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Form 8-K/A CVS HEALTH Corp For: Nov 08

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November 8, 2016 9:35 AM EST


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 8-K/A
(Amendment No. 1)

 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported):  November 8, 2016
 
a1282016cvslogo.gif
CVS HEALTH CORPORATION
(Exact Name of Registrant
as Specified in its Charter)
 
 
 
Delaware
 
 
 
 
(State or Other Jurisdiction of Incorporation)
 
 
 
 
 
 
 
001-01011
 
 
 
05-0494040
(Commission File Number)
 
 
 
(IRS Employer Identification No.)
 
One CVS Drive
 
 
Woonsocket, Rhode Island
 
02895
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (401) 765-1500
 

 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 






Item 2.02      Results of Operations and Financial Condition.
 
On November 8, 2016, CVS Health Corporation (the “Company”) filed a Current Report on Form 8-K with a press release announcing its earnings for the three months ended September 30, 2016. We are filing an amendment to that Form 8-K solely to correct a typographical error that appeared in both the fifth sub-bullet under the headline “2016 Guidance” and in the guidance paragraph of the press release. In each case, the range of $9.3 billion to $9.5 billion has been changed to a range of $9.1 billion to $9.3 billion. There were no other changes to the press release.

Specifically, the original sub-bullet in relevant part stated: “Raised full year cash flow from operations to $9.3 to $9.5 billion…” and the original guidance paragraph of the press release in relevant part stated: “The Company raised cash flow guidance for 2016 and now expects to deliver cash flow from operations of $9.3 billion to $9.5 billion …”

The relevant part of the corrected sub-bullet is: “Raised full year cash flow from operations to $9.1 to $9.3 billion …” and the relevant part of the corrected sentence in the guidance paragraph is: “The Company raised cash flow guidance for 2016 and now expects to deliver cash flow from operations of $9.1 billion to $9.3 billion …”

A copy of the corrected press release is attached to this Amendment No. 1 as Exhibit 99.1.

The information in this report is being furnished, not filed. Accordingly, the information in Item 9.01 of this report will not be incorporated by reference into any registration statement filed by the Company under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated by reference.
 
Item 9.01                   Financial Statements and Exhibits.
 
(d)         Exhibits
 
99.1      Press Release, dated November 8, 2016 of CVS Health Corporation.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
CVS HEALTH CORPORATION
 
 
 
By:
/s/ David M. Denton
 
 
David M. Denton
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
 
 
 
Dated:
November 8, 2016



Exhibit 99.1
 
Investor
 
Nancy Christal
 
Media
 
Carolyn Castel
Contact:
 
Senior Vice President
 
Contact:
 
Vice President
 
 
Investor Relations
 
 
 
Corporate Communications
 
 
(914) 722-4704
 
 
 
(401) 770-5717
 
FOR IMMEDIATE RELEASE
 
CVS HEALTH REPORTS THIRD QUARTER RESULTS
LOWERS AND NARROWS 2016 GUIDANCE, PROVIDES 2017 PRELIMINARY OUTLOOK
AND ANNOUNCES NEW LONG-TERM ADJUSTED EPS TARGET

Third Quarter Year-over-year Highlights:
•
Net revenues increased 15.5% to $44.6 billion
•
GAAP operating profit increased 20.9% to $2.8 billion
•
GAAP diluted EPS from continuing operations of $1.43
•
Adjusted EPS increased 28.0% to $1.64
•
GAAP and Adjusted EPS both include a benefit of approximately 5 cents per share related to a lower income tax rate primarily due to the resolution of tax matters previously forecasted for the fourth quarter

Year-to-date Highlights:
•
Cash flow from operations of $7.9 billion
•
Generated free cash flow of $6.6 billion

2016 Guidance:
•
Full year GAAP diluted EPS lowered and narrowed to $4.84 to $4.90 from $4.92 to $5.00, including third quarter acquisition-related integration costs
•
Full year Adjusted EPS lowered and narrowed to $5.77 to $5.83 from $5.81 to $5.89
•
Provided fourth quarter GAAP diluted EPS of $1.52 to $1.58, excluding acquisition-related integration costs
•
Provided fourth quarter Adjusted EPS of $1.64 to $1.70, up 7.00% to 10.75%
•
Raised full year cash flow from operations to $9.1 to $9.3 billion; free cash flow to $6.8 to $7.0 billion

2017 Preliminary Outlook:
•
Provided full year GAAP diluted EPS of $5.16 to $5.33
•
Provided full year Adjusted EPS of $5.77 to $5.93
•
Both include the projected loss of more than 40 million retail prescriptions related to new restricted pharmacy networks
•
GAAP diluted EPS includes impact of previously announced termination of pension plan

WOONSOCKET, RHODE ISLAND, November 8, 2016 - CVS Health Corporation (NYSE: CVS) today announced operating results for the three months ended September 30, 2016.

