Express Scripts Announces 1st Quarter Results; Announces New Credit Agreement; Narrows 2015 Guidance Range; Maintains Mid-Point

Adjusted claims

310 to 330

(4%) to 2%

Adjusted earnings per diluted share

$1.39 to $1.43

13% to 16%

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Operations 

 Three Months Ended
March 31, 

  (in millions, except per share data) 

2015

2014

Revenues^(*)

$ 24,899.6

$ 23,685.0

Cost of revenues^(*)

23,065.6

21,934.6

    Gross profit 

1,834.0

1,750.4

Selling, general and administrative

1,007.4

1,041.2

Operating income

826.6

709.2

Other (expense) income:

    Interest income and other 

5.3

11.1

    Interest expense and other 

(116.4)

(124.5)

(111.1)

(113.4)

Income before income taxes

715.5

595.8

Provision for income taxes

268.4

261.3

Net income 

447.1

334.5

Less: Net income attributable to non-controlling interest

6.0

6.2

Net income attributable to Express Scripts

$      441.1

$      328.3

Weighted-average number of common shares outstanding during the period: 

    Basic 

728.4

775.4

    Diluted 

735.4

786.4

Earnings per share:

     Basic

$        0.61

$        0.42

     Diluted

$        0.60

$        0.42

(*) Includes retail pharmacy co-payments of $2,634.3 million and $2,897.9 million for the three months ended March 31, 2015 and 2014, respectively.

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Balance Sheet 

 March 31,  

 December 31,  

 (in millions) 

2015

2014

 Assets 

 Current assets: 

 Cash and cash equivalents 

$      905.8

$   1,832.6

 Restricted cash and investments 

28.0

9.1

 Receivables, net 

5,819.4

5,979.8

 Inventories 

1,885.9

2,113.2

 Deferred taxes 

427.9

390.8

 Prepaid expenses and other current assets 

104.5

242.6

    Total current assets 

9,171.5

10,568.1

 Property and equipment, net 

1,510.2

1,584.0

 Goodwill 

29,279.1

29,280.9

 Other intangible assets, net 

11,818.2

12,255.2

 Other assets 

126.1

110.7

    Total assets 

$ 51,905.1

$ 53,798.9

 Liabilities and stockholders' equity 

 Current liabilities: 

 Claims and rebates payable 

$   7,928.3

$   8,488.2

 Accounts payable 

3,038.5

3,137.3

 Accrued expenses 

2,326.3

2,836.1

 Current maturities of long-term debt 

1,607.1

2,555.3

    Total current liabilities 

14,900.2

17,016.9

 Long-term debt 

10,741.2

11,012.7

 Deferred taxes 

4,846.1

4,923.2

 Other liabilities 

802.9

782.1

    Total liabilities 

31,290.4

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 per share; shares issued: 851.8 and 848.6, respectively; shares outstanding: 729.3 and 726.1, respectively 

8.5

8.5

 Additional paid-in capital 

22,788.9

22,671.4

 Accumulated other comprehensive (loss) income 

(5.9)

2.1

 Retained earnings 

6,361.5

5,920.4

29,153.0

28,602.4

 Common stock in treasury at cost, 122.5 shares 

(8,548.2)

(8,548.2)

    Total Express Scripts stockholders' equity 

20,604.8

20,054.2

 Non-controlling interest 

9.9

9.8

    Total stockholders' equity 

20,614.7

20,064.0

    Total liabilities and stockholders' equity 

$ 51,905.1

$ 53,798.9

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Cash Flows 

 Three Months Ended
March 31, 

 (in millions) 

2015

2014

 Cash flows from operating activities: 

 Net income 

$   447.1

$    334.5

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

 Depreciation and amortization 

556.7

553.1

 Deferred income taxes 

(114.2)

(35.7)

 Employee stock-based compensation expense 

26.9

28.0

 Other, net 

(32.2)

(40.1)

 Changes in operating assets and liabilities:  

