Express Scripts Announces 2nd Quarter Results; Increases 2015 Guidance Range

Adjusted claims

320 to 340

(3%) to 4%

Adjusted earnings per diluted share

$1.41 to $1.45

9% to 12%

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Operations 

Three Months EndedJune 30,

Six Months Ended June 30,

  (in millions, except per share data) 

2015

2014

2015

2014

Revenues(*)

$ 25,454.2

$ 25,111.0

$ 50,353.8

$ 48,796.0

Cost of revenues(*)

23,103.3

46,388.6

45,037.9

    Gross profit 

2,131.2

2,007.7

3,965.2

3,758.1

Selling, general and administrative

998.5

1,041.7

2,005.9

2,082.9

Operating income

1,132.7

966.0

1,959.3

1,675.2

Other (expense) income:

    Interest income and other 

6.0

10.3

11.3

21.4

    Interest expense and other 

(132.3)

(134.7)

(248.7)

(259.2)

(126.3)

(124.4)

(237.4)

(237.8)

Income before income taxes

1,006.4

841.6

1,721.9

1,437.4

Provision for income taxes

400.3

318.9

668.7

580.2

Net income 

606.1

522.7

1,053.2

857.2

Less: Net income attributable to non-controlling interest

6.0

7.5

12.0

13.7

Net income attributable to Express Scripts

$      600.1

$      515.2

$   1,041.2

$      843.5

Weighted-average number of common shares

 outstanding during the period: 

    Basic 

675.4

758.1

701.7

766.7

    Diluted 

681.4

766.5

708.3

776.4

Earnings per share:

     Basic

$        0.89

$        0.68

$        1.48

$        1.10

     Diluted

$        0.88

$        0.67

$        1.47

$        1.09

 (*) Includes retail pharmacy co-payments of $2,322.4 million and $2,578.5 million for the three months ended June 30, 2015 and 2014, respectively, and $4,956.7 million and $5,476.4 million for the six months ended June 30, 2015 and 2014, respectively. 

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Balance Sheet 

 June 30,  

 December 31,  

 (in millions) 

2015

2014

 Assets 

 Current assets: 

 Cash and cash equivalents 

$      721.0

$            1,832.6

 Receivables, net 

6,494.5

5,979.8

 Inventories 

1,650.0

2,113.2

 Deferred taxes 

423.8

390.8

 Prepaid expenses and other current assets 

348.4

251.7

    Total current assets 

9,637.7

10,568.1

 Property and equipment, net 

1,411.9

1,584.0

 Goodwill 

29,279.6

29,280.9

 Other intangible assets, net 

11,400.6

12,255.2

 Other assets 

138.0

110.7

    Total assets 

$ 51,867.8

$          53,798.9

 Liabilities and stockholders' equity 

 Current liabilities: 

 Claims and rebates payable 

$   8,213.6

$            8,488.2

 Accounts payable 

3,322.7

3,137.3

 Accrued expenses 

2,182.8

2,836.1

 Current maturities of long-term debt 

2,149.7

2,555.3

    Total current liabilities 

15,868.8

17,016.9

 Long-term debt 

14,583.9

11,012.7

 Deferred taxes 

4,761.7

4,923.2

 Other liabilities 

822.4

782.1

    Total liabilities 

36,036.8

33,734.9

 Stockholders' equity: 

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

 no shares issued and outstanding 

-

-

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

 shares issued: 853.3 and 848.6, respectively; 

 shares outstanding: 675.7 and 726.1, respectively 

8.5

8.5

 Additional paid-in capital 

22,078.7

22,671.4

 Accumulated other comprehensive (loss) income 

(3.4)

2.1

 Retained earnings 

6,961.6

5,920.4

29,045.4

28,602.4

 Common stock in treasury at cost, 177.6 and 122.5 shares, respectively  

(13,223.2)

(8,548.2)

    Total Express Scripts stockholders' equity 

15,822.2

20,054.2

 Non-controlling interest 

8.8

9.8

    Total stockholders' equity 

15,831.0

20,064.0

    Total liabilities and stockholders' equity 

$ 51,867.8

$          53,798.9

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Cash Flows 

Six Months EndedJune 30,

 (in millions) 

2015

2014

 Cash flows from operating activities: 

 Net income 

$ 1,053.2

$    857.2

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

 Depreciation and amortization 

1,144.9

1,111.2

 Deferred income taxes 

(194.0)

