CVS Health Reports Third Quarter Results

CVS HEALTH CORPORATIONCondensed Consolidated Statements of Income(Unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

In millions, except per share amounts

2016

2015

2016

2015

Net revenues

$

44,615

$

38,644

$

131,555

$

112,144

Cost of revenues

37,123

31,983

110,304

92,917

Gross profit

7,492

6,661

21,251

19,227

Operating expenses

4,675

4,330

13,908

12,502

Operating profit

2,817

2,331

7,343

6,725

Interest expense, net

253

261

816

562

Loss on early extinguishment of debt

101

—

643

—

Income before income tax provision

2,463

2,070

5,884

6,163

Income tax provision

921

833

2,271

2,433

Income from continuing operations

1,542

1,237

3,613

3,730

Income (loss) from discontinued operations, net of tax

(1)

10

(1)

10

Net income

1,541

1,247

3,612

3,740

Net income attributable to noncontrolling interest

(1)

(1)

(2)

(1)

Net income attributable to CVS Health

$

1,540

$

1,246

$

3,610

$

3,739

Basic earnings per share:

Income from continuing operations attributable to CVS Health

$

1.44

$

1.10

$

3.34

$

3.31

Income from discontinued operations attributable to CVS Health

$

—

$

0.01

$

—

$

0.01

Net income attributable to CVS Health

$

1.44

$

1.11

$

3.34

$

3.32

Weighted average basic shares outstanding

1,068

1,114

1,076

1,122

Diluted earnings per share:

Income from continuing operations attributable to CVS Health

$

1.43

$

1.10

$

3.32

$

3.28

Income from discontinued operations attributable to CVS Health

$

—

$

0.01

$

—

$

0.01

Net income attributable to CVS Health

$

1.43

$

1.11

$

3.32

$

3.29

Weighted average diluted shares outstanding

1,073

1,121

1,082

1,130

Dividends declared per share

$

0.425

$

0.350

$

1.275

$

1.050

CVS HEALTH CORPORATIONCondensed Consolidated Balance Sheets(Unaudited)

September 30,

December 31,

In millions, except per share amounts

2016

2015

Assets:

Cash and cash equivalents

$

2,189

$

2,459

Short-term investments

74

88

Accounts receivable, net

13,625

11,888

Inventories

14,348

14,001

Other current assets

703

722

Total current assets

30,939

29,158

Property and equipment, net

9,901

9,855

Goodwill

38,214

38,106

Intangible assets, net

13,567

13,878

Other assets

1,535

1,440

Total assets

$

94,156

$

92,437

Liabilities:

Accounts payable

$

7,584

$

7,490

Claims and discounts payable

9,178

7,653

Accrued expenses

8,856

6,829

Short-term debt

340

—

Current portion of long-term debt

783

1,197

Total current liabilities

26,741

23,169

Long-term debt

25,610

26,267

Deferred income taxes

4,254

4,217

Other long-term liabilities

1,597

1,542

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; 1,705 shares issued and 1,066

shares outstanding at September 30, 2016 and 1,699 shares issued and 1,101 shares

outstanding at December 31, 2015

17

17

Treasury stock, at cost: 638 shares at September 30, 2016 and 597 shares at December 31,

(32,991)

(28,886)

Shares held in trust: 1 share at September 30, 2016 and December 31, 2015

(31)

(31)

Capital surplus

31,541

30,948

Retained earnings

37,732

35,506

Accumulated other comprehensive income (loss)

(319)

(358)

Total CVS Health shareholders' equity

35,949

37,196

Noncontrolling interest

5

7

Total shareholders' equity

35,954

37,203

Total liabilities and shareholders' equity

$

94,156

$

92,437

CVS HEALTH CORPORATIONCondensed Consolidated Statements of Cash Flows(Unaudited)

Nine Months Ended

September 30,

In millions

2016

2015

Cash flows from operating activities:

Cash receipts from customers

$

128,545

$

108,324

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(106,371)

(89,530)

Cash paid to other suppliers and employees

(11,092)

(11,240)

Interest received

14

15

Interest paid

(954)

(423)

Income taxes paid

(2,194)

(2,305)

Net cash provided by operating activities

7,948

4,841

Cash flows from investing activities:

Purchases of property and equipment

(1,607)

(1,490)

Proceeds from sale-leaseback transactions

230

34

Proceeds from sale of property and equipment and other assets

22

28

Acquisitions (net of cash acquired) and other investments

(333)

(9,503)

Purchase of available-for-sale investments

(40)

