarily
represents a
charge for
noncancelable
lease
obligations
associated
with stores
closed in
connection
with our
enterprise
streamlining
initiative.
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 2018 2017
------------------------------------- ---- ----
Income before income tax provision $1,470 $1,534
Non-GAAP adjustments:
Amortization of intangible assets 210 200
Acquisition-related transaction and integration costs (1) 43 15
Loss on divestiture of subsidiary (2) 86 -
Net interest expense on financing associated with proposed Aetna
acquisition (3) 231 -
Charges in connection with store rationalization (4) - 199
--- ---
Adjusted income before income tax provision 2,040 1,948
Adjusted income tax provision 533 734
--- ---
Adjusted income from continuing operations 1,507 1,214
Net income attributable to noncontrolling interest - (1)
Adjusted income allocable to participating securities (3) (5)
--- ---
Adjusted income from continuing operations attributable to CVS Health $1,504 $1,208
====== ======
Weighted average diluted shares outstanding 1,019 1,035
Adjusted EPS $1.48 $1.17
===== =====
(1) In 2018,
transaction
and
integration
costs relate
to the
proposed
acquisition
of Aetna and
the
acquisition
of Omnicare.
In 2017,
integration
costs relate
to the
acquisition
of Omnicare.
(2) Represents the
pre-tax loss
on the sale
of
RxCrossroads
subsidiary
for $725
million on
January 2,
2018.
(3) Includes $161
million of
bridge
financing
costs, plus
$112 million
of interest
expense on
the $40
billion of
senior notes
issued on
March 9, 2018
and the $5
billion term
loan
facility,
less related
interest
income of $42
million
earned on the
proceeds of
the senior
notes.
(4) 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 2018 2017
----------- ---- ----
Net cash provided by operating activities $2,355 $3,533
Subtract: Additions to property and equipment (482) (457)
---- ----
Free cash flow $1,873 $3,076
====== ======
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.
In conjunction with the Company's implementation of a new enterprise resource planning system in the first quarter of 2018, the Company changed the manner in which certain shared functional costs are allocated to its reportable segments. Segment financial information for the three months ended March 31, 2017, has been retrospectively adjusted to reflect this change to the cost allocation methodology as shown below:
Pharmacy
Services Retail/LTC Corporate Intersegment Consolidated
In millions Segment Segment Segment Eliminations Totals
----------- ------- ------- ------- ------------ ------
Cost of revenues, as previously reported $30,127 $13,665 $(5,858) $37,934
Adjustments 14 (5) - 9
--- --- --- ---
Cost of revenues, as adjusted $30,141 $13,660 $(5,858) $37,943
======= ======= ======= =======
Gross profit, as previously reported $1,096 $5,676 $(192) $6,580
Adjustments (14) 5 - (9)
--- --- --- ---
Gross profit, as adjusted $1,082 $5,681 $(192) $6,571
====== ====== ===== ======
Operating expenses, as previously reported $312 $4,265 $226 $(16) $4,787
Adjustments 13 (17) (5) - (9)
--- --- --- --- ---
Operating expenses, as adjusted $325 $4,248 $221 $(16) $4,778
==== ====== ==== ==== ======
Operating profit (loss), as previously reported $784 $1,411 $(226) $(176) $1,793
Adjustments (27) 22 5 - -
--- --- --- --- ---
Operating profit (loss), as adjusted $757 $1,433 $(221) $(176) $1,793
==== ====== ===== ===== ======
The following is a reconciliation of the Company's segments to the accompanying condensed consolidated financial statements:
Pharmacy
Services Retail/LTC Corporate Intersegment Consolidated
In millions Segment(1) Segment Segment Eliminations(2) Totals
----------- --------- ------- ------- --------------- ------
Three Months Ended
March 31, 2018:
Net revenues $32,218 $20,432 $ - $(6,957) $45,693
Gross profit 1,138 5,916 - (195) 6,859
Operating profit (loss) (3)(4) 761 1,624 (264) (175) 1,946
March 31, 2017:
Net revenues 31,223 19,341 - (6,050) 44,514
Gross profit 1,082 5,681 - (192) 6,571
Operating profit (loss) (5) 757 1,433 (221) (176) 1,793
(1) Net revenues
of the
Pharmacy
Services
Segment
include
approximately
$3.3 billion
and $3.1
billion of
retail
co?payments
for the three
months ended
March 31,
2018 and
2017,
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(R)
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,
2018 includes
an $86
million loss
on the
divestiture
of the
RxCrossroads
subsidiary
and $3
million of
acquisition-
related
integration
costs related
to the
acquisition
of Omnicare.
(4) The Corporate
Segment
operating
loss for the
three months
ended March
31, 2018
includes $40
million in
acquisition-
related
transaction
and
integration
costs related
to the
proposed
Aetna
acquisition.
(5) 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 related
to the
acquisition
of Omnicare.