(212.2)

 Employee stock-based compensation expense 

54.4

54.4

 Other, net 

(40.0)

(35.1)

 Changes in operating assets and liabilities:  

 Accounts receivable 

(544.9)

(1,163.0)

 Inventories 

463.1

104.1

 Other current and noncurrent assets 

(123.8)

(44.8)

 Claims and rebates payable 

(274.6)

801.2

 Accounts payable 

207.9

65.2

 Accrued expenses 

(600.5)

(358.2)

 Other current and noncurrent liabilities 

35.6

9.5

 Net cash flows provided by operating activities 

1,181.3

1,189.5

 Cash flows from investing activities: 

 Purchases of property and equipment 

(107.1)

(208.8)

 Other 

2.2

6.7

 Net cash used in investing activities 

(104.9)

(202.1)

 Cash flows from financing activities: 

 Proceeds from long-term debt, net  

5,500.0

2,490.1

 Treasury stock acquired 

(5,500.0)

(2,659.9)

 Repayment of long-term debt 

(2,315.8)

(315.8)

 Net proceeds from employee stock plans 

129.5

312.1

 Excess tax benefit relating to employee stock compensation 

48.3

65.9

 Other 

(47.7)

(35.8)

 Net cash used in financing activities 

(2,185.7)

(143.4)

 Effect of foreign currency translation adjustment 

(2.3)

(0.2)

 Net (decrease) increase in cash and cash equivalents 

(1,111.6)

843.8

 Cash and cash equivalents at beginning of period 

1,832.6

1,991.4

 Cash and cash equivalents at end of period 

$ 2,835.2

 Table 1 

  Express Scripts Holding Company Unaudited Consolidated Selected Information 

 (in millions) 

Three Months EndedJune 30,

Six Months Ended June 30,

2015

2014

2015

2014

Claims Volume

Network

228.2

231.0

447.3

461.7

Home delivery and specialty(1)

30.2

32.0

60.4

62.5

   Total claims 

263.0

507.7

524.2

Total adjusted claims(2)

321.2

324.5

628.8

644.5

 Depreciation and Amortization (D&A):  

 Revenue amortization(3)

$   23.8

$   28.5

$      47.6

$      57.0

 Cost of revenues depreciation 

29.8

32.1

76.5

62.7

 Selling, general and administrative depreciation 

125.7

88.2

202.9

172.6

 Selling, general and administrative amortization(3)

408.9

409.3

817.9

818.9

      Total D&A  

$ 588.2

$ 558.1

$ 1,144.9

$ 1,111.2

 Generic Fill Rate* 

 Network 

85.5%

83.9%

85.3%

83.6%

 Home delivery 

79.6%

76.9%

79.2%

76.7%

 Overall 

84.7%

83.0%

84.5%

82.7%

 Note: See Appendix for Footnotes 

*The home delivery generic fill rate is currently lower than the network generic fill rate as fewer generic substitutions are available among maintenance medications (e.g. therapies for chronic conditions) commonly dispensed from home delivery pharmacies compared to acute medications which are primarily dispensed by pharmacies in our retail networks.

Table 2

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

(in millions)

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Gross profit, as reported

$ 2,131.2

$ 2,007.7

$     3,965.2

$ 3,758.1

Amortization of intangible assets (3)

23.8

28.5

47.6

57.0

Transaction and integration costs (4)

40.7

108.6

95.4

216.4

Adjusted gross profit

$ 2,195.7

$ 2,144.8

$     4,108.2

$ 4,031.5

Selling, general and administrative, as reported

$    998.5

$ 1,041.7

$     2,005.9

$ 2,082.9

Amortization of intangible assets (3)

408.9

409.3

817.9

818.9

Transaction and integration costs (4)

88.1

129.8

129.0

255.1

Legal settlement (5)

-

-

60.0

-

Adjusted selling, general and administrative

$    501.5

$    502.6

$        999.0

$ 1,008.9

 Note: See Appendix for Footnotes 

The Company is providing adjusted gross profit and adjusted selling, general and administrative expenses attributable to Express Scripts excluding the impact of transaction, integration and certain other costs and amortization of intangible assets (which are non-GAAP financial measures) in order to compare the underlying financial performance to prior periods.