President and Chief Executive Officer Larry Merlo stated, “We posted a solid third quarter with the PBM exceeding our expectations and retail performing at the lower end of our expectations. However, very recent pharmacy network changes in the marketplace are expected to cause some retail prescriptions to begin migrating out of our pharmacies this quarter. In addition, we are currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business. These factors combined are leading us to reduce the mid-point of our guidance for this year by five cents per share. The network changes have more significant implications for our 2017 outlook. While we expect a healthy increase in PBM operating profit growth in 2017, we expect a decrease in retail operating profit growth.”

Mr. Merlo continued, “We remain confident in our model and we are targeting 10% growth in Adjusted EPS for the longer term, as we continue to introduce new and innovative ways to drive value for patients, payors, and providers.”



1


Revenues
 
Net revenues for the three months ended September 30, 2016 increased 15.5%, or $6.0 billion, to $44.6 billion, compared to the three months ended September 30, 2015. Revenues in the Pharmacy Services Segment increased 19.2%, or $4.9 billion, to
$30.4 billion in the three months ended September 30, 2016. The increase was primarily driven by increased pharmacy network claim volume and growth in specialty pharmacy. Pharmacy network claims processed during the three months ended September 30, 2016 increased 23.3% to 282.6 million, compared to 229.1 million in the prior year. The increase in pharmacy network claim volume was primarily due to the growth in net new business. Mail choice claims processed during the three months ended September 30, 2016, increased 2.5%, to 22.4 million, compared to 21.9 million in the prior year. The increase in mail choice claims was primarily driven by the continued adoption of our Maintenance Choice® offerings.

Revenues in the Retail/LTC Segment increased 12.5%, or $2.2 billion, to approximately $20.1 billion, in the three months ended September 30, 2016. The increase was primarily driven by the addition of the long-term care ("LTC") pharmacy
operations acquired as part of the acquisition of Omnicare, Inc. ("Omnicare") in August 2015, the addition of the pharmacies and clinics of Target Corporation ("Target") acquired in December 2015 and pharmacy same store sales growth. Same store sales increased 2.3% versus the third quarter of 2015. Pharmacy same store sales rose 3.4% and pharmacy same store prescription volumes rose 3.0% on a 30-day equivalent basis. Pharmacy same store sales were negatively affected by approximately 340 basis points from recent generic drug introductions. Front store same store sales decreased 1.0%, which were negatively affected by softer customer traffic partially offset by an increase in basket size.

For the three months ended September 30, 2016, the generic dispensing rate increased approximately 160 basis points to 85.4% in the Pharmacy Services Segment and increased approximately 100 basis points to 85.8% in the Retail/LTC Segment.

Operating Profit

For the three months ended September 30, 2016, consolidated operating profit increased $486 million, or 20.9%. Excluding acquisition-related integration costs of $65 million in 2016 and acquisition-related transaction and integration costs of $127 million in 2015, consolidated operating profit increased $424 million, or 17.3%, from $2,458 million for the three months ended September 30, 2015 to $2,882 million for the three months ended September 30, 2016. For the three months ended September 30, 2016, operating profit increased $296 million, or 25.3%, to $1,458 million in the Pharmacy Services Segment and $130 million, or 7.9%, to $1,773 million in the Retail/LTC Segment. Excluding acquisition-related integration costs of $52 million and $12 million in the three months ended September 30, 2016 and 2015, respectively, the Retail/LTC Segment operating profit grew $170 million, or 10.3%, to $1,825 million for the three months ended September 30, 2016. Both segments benefited from increased generic drugs dispensed. The Pharmacy Services Segment was also positively affected by growth in specialty pharmacy, growth in Medicare Part D lives and favorable purchasing economics. The Retail/LTC Segment was also positively affected by the acquisition of the pharmacies and clinics of Target and the acquisition of Omnicare's LTC business as well as an improved front store margin rate. These positive factors for both segments were partially offset by continued pricing in the Pharmacy Services Segment and reimbursement pressure in the Retail/LTC Segment.

Net Income and Earnings Per Share

Net income for the three months ended September 30, 2016 was $1.5 billion, an increase of $294 million or 23.6%. The increase in net income is primarily due to the $486 million increase in operating profit discussed above partially offset by a
$101 million loss on early extinguishment of debt. Net income also benefited, by approximately $0.05 per share, from a lower income tax rate, which was primarily due to the resolution of income tax matters previously forecasted in the fourth quarter.

