CVS Health Reports Second Quarter Results

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions, except per share amounts

2016

2015

2016

2015

Net revenues

$

43,725

$

37,169

$

86,940

$

73,501

Cost of revenues

36,710

30,767

73,181

60,935

Gross profit

7,015

6,402

13,759

12,566

Operating expenses

4,665

4,140

9,233

8,172

Operating profit

2,350

2,262

4,526

4,394

Interest expense, net

280

166

563

300

Loss on early extinguishment of debt

542

—

542

—

Income before income tax provision

1,528

2,096

3,421

4,094

Income tax provision

604

824

1,350

1,601

Net income

924

1,272

2,071

2,493

Net income attributable to noncontrolling interest

—

—

(1)

—

Net income attributable to CVS Health

$

924

$

1,272

$

2,070

$

2,493

Net income per share attributable to CVS Health:

Basic

$

0.86

$

1.13

$

1.91

$

2.20

Diluted

$

0.86

$

1.12

$

1.90

$

2.19

Weighted average shares outstanding:

Basic

1,070

1,124

1,081

1,126

Diluted

1,075

1,132

1,087

1,134

Dividends declared per share

$

0.425

$

0.350

$

0.850

$

0.700

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

June 30,

December 31,

In millions, except per share amounts

2016

2015

Assets:

Cash and cash equivalents

$

1,127

$

2,459

Short-term investments

80

88

Accounts receivable, net

13,183

11,888

Inventories

14,177

14,001

Other current assets

881

722

Total current assets

29,448

29,158

Property and equipment, net

9,981

9,855

Goodwill

38,190

38,106

Intangible assets, net

13,639

13,878

Other assets

1,490

1,440

Total assets

$

92,748

$

92,437

Liabilities:

Accounts payable

$

7,351

$

7,490

Claims and discounts payable

8,938

7,653

Accrued expenses

7,244

6,829

Short-term debt

745

—

Current portion of long-term debt

2,291

1,197

Total current liabilities

26,569

23,169

Long-term debt

25,600

26,267

Deferred income taxes

4,260

4,217

Other long-term liabilities

1,553

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; 1,704 shares issued and 1,065

 shares outstanding at June 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 June 30, 2016 and 597 shares at December 31,

(33,010)

(28,886)

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

(31)

(31)

  Capital surplus

31,454

30,948

  Retained earnings

36,647

35,506

  Accumulated other comprehensive income (loss)

(317)

(358)

 Total CVS Health shareholders' equity

34,760

37,196

Noncontrolling interest

6

7

  Total shareholders' equity

34,766

37,203

Total liabilities and shareholders' equity

$

92,748

$

92,437

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended

June 30,

In millions

2016

2015

Cash flows from operating activities:

Cash receipts from customers

$

84,324

$

71,014

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(70,851)

(58,129)

Cash paid to other suppliers and employees

(7,082)

(7,935)

Interest received

9

9

Interest paid

(615)

(311)

Income taxes paid

(1,762)

(1,627)

Net cash provided by operating activities

4,023

3,021

Cash flows from investing activities:

Purchases of property and equipment

(1,102)

(942)

Proceeds from sale-leaseback transactions

—

34

Proceeds from sale of property and equipment and other assets

11

14

Acquisitions (net of cash acquired) and other investments

(168)

(112)

Purchase of available-for-sale investments

(39)

(124)

Sale or maturity of available-for-sale investments

67

40

Net cash used in investing activities

(1,231)

(1,090)

Cash flows from financing activities:

Increase in short-term debt

745

803

Proceeds from issuance of long-term debt

3,455

—

Repayments of long-term debt

(3,579)

(550)

Purchase of noncontrolling interest in subsidiary

(39)

—

Dividends paid

(929)

(794)

Proceeds from exercise of stock options

122

211

Excess tax benefits from stock-based compensation

63

97

Repurchase of common stock

(3,960)

(2,934)

Other

(4)

—

Net cash used in financing activities

(4,126)

(3,167)

Effect of exchange rates on cash and cash equivalents

2

(1)

Net decrease in cash and cash equivalents

(1,332)

(1,237)

Cash and cash equivalents at the beginning of the period

2,459

2,481

Cash and cash equivalents at the end of the period

$

1,127

$

1,244

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

Net income

$

2,071

$

2,493

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

Depreciation and amortization

1,236

978

Stock-based compensation

107

88

Loss on early extinguishment of debt

542

—

Deferred income taxes and other non-cash items

75

6

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

Accounts receivable, net

(1,279)

(1,211)

Inventories

(167)

(465)

Other current assets

(170)

131

Other assets

(53)

(48)

Accounts payable and claims and discounts payable

1,164

1,383

Accrued expenses

492

(241)

Other long-term liabilities

5

(93)

Net cash provided by operating activities

$

4,023

$

3,021

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.