 Table 3 

 Express Scripts Holding Company EBITDA and Adjusted EBITDA Reconciliation 

 (in millions, except per claim data) 

Provided below is a reconciliation of net income attributable to Express Scripts to EBITDA and Adjusted EBITDA attributable to Express Scripts.  The Company believes net income is the most directly comparable measure calculated under U.S. GAAP.  

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Net income attributable to Express Scripts, as reported

$    600.1

$    515.2

$ 1,041.2

$    843.5

  Provision for income taxes

400.3

318.9

668.7

580.2

  Depreciation and amortization*

588.2

558.1

1,144.9

1,111.2

  Other expense 

126.3

124.4

237.4

237.8

EBITDA attributable to Express Scripts, as reported

1,714.9

1,516.6

3,092.2

2,772.7

Transaction and integration costs (4)*

79.6

218.6

154.4

433.5

Legal settlement (5)

-

-

60.0

-

Adjusted EBITDA attributable to Express Scripts

$ 1,794.5

$ 1,735.2

$ 3,306.6

$ 3,206.2

Total adjusted claims 

321.2

324.5

628.8

644.5

Adjusted EBITDA attributable to Express Scripts, per adjusted claim

$      5.59

$      5.35

$      5.26

$      4.97

 Note: See Appendix for Footnotes 

The Company is providing EBITDA and adjusted EBITDA excluding the impact of certain charges (both of which are non-GAAP financial measures) in order to compare the underlying financial performance to prior periods.

EBITDA attributable to Express Scripts is earnings before income taxes, depreciation and amortization and other expense, or alternatively calculated as operating income plus depreciation and amortization.  EBITDA attributable to Express Scripts 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 attributable to Express Scripts, 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 accounting principles generally accepted in the United States.  In addition, our definition and calculation of EBITDA attributable to Express Scripts may not be comparable to that used by other companies.

Adjusted EBITDA attributable to Express Scripts per adjusted claim is a supplemental measurement used by analysts and investors to help evaluate overall operating performance.  We have calculated adjusted EBITDA attributable to Express Scripts excluding transaction and integration costs recorded each year, and a legal settlement, as these charges are not considered an indicator of ongoing company performance.  Adjusted EBITDA attributable to Express Scripts per adjusted claim is calculated by dividing adjusted EBITDA attributable to Express Scripts by the adjusted claim volume for the period.  This measure is used as an indicator of EBITDA attributable to Express Scripts performance on a per-unit basis.  Adjusted EBITDA attributable to Express Scripts, and as a result, adjusted EBITDA attributable to Express Scripts per adjusted claim, are each affected by the changes in claim volumes between retail and home delivery, the relative representation of brand-name, generic and specialty pharmacy drugs, as well as the level of efficiency in the business.

*  Depreciation and amortization for the three months ended June 30, 2015 and 2014 presented above includes $49.2 million and $19.8 million, respectively, of depreciation related to the integration of Medco Health Solutions, Inc. ("Medco") which is not included in transaction and integration costs.  Depreciation and amortization for the six months ended June 30, 2015 and 2014 presented above includes $70.0 million and $38.0 million, respectively, of depreciation related to the integration of Medco which is not included in transaction and integration costs.  

 Table 4 

 Calculation of Express Scripts Holding Company Adjusted Diluted EPS  

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Diluted EPS attributable to Express Scripts, as reported

$ 0.88

$ 0.67

$ 1.47

$ 1.09

Excluding items indicated: 

Transaction and integration costs (4)

0.12

0.20

0.20

0.37

Legal settlement (5)

-

-

0.05

-

Debt redemption costs (7)

0.01

-

0.01

-

Discrete tax items (6)

0.04

-

0.04

0.05

Amortization of intangible assets (3)

0.39

0.36

0.76

0.70

Diluted EPS attributable to Express Scripts, adjusted

$ 1.44

$ 1.23

$ 2.53

$ 2.21

 Note: See Appendix for Footnotes 

The Company is providing diluted EPS attributable to Express Scripts and adjusted diluted EPS attributable to Express Scripts excluding the impact of transaction, integration and certain other costs and amortization of intangible assets (which are non-GAAP financial measures) in order to compare the underlying financial performance to prior periods.

