Express Scripts Announces 2016 First Quarter Results; Increases 2016 Guidance Range: Raises Mid-Point; Provides 2016 Second Quarter Guidance

Table 6

2016 Current Range

Table 6

2016 Previous Range

Total adjusted claims

Table 1

1,255 to 1,295

1,255 to 1,295

Adjusted SG&A

Table 2

$1,905 to $1,985

$1,905 to $1,985

EBITDA

Table 3

$7,230 to $7,430

$7,230 to $7,430

Diluted weighted average shares*

635 to 645

645 to 665

Adjusted diluted earnings per share

Table 4

$6.31 to $6.43

$6.10 to $6.28

*Incorporates assumptions regarding future share repurchases upon settlement of the February 2016 ASR program (expected to settle in the third quarter of 2016), along with potential financing activities in the second half of 2016.

Table 6

Estimated Quarter Ending

June 30, 2016

(in millions, except per share data)

Year-Over-Year Change

Total adjusted claims

Table 1

312 to 322

(3%) to flat

Adjusted diluted earnings per share

Table 4

$1.55 to $1.59

   8% to 10%

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Operations 

 Three Months Ended
March 31, 

  (in millions, except per share data) 

2016

2015

Revenues^(*)

$ 24,791.8

$ 24,899.6

Cost of revenues^(*)

22,944.8

23,065.6

    Gross profit 

1,847.0

1,834.0

Selling, general and administrative

906.2

1,007.4

Operating income

940.8

826.6

Other (expense) income:

    Interest income and other 

8.8

5.3

    Interest expense and other 

(138.6)

(116.4)

(129.8)

(111.1)

Income before income taxes

811.0

715.5

Provision for income taxes

278.8

268.4

Net income 

532.2

447.1

Less: Net income attributable to non-controlling interest

6.1

6.0

Net income attributable to Express Scripts

$      526.1

$      441.1

Weighted-average number of common shares

 outstanding during the period: 

    Basic 

645.0

728.4

    Diluted 

649.7

735.4

Earnings per share attributable to Express Scripts:

     Basic

$        0.82

$        0.61

     Diluted

$        0.81

$        0.60

(*) Includes retail pharmacy co-payments of $2,541.0 million and $2,634.3 million for the three months ended March 31, 2016 and 2015, respectively.

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Balance Sheet 

 March 31,  

 December 31,

 (in millions) 

2016

2015

 Assets 

 Current assets: 

 Cash and cash equivalents 

$     1,771.1

$            3,186.3

 Receivables, net 

6,758.4

6,721.3

 Inventories 

1,733.4

2,023.1

 Prepaid expenses and other current assets 

136.9

128.8

    Total current assets 

10,399.8

12,059.5

 Property and equipment, net 

1,259.7

1,291.3

 Goodwill 

29,278.6

29,277.3

 Other intangible assets, net 

10,026.5

10,469.7

 Other assets 

143.0

145.5

    Total assets 

$   51,107.6

$          53,243.3

 Liabilities and stockholders' equity 

 Current liabilities: 

 Claims and rebates payable 

$     8,956.4

$            9,397.7

 Accounts payable 

3,681.8

3,451.8

 Accrued expenses 

2,390.1

2,659.4

 Current maturities of long-term debt 

2,208.6

1,646.4

    Total current liabilities 

17,236.9

17,155.3

 Long-term debt 

14,382.7

13,946.3

 Deferred taxes 

3,957.0

4,069.8

 Other liabilities 

681.8

691.4

    Total liabilities 

36,258.4

35,862.8

 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: 855.8 and 854.5, respectively; shares outstanding: 632.5 and 676.9, respectively 

8.6

8.5

 Additional paid-in capital 

22,514.7

22,204.7

 Accumulated other comprehensive loss 

(7.7)

(14.0)

 Retained earnings 

8,922.9

8,396.8

31,438.5

30,596.0

 Common stock in treasury at cost, 223.3 and 177.6 shares, respectively  

(16,597.4)