 Accounts receivable 

129.8

124.6

 Inventories 

227.2

143.8

 Other current and noncurrent assets 

123.8

(2.6)

 Claims and rebates payable 

(559.9)

(418.9)

 Accounts payable 

(72.3)

(58.0)

 Accrued expenses 

(467.2)

(181.4)

 Other current and noncurrent liabilities 

15.7

6.7

 Net cash flows provided by operating activities 

281.4

454.0

 Cash flows from investing activities: 

 Purchases of property and equipment 

(48.3)

(117.1)

 Other 

(19.7)

2.0

 Net cash used in investing activities 

(68.0)

(115.1)

 Cash flows from financing activities: 

 Repayment of long-term debt 

(1,210.5)

(158.0)

 Net proceeds from employee stock plans 

48.8

250.3

 Excess tax benefit relating to employee stock-based compensation 

33.8

52.9

 Treasury stock acquired 

-

(618.2)

 Other 

(8.6)

(4.4)

 Net cash used in financing activities 

(1,136.5)

(477.4)

 Effect of foreign currency translation adjustment 

(3.7)

(2.5)

 Net decrease in cash and cash equivalents 

(926.8)

(141.0)

 Cash and cash equivalents at beginning of period 

1,832.6

1,991.4

 Cash and cash equivalents at end of period 

$   905.8

$ 1,850.4

 Table 1 

  Express Scripts Holding Company Unaudited Consolidated Selected Information 

 (in millions) 

 Three Months Ended
March 31,  

2015

2014

Claims Volume

Continuing operations:

Network

219.1

230.7

Home delivery and specialty⁽¹⁾

30.2

30.5

   Total claims 

249.3

261.2

Total adjusted claims⁽²⁾

307.6

320.0

 Depreciation and Amortization (D&A):  

 Revenue amortization⁽³⁾

$   23.8

$   28.5

 Cost of revenues depreciation 

46.7

30.6

 Selling, general and administrative depreciation 

77.2

84.4

 Selling, general and administrative amortization⁽³⁾

409.0

409.6

      Total D&A  

$ 556.7

$ 553.1

 Generic Fill Rate* 

 Network 

85.1%

83.3%

 Home delivery 

78.8%

76.4%

 Overall 

84.3%

82.4%

 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
March 31,  

2015

2014

Gross profit, as reported

$ 1,834.0

$ 1,750.4

Amortization of intangible assets ⁽³⁾

23.8

28.5

Transaction and integration costs ⁽⁴⁾

54.7

107.8

Adjusted gross profit

$ 1,912.5

$ 1,886.7

Selling, general and administrative, as reported

$ 1,007.4

$ 1,041.2

Amortization of intangible assets ⁽³⁾

409.0

409.6

Transaction and integration costs ⁽⁴⁾

40.9

125.3

Legal settlement ⁽⁵⁾

60.0

-

Adjusted selling, general and administrative

$    497.5

$    506.3

 Note: See Appendix for Footnotes 

The Company is providing adjusted gross profit and adjusted selling, general and administrative expenses (both of which are non-GAAP financial measures), in each case, excluding the impact of amortization of intangible assets and transaction and integration costs 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
March 31,   

2015

2014

Net income attributable to Express Scripts, as reported

$    441.1

$    328.3

  Provision for income taxes

268.4

261.3

  Depreciation and amortization*

556.7

553.1

  Other expense 

111.1

113.4

EBITDA attributable to Express Scripts, as reported

1,377.3

1,256.1

Transaction and integration costs ^(4)*

74.8

214.9

Legal settlement ⁽⁵⁾

60.0

-

Adjusted EBITDA attributable to Express Scripts

$ 1,512.1

$ 1,471.0

Total adjusted claims 

307.6

320.0

Adjusted EBITDA attributable to Express Scripts, per adjusted claim

$      4.92

$      4.60

 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 March 31, 2015 and 2014 presented above includes $20.8 million and $18.2 million, respectively, of depreciation related to the integration of Medco Health Solutions, Inc. ("Medco") which is not included in transaction and integration costs.

