Express Scripts Announces 3rd Quarter Results; Increases 2015 Guidance Range

Estimated Quarter Ending

December 31, 2015

Year Over Year Change

Adjusted claims

333 million to 353 million

(1%) to 5%

Adjusted earnings per diluted share

$1.54 to $1.58

11% to 14%

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Operations 

 Three Months Ended
September 30, 

 Nine Months Ended
September 30, 

  (in millions, except per share data) 

2015

2014

2015

2014

Revenues^(*)

$  25,222.6

$   25,778.5

$  75,576.4

$  74,574.5

Cost of revenues^(*)

23,705.5

69,437.7

68,743.4

    Gross profit 

2,173.5

2,073.0

6,138.7

5,831.1

Selling, general and administrative

1,007.3

1,088.6

3,013.2

3,171.5

Operating income

1,166.2

984.4

3,125.5

2,659.6

Other (expense) income:

    Interest income and other 

7.8

15.5

19.1

36.9

    Interest expense and other 

(128.4)

(201.6)

(377.1)

(460.8)

(120.6)

(186.1)

(358.0)

(423.9)

Income before income taxes

1,045.6

798.3

2,767.5

2,235.7

Provision for income taxes

378.2

209.2

1,046.9

789.4

Net income 

667.4

589.1

1,720.6

1,446.3

Less: Net income attributable to non-controlling interest

5.7

6.8

17.7

20.5

Net income attributable to Express Scripts

$       661.7

$        582.3

$    1,702.9

$    1,425.8

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

    Basic 

676.3

738.1

693.1

757.1

    Diluted 

682.2

746.0

699.5

766.1

Earnings per share:

     Basic

$         0.98

$          0.79

$         2.46

$         1.88

     Diluted

$         0.97

$          0.78

$         2.43

$         1.86

(*) Includes retail pharmacy co-payments of $2,161.5 million and $2,418.3 million for the three months ended September 30, 2015 and 2014, respectively, and $7,118.2 million and $7,894.7 million for the nine months ended September 30, 2015 and 2014, respectively.

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Balance Sheet 

 September 30,  

 December 31,  

 (in millions) 

2015

2014

 Assets 

 Current assets: 

 Cash and cash equivalents 

$                438.2

$             1,832.6

 Receivables, net 

7,391.1

5,979.8

 Inventories 

1,730.4

2,113.2

 Deferred taxes 

359.9

390.8

 Prepaid expenses and other current assets 

354.8

251.7

    Total current assets 

10,274.4

10,568.1

 Property and equipment, net 

1,343.1

1,584.0

 Goodwill 

29,277.9

29,280.9

 Other intangible assets, net 

10,961.5

12,255.2

 Other assets 

139.6

110.7

    Total assets 

$           51,996.5

$           53,798.9

 Liabilities and stockholders' equity 

 Current liabilities: 

 Claims and rebates payable 

$             8,738.6

$             8,488.2

 Accounts payable 

3,273.0

3,137.3

 Accrued expenses 

2,353.0

2,836.1

 Current maturities of long-term debt 

1,649.2

2,555.3

    Total current liabilities 

16,013.8

17,016.9

 Long-term debt 

14,037.7

11,012.7

 Deferred taxes 

4,621.8

4,923.2

 Other liabilities 

777.0

782.1

    Total liabilities 

33,734.9

 Stockholders' equity: 

 Preferred stock, 15.0 shares authorized, $0.01 par value per share; no shares issued and outstanding 

-

-

 Common stock, 2,985.0 shares authorized, $0.01 par value; shares issued: 853.9 and 848.6, respectively; shares outstanding: 676.3 and 726.1, respectively 

8.5

8.5

 Additional paid-in capital 

22,140.4

22,671.4

 Accumulated other comprehensive (loss) income 

(10.7)

2.1

 Retained earnings 

7,623.3

5,920.4

29,761.5

28,602.4

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

(13,223.2)

(8,548.2)

    Total Express Scripts stockholders' equity 

16,538.3

20,054.2

 Non-controlling interest 

7.9

9.8

    Total stockholders' equity 

16,546.2

20,064.0

    Total liabilities and stockholders' equity 

$           51,996.5

$           53,798.9

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Cash Flows 

 Nine Months Ended
September 30, 

 (in millions) 

2015

2014

 Cash flows from operating activities: 

 Net income 

$            1,720.6

$            1,446.3

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

 Depreciation and amortization 

1,727.7

1,658.2

 Deferred income taxes 

(270.5)

(272.9)

 Employee stock-based compensation expense 

86.8

82.3

 Other, net 

(45.3)

(17.1)

 Changes in operating assets and liabilities:  

 Accounts receivable 

(1,468.7)

(2,420.3)

 Inventories 

382.7

81.3

 Other current and noncurrent assets 

(139.7)

(146.3)

 Claims and rebates payable 

250.4

1,047.2

 Accounts payable 

172.2

93.1

 Accrued expenses 

(425.0)

40.1

 Other current and noncurrent liabilities 

(16.9)

32.7

 Net cash flows provided by operating activities 

1,974.3

1,624.6

 Cash flows from investing activities: 

 Purchases of property and equipment 

(177.1)

(327.0)

 Other, net 

19.2

7.7

 Net cash used in investing activities 

(157.9)

(319.3)

 Cash flows from financing activities: 

 Proceeds from long-term debt, net of discounts 

5,500.0

2,490.1

 Treasury stock acquired 

(5,500.0)

(3,673.5)

 Repayment of long-term debt 

(3,353.3)

(1,723.7)

 Net proceeds from employee stock plans 

155.0

419.4

 Excess tax benefit relating to employee stock compensation 

53.0

75.4

 Other 

(58.8)