(13,223.2)

    Total Express Scripts stockholders' equity 

14,841.1

17,372.8

 Non-controlling interest 

8.1

7.7

    Total stockholders' equity 

14,849.2

17,380.5

    Total liabilities and stockholders' equity 

$   51,107.6

$          53,243.3

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Cash Flows 

 Three Months Ended
March 31, 

 (in millions) 

2016

2015

 Cash flows from operating activities: 

 Net income 

$    532.2

$   447.1

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

 Depreciation and amortization 

525.3

556.7

 Deferred income taxes 

(112.8)

(114.2)

 Employee stock-based compensation expense 

27.9

26.9

 Other, net 

(3.7)

(32.2)

 Changes in operating assets and liabilities:  

 Accounts receivable 

(45.4)

129.8

 Inventories 

289.7

227.2

 Other current and noncurrent assets 

(8.1)

123.8

 Claims and rebates payable 

(441.4)

(559.9)

 Accounts payable 

229.0

(72.3)

 Accrued expenses 

(232.2)

(467.2)

 Other current and noncurrent liabilities 

(9.3)

15.7

 Net cash flows provided by operating activities 

751.2

281.4

 Cash flows from investing activities: 

 Purchases of property and equipment 

(82.6)

(48.3)

 Other, net 

2.8

(19.7)

 Net cash used in investing activities 

(79.8)

(68.0)

 Cash flows from financing activities: 

 Treasury stock acquired 

(3,109.2)

-

 Proceeds from long-term debt, net of discounts 

1,991.0

-

 Repayment of long-term debt 

(972.2)

(1,210.5)

 Net proceeds from employee stock plans 

11.1

48.8

 Excess tax benefit relating to employee stock-based compensation 

8.2

33.8

 Other, net 

(19.3)

(8.6)

 Net cash used in financing activities 

(2,090.4)

(1,136.5)

 Effect of foreign currency translation adjustment 

3.8

(3.7)

 Net decrease in cash and cash equivalents 

(1,415.2)

(926.8)

 Cash and cash equivalents at beginning of period 

3,186.3

1,832.6

 Cash and cash equivalents at end of period 

$ 1,771.1

$   905.8

 Table 1 

  Express Scripts Holding Company Unaudited Consolidated Selected Information 

 (in millions) 

 Three Months Ended
March 31,  

2016

2015

Claims Volume

Network

226.1

219.1

Home delivery and specialty⁽¹⁾

30.3

30.2

   Total claims 

256.4

249.3

Adjusted network

234.7

219.1

Adjusted home delivery and specialty⁽¹⁾

88.8

88.5

   Total adjusted claims⁽²⁾

323.5

307.6

 Depreciation and Amortization (D&A):  

 Revenue amortization⁽³⁾

$   34.3

$   23.8

 Cost of revenues depreciation 

28.9

46.7

 Selling, general and administrative depreciation 

53.1

77.2

 Selling, general and administrative amortization⁽³⁾

409.0

409.0

      Total D&A  

$ 525.3

$ 556.7

 Generic Fill Rate* 

 Network 

85.9%

85.1%

 Home delivery 

79.8%

78.8%

 Overall 

85.2%

84.3%

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 Unaudited Adjusted Gross Profit and SG&A 

(in millions)

 Three Months Ended
March 31,  

2016

2015

Gross profit, as reported

$ 1,847.0

$ 1,834.0

Amortization of intangible assets ⁽³⁾

34.3

23.8

Transaction and integration costs ⁽⁴⁾

-

54.7

Adjusted gross profit

$ 1,881.3

$ 1,912.5

Selling, general and administrative, as reported

$    906.2

$ 1,007.4

Amortization of intangible assets ⁽³⁾

409.0

409.0

Transaction and integration costs ⁽⁴⁾

-

40.9

Legal settlement ⁽⁵⁾

-

60.0

Adjusted selling, general and administrative

$    497.2

$    497.5

Note: See Appendix for Footnotes

The Company is providing adjusted gross profit and adjusted selling, general and administrative expenses 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 Unaudited 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,   