 Table 4 

 Calculation of Express Scripts Holding Company Adjusted Diluted EPS  

Three Months Ended
March 31,

2015

2014

 (per diluted share) 

Diluted EPS attributable to Express Scripts, as reported

$ 0.60

$ 0.42

Excluding items indicated: 

Transaction and integration costs ⁽⁴⁾

0.08

0.18

Legal settlement ⁽⁵⁾

0.05

-

Discrete tax items ⁽⁶⁾

-

0.05

Amortization of intangible assets ⁽³⁾

0.37

0.34

Diluted EPS attributable to Express Scripts, adjusted

$ 1.10

$ 0.99

 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
March 31, 2015 

Income
before
income
taxes

Provision
for income
taxes

Effective
income tax
rate

Income before income taxes, as reported

$    715.5

$ 268.4

Net income attributable to non-controlling interest

(6.0)

-

Income before income taxes attributable to Express Scripts

709.5

268.4

37.8%

Excluding items indicated: 

Transaction and integration costs⁽⁴⁾

95.6

35.9

Legal settlement⁽⁵⁾

60.0

22.5

Discrete tax items⁽⁶⁾

-

(2.3)

Amortization of intangible assets⁽³⁾

432.8

162.3

Income before income taxes attributable to Express Scripts, as adjusted

$ 1,297.9

$ 486.8

37.5%

Adjusted net income attributable to Express Scripts

$ 811.1

 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 certain items 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
March 31, 2014 

Income
before
income
taxes

Provision
for income
taxes

Effective
income tax
rate

Income before income taxes, as reported

$    595.8

$ 261.3

Net income attributable to non-controlling interest

(6.2)

-

Income before income taxes attributable to Express Scripts

589.6

-

261.3

44.3%

Excluding items indicated: 

Transaction and integration costs⁽⁴⁾

233.1

89.0

Discrete tax items⁽⁶⁾

-

(36.1)

Amortization of intangible assets⁽³⁾

438.1

167.4

Income before income taxes attributable to Express Scripts, as adjusted

$ 1,260.8

$ 481.6

38.2%

Adjusted net income attributable to Express Scripts

$ 779.2

 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 certain items 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 

(per diluted share) 

Adjusted earnings per diluted share attributable to Express Scripts*

$5.37 to $5.47

Year over year growth 

10%-12%

GAAP items not included in guidance (*) 

The Company anticipates full-year 2015 integration costs to be approximately $250.0 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 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.  2015 Adjusted EPS will exclude amortization of intangible assets per diluted share in the range of $1.52 to $1.56.

 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 (formerly known as WellPoint) 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 ($14.9 million net of tax) and $28.5 million ($17.6 million net of tax) is included as a reduction to revenue for the three months ended March 31, 2015 and 2014, respectively.  

Other legacy ESI intangible amortization of $9.4 million ($5.9 million net of tax) and $9.4 million ($5.8 million net of tax) for the three months ended March 31, 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 $399.6million ($249.7 million net of tax) and $400.2 million ($247.3 million net of tax) for the three months ended March 31, 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 $54.7 million ($34.2 million net of tax) and $107.8 million ($66.6 million net of tax) primarily composed of integration-related activities, are included in gross profit for the three months ended March 31, 2015 and 2014, respectively.  

Costs of $40.9 million ($25.5 million net of tax) and $125.3 million ($77.5 million net of tax) primarily composed of professional fees, integration-related activities and severance costs, are included in selling, general and administrative expense for the three months ended March 31, 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 three months ended March 31, 2015.

⁽⁶⁾ Provision for income taxes includes discrete tax charges for continuing operations of $2.3 million for the three months ended March 31, 2015, primarily attributable to changes in our unrecognized tax benefits and discrete tax charges for continuing operations of $36.1 million for the three months ended March 31, 2014, primarily attributable to changes in unrecognized tax benefits and deferred tax implications of newly enacted state laws.