GAAP earnings per diluted share from continuing operations (“GAAP diluted EPS”) for the three months ended September 30, 2016 was $1.43, compared to $1.10 in the prior year. Adjusted earnings per share (“Adjusted EPS”) for the three months ended September 30, 2016 and 2015, was $1.64 and $1.28, respectively. Adjusted EPS excludes $197 million and $160 million of intangible asset amortization for the three months ended September 30, 2016 and 2015, respectively. Adjusted EPS for the three months ended September 30, 2016 also excludes $65 million of acquisition-related integration costs and the loss on early extinguishment of debt of $101 million. Adjusted EPS for the three months ended September 30, 2015 also excludes $127 million of acquisition-related transaction and integration costs and $16 million of acquisition-related bridge financing costs. Further detail is shown in the Adjusted Earnings Per Share reconciliation later in this release.





2


Guidance
 
The Company lowered and narrowed full year GAAP diluted EPS to $4.84 to $4.90 from $4.92 to $5.00, including acquisition-related integration costs recorded in the nine months ended September 30, 2016. The Company lowered and narrowed full year Adjusted EPS to $5.77 to $5.83 from $5.81 to $5.89. Estimated acquisition-related integration costs for the fourth quarter of 2016 are excluded from the 2016 guidance. Further detail is shown in the 2016 Adjusted Earnings Per Share Guidance reconciliation attached to this release.

In the fourth quarter of 2016, the Company expects to deliver GAAP diluted EPS of $1.52 to $1.58. The Company expects to deliver Adjusted EPS of $1.64 to $1.70. Further detail is shown in the 2016 Adjusted Earnings Per Share Guidance reconciliation attached to this release.

The Company raised cash flow guidance for 2016 and now expects to deliver cash flow from operations of $9.1 billion to $9.3 billion and 2016 free cash flow of $6.8 billion to $7.0 billion. Further detail is shown in the 2016 Free Cash Flow Guidance reconciliation attached to this release.

2017 Preliminary Outlook

The Company provided a preliminary outlook for 2017. GAAP diluted EPS is expected to be in the range of $5.16 to $5.33 and Adjusted EPS is expected to be in the range of $5.77 to $5.93. Included in this outlook is the impact from the projected loss of more than 40 million retail prescriptions related to marketplace changes, including new retail pharmacy networks that are excluding CVS Pharmacy drugstores. The GAAP outlook includes the expected impact of the previously-announced termination of one of the Company’s pension plans and excludes the impact of integration costs related to the acquisition of Omnicare, which will be updated as the year progresses. Further detail is shown in the 2017 Preliminary Outlook reconciliation later in this release.

New Share Repurchase Authorization
The share repurchase authorization approved in December 2014 is nearing completion with approximately $3.7 billion remaining. Reflecting the board's ongoing commitment to returning value to shareholders, the Company announced that, consistent with its practice, the board of directors approved a new share repurchase program for up to $15 billion of the Company's outstanding common stock. Combined with the approximately $3.7 billion that remains from the 2014 program, the Company has approximately $18.7 billion available for share repurchases. The share repurchase authorization, which is effective immediately and is expected to be completed over a multi-year period, permits the Company to effect the repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions.

Real Estate Program
 
During the three months ended September 30, 2016, the Company opened 48 new retail stores and closed 6 retail stores. In addition, the Company relocated 11 retail stores. As of September 30, 2016, the Company operated 9,694 retail stores, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.

Teleconference and Webcast
 
The Company will be holding a conference call today for the investment community at 8:30 am (ET) 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.









3


About the Company
 
CVS Health is a pharmacy innovation company helping people on their path to better health. Through its more than 9,600 retail pharmacies, more than 1,100 walk-in medical clinics, a leading pharmacy benefits manager with more than 80 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year, and expanding specialty pharmacy services, 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.

Forward-Looking Statements
 
This press release contains forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements 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.

 — Tables Follow —

4


CVS HEALTH CORPORATION
Condensed 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

 



5


CVS HEALTH CORPORATION
Condensed 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,
 
 
 
 
2015
 
(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

 


6


CVS HEALTH CORPORATION
Condensed 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


7


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.


8



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.



9


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




10


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.
 



11


Supplemental Information
(Unaudited)
 
Pharmacy Services Segment
 
The following table summarizes the Pharmacy Services Segment’s performance for the respective periods:
 
 
 
Three Months Ended
September 30,

Nine Months Ended
September 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.



 

12


Supplemental Information
(Unaudited)
 
Retail/LTC Segment
 
The following table summarizes the Retail/LTC Segment’s performance for the respective periods:

 
 
Three Months Ended
September 30,

Nine Months Ended
September 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
 %
 
29.1
 %
 
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.




13


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.




14


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





15


2017 Preliminary Outlook
Adjusted 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 Ending
December 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.


16

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