2016

2015

Net income attributable to Express Scripts, as reported

$    526.1

$    441.1

  Provision for income taxes⁽⁷⁾

278.8

268.4

  Depreciation and amortization^(3)*

525.3

556.7

  Other expense, net

129.8

111.1

EBITDA attributable to Express Scripts, as reported

1,460.0

1,377.3

Transaction and integration costs ^(4)*

-

74.8

Legal settlement ⁽⁵⁾

-

60.0

EBITDA/Adjusted EBITDA attributable to Express Scripts

$ 1,460.0

$ 1,512.1

Total adjusted claims⁽²⁾

323.5

307.6

EBITDA/Adjusted EBITDA attributable to Express Scripts, per adjusted claim

$      4.51

$      4.92

 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.  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 is a supplemental measurement used by analysts and investors to help evaluate overall operating performance.  Adjusted EBITDA attributable to Express Scripts is calculated excluding transaction and integration costs recorded each year and a legal settlement as these charges are not considered an indicator of ongoing company performance.

EBITDA and Adjusted EBITDA attributable to Express Scripts per adjusted claim is calculated by dividing EBITDA and Adjusted EBITDA, as applicable, by the adjusted claim volume for the period.  This measure is used as an indicator of EBITDA and Adjusted EBITDA, as applicable, attributable to Express Scripts performance on a per unit basis.  EBITDA and Adjusted EBITDA, as applicable, attributable to Express Scripts, and, as a result, EBITDA and Adjusted EBITDA, as applicable, attributable to Express Scripts per adjusted claim, are each affected by the changes in claims volume between retail and home delivery and 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 presented above includes $20.8 million 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 Unaudited Adjusted Diluted EPS  

 Three Months Ended
March 31,  

2016

2015

Diluted EPS attributable to Express Scripts, as reported

$ 0.81

$ 0.60

Excluding items indicated: 

Transaction and integration costs ⁽⁴⁾

-

0.08

Legal settlement ⁽⁵⁾

-

0.05

Debt redemption costs ⁽⁶⁾

0.01

-

Discrete tax items ⁽⁷⁾

(0.03)

-

Amortization of intangible assets ⁽³⁾

0.43

0.37

Diluted EPS attributable to Express Scripts, adjusted

$ 1.22

$ 1.10

 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 Unaudited Adjusted Net Income and Adjusted Effective Income Tax Rate 

 (in millions) 

 Three Months Ended
March 31, 2016 

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes, as reported

$    811.0

$     278.8

Net income attributable to non-controlling interest

(6.1)

-

Income before income taxes attributable to Express Scripts

804.9

278.8

34.6%

Excluding items indicated: 

Debt redemption costs ⁽⁶⁾

9.7

3.6

Discrete tax items⁽⁷⁾

-

19.7

Amortization of intangible assets⁽³⁾

443.3

164.4

Income before income taxes attributable to Express Scripts, as adjusted

$ 1,257.9

$     466.5

37.1%

Adjusted net income attributable to Express Scripts

$     791.4

 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 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 Unaudited 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⁽⁷⁾

-

(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 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 Unaudited 2016 Guidance Information 