(184)

Sale or maturity of available-for-sale investments

76

115

Net cash used in investing activities

(1,652)

(11,000)

Cash flows from financing activities:

Increase in short-term debt

340

(685)

Proceeds from issuance of long-term debt

3,455

14,808

Repayments of long-term debt

(5,185)

(2,898)

Purchase of noncontrolling interest in subsidiary

(39)

—

Payments of contingent consideration

(26)

—

Dividends paid

(1,384)

(1,185)

Proceeds from exercise of stock options

205

277

Excess tax benefits from stock-based compensation

72

132

Repurchase of common stock

(4,000)

(3,871)

Other

(6)

(2)

Net cash provided by (used in) financing activities

(6,568)

6,576

Effect of exchange rates on cash and cash equivalents

2

(8)

Net increase (decrease) in cash and cash equivalents

(270)

409

Cash and cash equivalents at the beginning of the period

2,459

2,481

Cash and cash equivalents at the end of the period

$

2,189

$

2,890

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

Net income

$

3,612

$

3,740

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

Depreciation and amortization

1,847

1,510

Stock-based compensation

166

175

Loss on early extinguishment of debt

643

—

Deferred income taxes and other non-cash items

119

(184)

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

Accounts receivable, net

(1,714)

(2,530)

Inventories

(337)

(893)

Other current assets

2

591

Other assets

(86)

(13)

Accounts payable and claims and discounts payable

1,570

2,038

Accrued expenses

2,077

523

Other long-term liabilities

49

(116)

Net cash provided by operating activities

$

7,948

$

4,841

Non-GAAP Financial Measures

The following provides reconciliations of certain non-GAAP financial measures presented in this press release to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company uses the non-GAAP measures "Adjusted EPS" and "Free Cash Flow" 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 Earnings per Share, or Adjusted EPS, as net income excluding the impact of the amortization of intangible assets, acquisition-related transaction and integration costs, acquisition-related bridge financing costs, charge related to a disputed 1999 legal settlement and loss on early extinguishment of debt divided by the Company's weighted average diluted shares outstanding. The Company 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 properties 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. The Company's definitions of Adjusted EPS and Free Cash Flow may not be comparable to similarly titled measurements reported by other companies.

The Company has not provided a reconciliation of the long-term Adjusted EPS target announced today to GAAP EPS. The Company is unable to reasonably estimate the GAAP items excluded from the multi-year, long-term Adjusted EPS target.

Adjusted Earnings Per Share(Unaudited)

The following is a reconciliation of income before income tax provision to Adjusted EPS:

Three Months Ended

September 30,

Nine Months Ended

September 30,

In millions, except per share amounts

2016

2015

2016

2015

Income before income tax provision

$

2,463

$

2,070

$

5,884

$

6,163

Non-GAAP adjustments:

Amortization of intangible assets

197

160

593

419

Acquisition-related transaction and integration costs(1)

65

127

207

147

Acquisition-related bridge financing costs(1)

—

16

—

52

Charge related to a disputed 1999 legal settlement

—

—

3

—

Loss on early extinguishment of debt

101

—

643

—

Adjusted income before income tax provision

2,826

2,373

7,330

6,781

Adjusted income tax provision

1,063

933

2,832

2,658

Adjusted income from continuing operations

1,763

1,440

4,498

4,123

Net income attributable to noncontrolling interest

(1)

(1)

(2)

(1)

Adjusted income allocable to participating securities

(8)

(6)

(23)

(18)

Adjusted income from continuing operations attributable to      CVS Health

$

1,754

$

1,433

$

4,473

$

4,104

Weighted average diluted shares outstanding

1,073

1,121

1,082

1,130

Adjusted EPS

$

1.64

$

1.28

$

4.13

$

3.63

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

Free Cash Flow(Unaudited)

The following is a reconciliation of net cash provided by operating activities to free cash flow:

Nine Months Ended

September 30,

In millions

2016

2015

Net cash provided by operating activities

$

7,948

$

4,841

Subtract: Additions to property and equipment

(1,607)

(1,490)

Add: Proceeds from sale-leaseback transactions

230

34

Free cash flow

$

6,571

$

3,385

Supplemental Information(Unaudited)

The Company evaluates its Pharmacy Services Segment and Retail/LTC Segment performance based on net revenue, 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 condensed consolidated financial statements:

In millions

Pharmacy

Services

Segment(1)

Retail/LTC

Segment

Corporate

Segment

Intersegment

Eliminations(2)