 Table 5 

 Calculation of Express Scripts Holding Company Adjusted Net Income and Adjusted Effective Income Tax Rate 

 (in millions) 

Three Months Ended June 30, 2015

Six Months Ended June 30, 2015

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes, as reported

$ 1,006.4

$     400.3

$ 1,721.9

$      668.7

Net income attributable to non-controlling interest

(6.0)

-

(12.0)

-

Income before income taxes attributable to Express Scripts

1,000.4

400.3

40.0%

1,709.9

668.7

39.1%

Excluding items indicated: 

Transaction and integration costs(4)

128.8

48.5

224.4

84.4

Legal settlement(5)

-

-

60.0

22.5

Debt redemption costs (7)

9.2

3.5

9.2

3.5

Discrete tax items(6)

-

(23.4)

-

(25.7)

Amortization of intangible assets(3)

432.7

163.1

865.5

325.4

Income before income taxes attributable to Express Scripts, as adjusted

$ 1,571.1

$     592.0

37.7%

$ 2,869.0

$   1,078.8

37.6%

Adjusted net income attributable to Express Scripts

$     979.1

$   1,790.2

 Note: See Appendix for Footnotes 

The Company is providing adjusted net income attributable to Express Scripts, net of tax and adjusted effective income tax rate attributable to Express Scripts excluding the impact of transaction, integration and certain other costs and amortization of intangible assets (which are non-GAAP financial measures) in order to compare the underlying financial performance to prior periods.

 Table 5A 

 Calculation of Express Scripts Holding Company Adjusted Net Income and Adjusted Effective Income Tax Rate 

 (in millions) 

Three Months Ended June 30, 2014

Six Months Ended June 30, 2014

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes, as reported

$    841.6

$     318.9

$ 1,437.4

$     580.2

Net income attributable to non-controlling interest

(7.5)

-

(13.7)

-

Income before income taxes attributable to Express Scripts

834.1

318.9

38.2%

1,423.7

580.2

40.8%

Excluding items indicated: 

Transaction and integration costs(4)

238.4

90.5

471.5

179.5

Debt redemption costs(7)

4.4

1.7

4.4

1.7

Discrete tax items(6)

-

(1.9)

-

(38.0)

Amortization of intangible assets(3)

437.8

166.1

875.9

333.5

Income before income taxes attributable to Express Scripts, as adjusted

$ 1,514.7

$     575.3

38.0%

$ 2,775.5

$  1,056.9

38.1%

Adjusted net income attributable to Express Scripts

$     939.4

$  1,718.6

 Note: See Appendix for Footnotes 

The Company is providing adjusted net income attributable to Express Scripts, net of tax and adjusted effective income tax rate attributable to Express Scripts excluding the impact of transaction, integration and certain other costs and amortization of intangible assets (which are non-GAAP financial measures) in order to compare the underlying financial performance to prior periods.

Table 6

Express Scripts Holding Company 2015 Guidance Information

Estimated Year Ending December 31, 2015

Estimated Year Ending December 31, 2015

  (in millions, except per share and per claim data) 

 Current Guidance 

 Previous Guidance 

Adjusted EPS attributable to Express Scripts*

$5.46 to $5.54

$5.37 to $5.47

Year over year growth 

12%-14%

10%-12%

Total adjusted claims

1,280 to 1,320

1,280 to 1,320

Adjusted selling, general and administrative*

$1,950 to $2,025

$1,925 to $2,000

Depreciation**

$420 to $440

$420 to $460

Effective income tax rate 

37.5% to 37.7%

37.3% to 37.7%

Adjusted EBITDA*

$6,960 to $7,120

$6,925 to $7,125

Adjusted EBITDA per adjusted claim*

$5.30 to $5.50

$5.25 to $5.45

Diluted weighted average shares outstanding during the period

695 to 705

695 to 715

Cash flow from operations

$4,500 to $5,000

$4,500 to $5,000

Capital expenditures

$300 to $350

$300 to $400

GAAP items not included in guidance (*) 

The Company anticipates full-year 2015 integration costs to be approximately $250 million, but the exact amount is indeterminable.  Accordingly, the Company is unable to include these charges in the list of GAAP items not included in guidance for 2015 full-year adjusted earnings per diluted share attributable to Express Scripts, adjusted selling, general and administrative, adjusted EBITDA and adjusted EBITDA per adjusted claim or to provide a reconciliation to the corresponding GAAP measure.  In addition, full-year 2015 integration costs excludes a non-cash adjustment to depreciation and amortization of approximately $144 million related to the acceleration of remaining useful lives for Medco acquired assets.  2015 Adjusted EPS will exclude amortization of intangible assets per diluted share in the range of $1.53 to $1.57. 