Estimated
Year Ending
December 31, 2016 

Estimated
Year Ending
December 31, 2016 

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

 Current Guidance 

Previous Guidance

Adjusted Diluted EPS attributable to Express Scripts*

$6.31 to $6.43

$6.10 to $6.28

Year over year growth 

14%-16%

10%-14%

Diluted EPS attributable to Express Scripts

$4.53 to $4.61

$4.46 to $4.60

Total adjusted claims

1,255 to 1,295

1,255 to 1,295

Adjusted selling, general and administrative**

$1,905 to $1,985

$1,905 to $1,985

Selling, general and administrative

$3,520 to $3,640

$3,515 to $3,635

Operating income***

$5,135 to $5,250

$5,245 to $5,360

EBITDA attributable to Express Scripts****

$7,230 to $7,430

$7,230 to $7,430

Diluted weighted average shares outstanding during the period

635 to 645

645 to 665

Net cash flow provided by operating activities

$4,600 to $5,100

$4,600 to $5,100

 Estimated
 Three Months Ending
 June 30, 2016 

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

 Current Guidance 

Adjusted Diluted EPS attributable to Express Scripts*

$1.55 to $1.59

Year over year growth 

8%-10%

Diluted EPS attributable to Express Scripts

$1.10 to $1.13

Total adjusted claims

312 to 322

GAAP items not included in guidance (*) 

*The Company is unable to reasonably estimate the charges, including discrete tax items, anticipated to be included in the list of GAAP items not included in such measure.  Estimated 2016 Adjusted Diluted EPS attributable to Express Scripts excludes amortization of intangible assets per diluted share in the range of $1.78 to $1.82.   Estimated three months ending June 30, 2016 Adjusted Diluted EPS attributable to Express Scripts excludes amortization of intangible assets per diluted share in the range of $0.45 to $0.46.       

**Estimated 2016 Adjusted selling, general and administrative excludes amortization of intangible assets in the range of $1,615 million to $1,655 million. 

***Change in Operating Income guidance is solely from the revision of the amortization schedule, in Q1 2016, for the intangible assets associated with the NextRx acquisition, from 15 years to the remaining term of the contract.  See footnote 3.

****Estimated 2016 EBITDA attributable to Express Scripts is estimated 2016 Adjusted Operating Income excluding depreciation and amortization in the range of $300 million to $350 million and includes net income attributable to non-controlling interest of $20 million to $25 million.  Estimated 2016 Adjusted Operating Income is Operating Income excluding selling, general and administrative amortization of intangible assets in the range of $1,615 million to $1,655 million and revenue amortization of intangible assets of approximately $200 million.

 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) Freedom Fertility claims. 

(2) Total adjusted claims (a) includes an adjustment to certain network claims to reflect an approximate 30-day equivalent fill and (b) reflects 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 $34.3 million ($21.6 million net of tax) and $23.8 million ($14.9 million net of tax) is included as a reduction to revenue for the three months ended March 31, 2016 and 2015, respectively.  The Company's 10-year agreement with Anthem under which we provide pharmacy benefit management services to Anthem and its designated affiliates was previously amortized using a modified pattern of benefit method over an estimated useful life of 15 years.  Beginning in March 2016, we began amortizing our agreement with Anthem over the remaining term of the contract (i.e. using a modified pattern of benefit over an estimated useful life of 10 years from the time the agreement was executed in 2009), which resulted in an additional $10.5 million of revenue amortization recognized for the three months ended March 31, 2016. 

Other legacy ESI intangible amortization of $9.4 million ($5.9 million net of tax) for each of the three months ended March 31, 2016 and 2015, is included in selling, general and administrative expense.  

Amortization of intangible assets related to the acquisition of Medco of $399.6 million ($251.4 million net of tax) and $399.6 million ($249.7 million net of tax) for the three months ended March 31, 2016 and 2015, 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) are primarily composed of integration-related activities, and are included in gross profit for the three months ended March 31, 2015.  

Costs of $40.9 million ($25.5 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 March 31, 2015.  

(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) Debt redemption costs, which include write-off of discounts, write-off of deferred financing costs and interest accrued from February 25, 2016 to the redemption date incurred for the early redemption of senior notes, totaled $9.7 million ($6.1 million net of tax) and are included in interest expense for the three months ended March 31, 2016. 

(7) Provision for income taxes includes discrete tax benefits of $19.7 million and discrete tax charges of $2.3 million for the three months ended March 31, 2016 and 2015, respectively.  The 2016 net discrete tax benefits  and 2015 net discrete tax charges relate primarily to changes in unrecognized tax benefits.