Consolidated

Totals

Three Months Ended

September 30, 2016:

Net revenues

$

30,429

$

20,143

$

—

$

(5,957)

$

44,615

Gross profit(3)

1,797

5,893

—

(198)

7,492

Operating profit (loss)(4)(5)

1,458

1,773

(229)

(185)

2,817

September 30, 2015:

Net revenues

25,528

17,912

—

(4,796)

38,644

Gross profit

1,468

5,373

—

(180)

6,661

Operating profit (loss)(4)(5)

1,162

1,643

(309)

(165)

2,331

Nine Months Ended

September 30, 2016:

Net revenues

88,704

60,253

—

(17,402)

131,555

Gross profit(3)

4,266

17,560

—

(575)

21,251

Operating profit (loss)(4)(5)

3,278

5,255

(661)

(529)

7,343

September 30, 2015:

Net revenues

73,849

52,105

—

(13,810)

112,144

Gross profit

3,735

15,990

—

(498)

19,227

Operating profit (loss)(4)(5)

2,837

5,050

(712)

(450)

6,725

(1)   Net revenues of the Pharmacy Services Segment include approximately $2.5 billion and $2.1 billion of retail co-payments for the three months ended September 30, 2016 and 2015, respectively, as well as $8.1 billion and $6.8 billion of retail co-payments for the nine months ended September 30, 2016 and 2015, 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 our retail stores to purchase covered products, when members enrolled in programs such as Maintenance Choice ® elect to pick up maintenance prescriptions at one of our retail stores instead of receiving them through the mail, or when members have prescriptions filled at our 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 gross profit for the three and nine months ended September 30, 2016 includes $5 million and $15 million, respectively, of acquisition-related integration costs. The integration costs are related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

(4)   The Retail/LTC Segment operating profit for the three and nine months ended September 30, 2016 includes $52 million and $194 million, respectively, of acquisition-related integration costs. The Retail/LTC Segment operating profit for the three and nine months ended September 30, 2015 includes $12 million of acquisition-related integration costs. The integration costs are related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

(5)   The Corporate Segment operating loss for the three and nine months ended September 30, 2016 includes $13 million of integration costs. The Corporate Segment operating loss for the three and nine months ended September 30, 2015 includes $115 million and $135 million, respectively, of acquisition-related transaction and integration costs.

Supplemental Information(Unaudited)

Pharmacy Services Segment

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

Three Months EndedSeptember 30,

Nine Months EndedSeptember 30,

In millions

2016

2015

2016

2015

Net revenues

$

30,429

$

25,528

$

88,704

$

73,849

Gross profit

1,797

1,468

4,266

3,735

Gross profit % of net revenues

5.9%

5.8%

4.8%

5.1%

Operating expenses

339

306

988

898

Operating expense % of net revenues

1.1%

1.2%

1.1%

1.2%

Operating profit

1,458

1,162

3,278

2,837

Operating profit % of net revenues

4.8%

4.6%

3.7%

3.8%

Net revenues:

Mail choice(1)

$

10,872

$

9,735

$

31,668

$

27,592

Pharmacy network(2)

19,469

15,716

56,783

46,043

Other

88

77

253

214

Pharmacy claims processed:

Total

305.0

251.0

912.5

752.3

Mail choice(1)

22.4

21.9

66.3

63.5

Pharmacy network(2)

282.6

229.1

846.2

688.8

Generic dispensing rate:

Total

85.4%

83.8%

85.4%

83.7%

Mail choice(1)

78.5%

76.5%

78.0%

76.3%

Pharmacy network(2)

86.0%

84.5%

85.9%

84.4%

Mail choice penetration rate

18.1%

21.1%

18.0%

20.5%

(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 our retail stores, as well as prescriptions filled at our retail stores 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 stores and specialty retail pharmacies, including our retail stores 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 EndedSeptember 30,

Nine Months EndedSeptember 30,

In millions

2016

2015

2016

2015

Net revenues

$

20,143

$

17,912

$

60,253

$

52,105

Gross profit(1)

5,893

5,373

17,560

15,990

Gross profit % of net revenues

29.3%

30.0%

9.1%

30.7%

Operating expenses(2)

4,120

3,730

12,305

10,940

Operating expense % of net revenues

20.5%

20.8%

20.4%

21.0%

Operating profit

1,773

1,643

5,255

5,050

Operating profit % of net revenues

8.8%

9.2%

8.7%

9.7%

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

302.9

258.7

908.9

744.1

Net revenue increase (decrease):