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 2018 2017
----------- ---- ----
Net revenues $32,218 $31,223
Gross profit 1,138 1,082
Gross profit % of net
revenues 3.5% 3.5%
Operating expenses 377 325
Operating expenses % of net
revenues 1.2% 1.0%
Operating profit 761 757
Operating profit % of net
revenues 2.4% 2.4%
Net revenues:
Mail choice (1) $11,208 $10,848
Pharmacy network (2)(4) 19,554 18,987
Other (4) 1,456 1,388
Pharmacy claims processed
(90 Day = 3 prescriptions)
(3):
Total 468.8 440.5
Mail choice (1) 69.3 63.7
Pharmacy network (2) 399.5 376.8
Generic dispensing rate (3):
Total 87.6% 87.0%
Mail choice (1) 83.9% 82.8%
Pharmacy network (2) 88.3% 87.7%
Mail choice penetration rate
(3) 14.8% 14.5%
(1) Mail choice is
defined as
claims filled
at a Pharmacy
Services mail
facility,
which
includes
specialty
mail claims
inclusive of
Specialty
Connect(R)
claims picked
up at retail,
as well as
prescriptions
filled at our
retail
pharmacies
under the
Maintenance
Choice(R)
program.
(2) Pharmacy
network net
revenues,
claims
processed and
generic
dispensing
rates do not
include
Maintenance
Choice
activity,
which is
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.
(3) 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.
(4) Amounts
revised for
the three
months ended
March 31,
2017 to
reflect the
reclassification
of Med D
premium
revenues from
pharmacy
network
revenues to
other
revenues.
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 2018 2017
----------- ---- ----
Net revenues $20,432 $19,341
Gross profit 5,916 5,681
Gross profit % of net
revenues 29.0% 29.4%
Operating expenses (1)(2) 4,292 4,248
Operating expenses % of
net revenues 21.0% 22.0%
Operating profit 1,624 1,433
Operating profit % of net
revenues 8.0% 7.4%
Net revenues:
Pharmacy $15,500 $14,436
Front Store 4,726 4,620
Other 206 285
Prescriptions filled (90
Day = 3 prescriptions)
(3) 328.8 303.1
Net revenue increase
(decrease):
Total 5.6% (3.8)%
Pharmacy 7.4% (3.8)%
Front Store 2.3% (3.9)%
Total prescription volume
(90 Day = 3
prescriptions) (3) 8.5% (0.6)%
Same store sales increase
(decrease) (4):
Total 5.8% (4.7)%
Pharmacy 7.3% (4.7)%
Front Store 1.6% (4.9)%
Prescription volume (90
Day = 3 prescriptions)
(3) 8.5% (1.4)%
Generic dispensing rates
(3) 88.1% 87.5%
(1) Operating
expenses for the
three months
ended March 31,
2018 include an
$86 million loss
on the
divestiture of
the RxCrossroads
subsidiary and
$3 million of
acquisition-
related
integration
costs related to
the acquisition
of Omnicare.
(2) Operating
expenses for the
three months
ended March 31,
2017 include a
$199 million
charge
associated with
store closures
and $15 million
of acquisition-
related
integration
costs related to
the acquisition
of Omnicare.
(3) 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.
(4) Same store sales
and
prescriptions
exclude revenues
from
MinuteClinic,
and revenue and
prescriptions
from stores in
Brazil, LTC
operations and,
in 2017, from
commercialization
services
provided through
RxCrossroads.
Adjusted Operating Profit Guidance
(Unaudited)
The following reconciliation of estimated operating profit to estimated adjusted operating profit 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 Operating Profit.
Year Ending
In millions December 31, 2018
----------- -----------------
Operating profit $9,480 $9,780
Non-GAAP adjustments:
Acquisition-related transaction and
integration costs 255 255
Loss on divestiture of subsidiary 86 86
--- ---
Adjusted operating profit $9,821 $10,121
====== =======
Three Months Ending
In millions June 30, 2018
----------- -------------
Operating profit $2,230 $2,300
Non-GAAP adjustments:
Acquisition-related transaction and
integration costs 40 40
--- ---
Adjusted operating profit $2,270 $2,340
====== ======
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, 2018
------------------------------------- -----------------
Income before income tax provision $7,324 $7,624
Non-GAAP adjustments:
Amortization of intangible assets 850 850
Acquisition-related transaction and integration costs 255 255
Loss on divestiture of subsidiary 86 86
Net interest expense on financing associated with proposed Aetna acquisition 1,115 1,115
----- -----
Adjusted income before income tax provision 9,630 9,930
Adjusted income tax provision 2,600 2,680
----- -----
Adjusted income from continuing operations 7,030 7,250
Net income attributable to noncontrolling interest (1) (1)
Adjusted income allocable to participating securities (12) (12)
--- ---
Adjusted income from continuing operations attributable to CVS Health $7,017 $7,237
====== ======
Weighted average diluted shares outstanding 1,022 1,022
Adjusted earnings per share $6.87 $7.08
===== =====
Three Months Ending
In millions, except per share amounts June 30, 2018
------------------------------------- -------------
Income before income tax provision $1,697 $1,767
Non-GAAP adjustments:
Amortization of intangible assets 215 215
Acquisition-related transaction and integration costs 40 40
Net interest expense on financing associated with proposed Aetna acquisition 268 268
--- ---
Adjusted income before income tax provision 2,220 2,290
Adjusted income tax provision 600 620
--- ---
Adjusted income from continuing operations 1,620 1,670
Net income attributable to noncontrolling interest - -
Adjusted income allocable to participating securities (2) (2)
--- ---
Adjusted income from continuing operations attributable to CVS Health $1,618 $1,668
====== ======
Weighted average diluted shares outstanding 1,020 1,020
Adjusted earnings per share $1.59 $1.64
===== =====
CONTACT: Investor Contact: Mike McGuire, Senior Vice President, Investor Relations, (401) 770-4050; Media Contact: Carolyn Castel, Vice President, Corporate Communications, (401) 770-5717
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SOURCE CVS Health Corporation