**  Approximately $305 to $325 million of this depreciation guidance is included in the guidance for adjusted selling, general and administrative expenses.  The remainder of the depreciation guidance is reported in cost of goods sold.

 Appendix 

 Footnotes 

(1)

Includes home delivery, specialty and other including:  (a) drugs distributed through patient assistance programs, (b) drugs distributed to clients of other PBMs 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 network claims. 

(3)

Amortization of intangible assets includes the following items:

Amortization of legacy Express Scripts Inc. ("ESI") intangible assets include amounts in both revenues and selling, general and administrative expense.

Revenue amortization is related to the customer contract with Anthem which commenced upon closing of the NextRx acquisition in 2009.  Amortization of intangibles that arises in connection with consideration given to a customer by a vendor is characterized as a reduction of revenues.  Intangible amortization of $23.8 million ($14.8 million net of tax) and $28.5 million ($17.7 million net of tax) is included as a reduction to revenue for the three months ended June 30, 2015 and 2014, respectively.  Intangible amortization of $47.6 million ($29.7 million net of tax) and $57.0 million ($35.3 million net of tax) is included as a reduction to revenue for the six months ended June 30, 2015 and 2014, respectively.    

Other legacy ESI intangible amortization of $9.4 million ($5.9 million net of tax) and $9.4 million ($5.9 million net of tax) for the three months ended June 30, 2015 and 2014, is included in selling, general and administrative expense, respectively.   Other legacy ESI intangible amortization of $18.8 million ($11.8 million net of tax) and $18.8 million ($11.7 million net of tax) for the six months ended June 30, 2015 and 2014, is included in selling, general and administrative expense, respectively.  

Amortization of intangible assets related to the acquisition of Medco Health Solutions, Inc. of $399.5million ($248.9 million net of tax) and $399.9 million ($248.1 million net of tax) for the three months ended June 30, 2015 and 2014, is included in selling, general and administrative expense, respectively.  Amortization of intangible assets related to the acquisition of Medco Health Solutions, Inc. of $799.1 million ($498.6 million net of tax) and $800.1 million ($495.4 million net of tax) for the six months ended June 30, 2015 and 2014, is included in selling, general and administrative expense, respectively.    

(4)

Transaction and integration costs include those costs directly related to the acquisition of Medco. 

Costs of $40.7 million ($25.3 million net of tax) and $108.6 million ($67.4 million net of tax) are primarily composed of integration-related activities, and are included in gross profit for the three months ended June 30, 2015 and 2014, respectively.  Costs of $95.4 million ($59.5 million net of tax) and $216.4 million ($134.0 million net of tax) are primarily composed of integration-related activities, and are included in gross profit for the six months ended June 30, 2015 and 2014, respectively.    

Costs of $88.1 million ($55.0 million net of tax) and $129.8 million ($80.5 million net of tax) are primarily composed of professional fees, integration-related activities and severance costs, and are included in selling, general and administrative expense for the three months ended June 30, 2015 and 2014, respectively.  Costs of $129.0 million ($80.5 million net of tax) and $255.1 million ($158.0 million net of tax) are primarily composed of professional fees, integration-related activities and severance costs, and are included in selling, general and administrative expense for the six months ended June 30, 2015 and 2014, respectively.  

(5)

Charge related to a legal settlement of $60.0 million ($37.5 million net of tax) is included in selling, general and administrative expense for the six months ended June 30, 2015.

(6)

Provision for income taxes includes discrete tax charges of $23.4 million and $25.7 million for the three and six months ended June 30, 2015, primarily relates to the deferred tax implications of newly enacted state laws and changes in our unrecognized tax benefits, and discrete tax charges of $1.9 million and $38.0 million for the three and six months ended June 30, 2014, primarily relates to interest on and changes in unrecognized tax benefits and the deferred tax implications of newly enacted state laws. 

Debt redemption costs, which include write-off of deferred financing fees incurred for the early repayment of the 2011 term loan, totaled $9.2 million ($5.7 million net of tax) and $4.4 million ($2.7 million net of tax) and are included in interest expense for the three and six months ended June 30, 2015 and 2014, respectively.