Total

12.5%

6.9%

15.6%

4.0%

Pharmacy

15.3%

10.4%

19.9%

7.0%

Front store

0.8%

(2.4)%

0.9%

(3.7)%

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

17.1%

10.7%

22.1%

7.7%

Same store increase (decrease)(4):

Total sales

2.3%

1.7%

2.8%

1.1%

Pharmacy sales

3.4%

4.6%

4.3%

4.3%

Front store sales

(1.0)%

(5.8)%

(1.0)%

(6.6)%

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

3.0%

4.4%

4.1%

4.8%

Generic dispensing rate

85.8%

84.8%

85.8%

84.7%

Pharmacy % of total revenues

76.0%

74.1%

75.2%

72.5%

(1)   Gross profit for the three and nine months ended September 30, 2016 includes $5 million and $15 million, respectively, of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

(2)   Operating expenses for the three and nine months ended September 30, 2016 includes $47 million and $179 million, respectively, of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target. Operating expenses for the three and nine months ended September 30, 2015 includes $12 million of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

(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, long-term care operations and from commercialization services.

2016 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 "Non-GAAP Financial Measures" above for more information on how we calculate Adjusted EPS.

In millions, except per share amounts

Year Ending

December 31, 2016

Income before income tax provision(1)

$

8,588

$

8,689

Non-GAAP adjustments:

Amortization of intangible assets

798

798

Acquisition-related integration costs(1)

207

207

Loss on early extinguishment of debt

643

643

Charge related to a disputed 1999 legal settlement

3

3

Adjusted income before income tax provision

10,239

10,340

Adjusted income tax provision

3,973

4,012

Adjusted income from continuing operations

6,266

6,328

Net income attributable to noncontrolling interest

(2)

(2)

Income allocable to participating securities

(32)

(32)

Adjusted income from continuing operations attributable to CVS Health

$

6,232

$

6,294

Weighted average diluted shares outstanding

1,080

1,080

Adjusted earnings per share

$

5.77

$

5.83

In millions, except per share amounts

Three Months Ending

December 31, 2016

Income before income tax provision(2)

$

2,704

$

2,805

Non-GAAP adjustments:

Amortization of intangible assets

205

205

Adjusted income before income tax provision

2,909

3,010

Adjusted income tax provision

1,140

1,180

Adjusted income from continuing operations

1,769

1,830

Net income attributable to noncontrolling interest

—

—

Income allocable to participating securities

(9)

(9)

Adjusted income from continuing operations attributable to CVS Health

$

1,760

$

1,821

Weighted average diluted shares outstanding

1,073

1,073

Adjusted earnings per share

$

1.64

$

1.70

(1)   2016 guidance includes integration costs for the acquisitions of Omnicare and the pharmacies and clinics of Target for the nine months ended September 30, 2016 and excludes estimated integration costs for the period from October 1, 2016 to December 31, 2016.

(2)   Estimated integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target for the period from October 1, 2016 to December 31, 2016 are excluded from 2016 guidance.

2016 Free Cash Flow Guidance(Unaudited)

The following reconciliation of net cash provided by operating activities to free cash flow contains forward-looking information. All forward-looking information involves risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking information for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q. See also "Non-GAAP Financial Measures" above for more information on how we calculate Free Cash Flow.

In millions

Year Ending

December 31, 2016

Net cash provided by operating activities

$

9,075

$

9,270

Subtract: Additions to property and equipment

(2,550)

(2,500)

Add: Proceeds from sale-leaseback transactions

275

230

Free cash flow

$

6,800

$

7,000

2017 Preliminary OutlookAdjusted Earnings Per Share(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 "Non-GAAP Financial Measures" above for more information on how we calculate Adjusted EPS.

In millions, except per share amounts

Year EndingDecember 31, 2017

Income before income tax provision(1)

$

8,835

$

9,152

Non-GAAP adjustments:

Amortization of intangible assets

820

820

Pension settlement

220

220

Adjusted income before income tax provision

9,875

10,192

Adjusted income tax provision

3,841

3,985

Adjusted income from continuing operations

6,034

6,207

Net income attributable to noncontrolling interest

(2)

(2)

Income allocable to participating securities

(33)

(33)

Adjusted income from continuing operations attributable to CVS Health

$

5,999

$

6,172

Weighted average diluted shares outstanding

1,040

1,040

Adjusted earnings per share

$

5.77

$

5.93

(1)   Estimated integration costs related to the acquisition of Omnicare are excluded from the 2017 Preliminary Outlook.