Adjusted Earnings per Share, or Adjusted EPS, is 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.

Adjusted Earnings Per Share

(Unaudited)

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

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions, except per share amounts

2016

2015

2016

2015

Income before income tax provision

$

1,528

$

2,096

$

3,421

$

4,094

Non-GAAP adjustments:

Amortization of intangible assets

197

131

396

260

Acquisition-related transaction and integration costs⁽¹⁾

81

21

142

21

Acquisition-related bridge financing costs⁽¹⁾

—

36

—

36

Charge related to a disputed 1999 legal settlement

—

—

3

—

Loss on early extinguishment of debt

542

—

542

—

Adjusted income before income tax provision

2,348

2,284

4,504

4,411

Adjusted income tax provision

923

897

1,770

1,724

Adjusted net income

1,425

1,387

2,734

2,687

Net income attributable to noncontrolling interest

—

—

(1)

—

Income allocable to participating securities

(6)

(7)

(13)

(12)

Adjusted net income attributable to CVS Health

$

1,419

$

1,380

$

2,720

$

2,675

Weighted average diluted shares outstanding

1,075

1,132

1,087

1,134

Adjusted EPS

$

1.32

$

1.22

$

2.50

$

2.36

   (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:

Six Months Ended

June 30,

In millions

2016

2015

Net cash provided by operating activities

$

4,023

$

3,021

Subtract: Additions to property and equipment

(1,102)

(942)

Add: Proceeds from sale-leaseback transactions

—

34

Free cash flow

$

2,921

$

2,113

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

June 30, 2016:

Net revenues

$

29,510

$

19,998

$

—

$

(5,783)

$

43,725

Gross profit⁽³⁾

1,367

5,837

—

(189)

7,015

Operating profit (loss)⁽³⁾

1,038

1,705

(220)

(173)

2,350

June 30, 2015:

Net revenues

24,442

17,242

—

(4,515)

37,169

Gross profit

1,241

5,322

—

(161)

6,402

Operating profit (loss)⁽⁴⁾

940

1,681

(215)

(144)

2,262

Six Months Ended

June 30, 2016:

Net revenues

58,275

40,110

—

(11,445)

86,940

Gross profit⁽³⁾

2,469

11,667

—

(377)

13,759

Operating profit (loss)⁽³⁾

1,820

3,482

(432)

(344)

4,526

June 30, 2015:

Net revenues

48,321

34,193

—

(9,013)

73,501

Gross profit

2,267

10,617

—

(318)

12,566

Operating profit (loss)⁽⁴⁾

1,675

3,408

(404)

(285)

4,394

(1)

Net revenues of the Pharmacy Services Segment include approximately $2.6 billion and $2.2 billion of retail co-payments for the three months ended June 30, 2016 and 2015, respectively, as well as $5.6 billion and $4.7 billion of retail co-payments for the six months ended June 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 and operating profit for the three months ended June 30, 2016 includes $6 million and $81 million, respectively, of acquisition-related integration costs. The Retail/LTC Segment gross profit and operating profit for the six months ended June 30, 2016 includes $10 million and $142 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 Corporate Segment operating loss for the three and six months ended June 30, 2015 includes $21 million of acquisition-related transaction costs.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

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

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions

2016

2015

2016

2015

Net revenues

$

29,510

$

24,442

$

58,275

$

48,321

Gross profit

1,367

1,241

2,469

2,267

Gross profit % of net revenues

4.6

%

5.1

%

4.2

%

4.7

%

Operating expenses

329

301

649

592

Operating expense % of net revenues

1.1

%

1.2

%

1.1

%

1.2

%

Operating profit

1,038

940

1,820

1,675

Operating profit % of net revenues

3.5

%

3.8

%

3.1

%

3.5

%

Net revenues:

Mail choice⁽¹⁾

$

10,646

$

9,107

$

20,796

$

17,857

Pharmacy network⁽²⁾

18,778

15,267

37,314

30,326

Other

86

68

165

138

Pharmacy claims processed:

Total

302.7

250.1

607.4

501.3

Mail choice⁽¹⁾

22.2

21.3

43.8

41.7

Pharmacy network⁽²⁾

280.5

228.8

563.6

459.6

Generic dispensing rate:

Total

85.4

%

83.9

%

85.3

%

83.7

%

Mail choice⁽¹⁾

78.0

%

76.3

%

77.7

%

76.2

%

Pharmacy network⁽²⁾

86.0

%

84.6

%

85.9

%

84.4

%

Mail choice penetration rate

18.1

%

20.7

%

17.9

%

20.2

%

(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 Ended

June 30,

Six Months Ended

June 30,

In millions

2016

2015

2016

2015

Net revenues

$

19,998

$

17,242

$

40,110

$

34,193

Gross profit⁽¹⁾

5,837

5,322

11,667

10,617

Gross profit % of net revenues

29.2

%

30.9

%

29.1

%

31.0

%

Operating expenses⁽¹⁾

4,132

3,641

8,185

7,209

Operating expense % of net revenues

20.7

%

21.1

%

20.4

%

21.1

%

Operating profit

1,705

1,681

3,482

3,408

Operating profit % of net revenues

8.5

%

9.7

%

8.7

%

10.0

%

Prescriptions filled (90 Day = 3 Rx)⁽²⁾

300.9

244.1

606.0

485.5

Net revenue increase (decrease):

Total

16.0

%

2.2

%

17.3

%

2.5

%

Pharmacy

21.2

%

5.2

%

22.4

%

5.2

%

Front store

(0.6)

%

(5.1)

%

1.0

%

(4.4)

%

Total prescription volume (90 Day = 3 Rx)⁽²⁾

23.2

%

6.0

%

24.8

%

6.1

%

Same store increase (decrease)⁽³⁾:

Total sales

2.1

%

0.5

%

3.1

%

0.8

%

Pharmacy sales

3.9

%

4.1

%

4.7

%

4.2

%

Front store sales

(2.5)

%

(7.8)

%

(0.9)

%

(7.0)

%

Prescription volume (90 Day = 3 Rx)⁽²⁾

3.5

%

4.8

%

4.7

%

4.9

%

Generic dispensing rate

86.1

%

85.0

%

85.9

%

84.7

%

Pharmacy % of total revenues

74.8

%

71.6

%

74.7

%

71.6

%

(1)

Gross profit and operating expenses for the three months ended June 30, 2016 include $6 million and $75 million, respectively, of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target. Gross profit and operating expenses for the six months ended June 30, 2016 include $10 million and $132 million, respectively, of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

(2)

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.

(3)

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.

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⁾

$

8,746

$

8,921

Non-GAAP adjustments:

Amortization of intangible assets

795

795

Acquisition-related integration costs⁽¹⁾

142

142

Charge related to a disputed 1999 legal settlement

3

3

Loss on early extinguishment of debt⁽²⁾

644

644

Adjusted income before income tax provision

10,330

10,505

Adjusted income tax provision

4,017

4,103

Adjusted net income

6,313

6,402

Net income attributable to noncontrolling interest

(2)

(2)

Income allocable to participating securities

(33)

(33)

Adjusted net income attributable to CVS Health

$

6,278

$

6,367

Weighted average diluted shares outstanding

1,081

1,081

Adjusted earnings per share

$

5.81

$

5.89

In millions, except per share amounts

Three Months Ending

 September 30, 2016

Income before income tax provision⁽¹⁾

$

2,459

$

2,526

Non-GAAP adjustments:

Amortization of intangible assets

195

195

Loss on early extinguishment of debt⁽³⁾

102

102

Adjusted income before income tax provision

2,756

2,823

Adjusted income tax provision

1,087

1,115

Adjusted net income

1,669

1,708

Net income attributable to noncontrolling interest

(1)

(1)

Income allocable to participating securities

(8)

(9)

Adjusted net income attributable to CVS Health

$

1,660

$

1,698

Weighted average diluted shares outstanding

1,075

1,075

Adjusted earnings per share

$

1.55

$

1.58

(1)

Excludes anticipated acquisition-related integration costs for the acquisitions of Omnicare and the pharmacies and clinics of Target for the period from July 1, 2016 through December 31, 2016.

(2)

Includes $542 million loss on early extinguishment of debt from the tender offers that closed in June 2016, as well as the approximately $102 million loss on early extinguishment of debt from the redemption of certain senior notes in June 2016 that closed in July 2016. See Note 5, "Borrowings" in the Company's Form 10-Q for the quarter ended June 30, 2016 for further information.

(3)

Includes approximately $102 million loss on early extinguishment of debt from the redemption of certain senior notes in June 2016 that closed in July 2016. See Note 5, "Borrowings" in the Company's Form 10-Q for the quarter ended June 30, 2016 for further information.

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

$

8,775

$

9,075

Subtract: Additions to property and equipment

(2,750)

(2,650)

Add: Proceeds from sale-leaseback transactions

275

175

Free cash flow

$

6,300

$

6,600

Investor

Nancy Christal

Media

Carolyn Castel

Contact:

Senior Vice President

Contact:

Vice President

Investor Relations

Corporate Communications

(914) 722-4704

(401) 770-5717