(46.2)

 Net cash used in financing activities 

(3,204.1)

(2,458.5)

 Effect of foreign currency translation adjustment 

(6.7)

(3.4)

 Net decrease in cash and cash equivalents 

(1,394.4)

(1,156.6)

 Cash and cash equivalents at beginning of period 

1,832.6

1,991.4

 Cash and cash equivalents at end of period 

$               438.2

$               834.8

 Table 1 

  Express Scripts Holding Company Unaudited Consolidated Selected Information 

 (in millions) 

 Three Months Ended
September 30,  

 Nine Months Ended
September 30,  

2015

2014

2015

2014

Claims Volume

Network

232.8

231.3

680.1

693.0

Home delivery and specialty⁽¹⁾

30.0

33.1

90.4

95.6

   Total claims 

264.4

770.5

788.6

Adjusted network

240.8

231.3

692.8

693.0

Adjusted home delivery and specialty⁽¹⁾

97.0

264.3

279.8

   Total adjusted claims⁽²⁾

328.3

328.3

957.1

972.8

 Depreciation and Amortization (D&A):  

 Revenue amortization⁽³⁾

$           23.8

$           28.5

$             71.4

$             85.5

 Cost of revenues depreciation 

25.2

33.2

101.7

95.9

 Selling, general and administrative depreciation 

124.8

72.1

327.7

244.7

 Selling, general and administrative amortization⁽³⁾

409.0

413.2

1,226.9

1,232.1

      Total D&A  

$         582.8

$         547.0

$        1,727.7

$        1,658.2

 Generic Fill Rate* 

 Network 

85.1%

84.0%

85.2%

83.7%

 Home delivery 

80.3%

77.5%

79.6%

76.9%

 Overall 

84.5%

83.1%

84.5%

82.9%

 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
September 30,  

 Nine Months Ended
September 30,  

2015

2014

2015

2014

Gross profit, as reported

$      2,173.5

$      2,073.0

$      6,138.7

$      5,831.1

Amortization of intangible assets ⁽³⁾

23.8

28.5

71.4

85.5

Transaction and integration costs ⁽⁴⁾

45.2

65.0

140.6

281.4

Adjusted gross profit

$      2,242.5

$      2,166.5

$      6,350.7

$      6,198.0

Selling, general and administrative, as reported

$      1,007.3

$      1,088.6

$      3,013.2

$      3,171.5

Amortization of intangible assets ⁽³⁾

409.0

413.2

1,226.9

1,232.1

Transaction and integration costs ⁽⁴⁾

68.2

157.7

197.2

412.8

Legal settlement ⁽⁵⁾

-

-

60.0

-

Adjusted selling, general and administrative

$         530.1

$         517.7

$      1,529.1

$      1,526.6

 Note: See Appendix for Footnotes 

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

 Table 3 

 Express Scripts Holding Company EBITDA and Adjusted EBITDA Reconciliation 

 (in millions, except per claim data) 

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

 Three Months Ended
September 30,   

 Nine Months Ended
September 30,  

2015

2014

2015

2014

Net income attributable to Express Scripts, as reported

$         661.7

$         582.3

$      1,702.9

$      1,425.8

  Provision for income taxes

378.2

209.2

1,046.9

789.4

  Depreciation and amortization*

582.8

547.0

1,727.7

1,658.2

  Other expense 

120.6

186.1

358.0

423.9

EBITDA attributable to Express Scripts, as reported

1,743.3

1,524.6

4,835.5

4,297.3

Transaction and integration costs ^(4)*

65.0

214.6

219.4

648.1

Legal settlement ⁽⁵⁾

-

-

60.0

-

Adjusted EBITDA attributable to Express Scripts

$      1,808.3

$      1,739.2

$      5,114.9

$      4,945.4

Total adjusted claims⁽²⁾

328.3

328.3

957.1

972.8

Adjusted EBITDA attributable to Express Scripts, per adjusted claim

$           5.51

$           5.30

$           5.34

$           5.08

 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 September 30, 2015 and 2014 presented above includes $48.4 million and $8.1 million, respectively, of depreciation related to the integration of Medco Health Solutions, Inc. ("Medco") which is not included in transaction and integration costs.  Depreciation and amortization for the nine months ended September 30, 2015 and 2014 presented above includes $118.4 million and $46.1 million, respectively, of depreciation related to the integration of Medco which is not included in transaction and integration costs.  

 Table 4 

 Calculation of Express Scripts Holding Company Adjusted Diluted EPS  

 Three Months Ended
September 30,  

 Nine Months Ended
September 30,  

2015

2014

2015

2014

 (per diluted share) 

Diluted EPS attributable to Express Scripts, as reported

$        0.97

$        0.78

$        2.43

$        1.86

Excluding items indicated: 

Transaction and integration costs ⁽⁴⁾

0.10

0.19

0.30

0.57

Legal settlement ⁽⁵⁾

-

-

0.05

-

Debt redemption costs ⁽⁶⁾

-

0.06

0.01

0.06

Discrete tax items ⁽⁷⁾

(0.02)

(0.11)

0.02

(0.06)

Amortization of intangible assets ⁽³⁾

0.40

0.37

1.16

1.07

Diluted EPS attributable to Express Scripts, adjusted

$        1.45

$        1.29

$        3.97

$        3.50

 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
September 30, 2015 

 Nine Months Ended
September 30, 2015 

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes, as reported

$   1,045.6

$      378.2

$   2,767.5

$   1,046.9

Net income attributable to non-controlling interest

(5.7)

-

(17.7)

-

Income before income taxes attributable to Express Scripts

1,039.9

378.2

36.4%

2,749.8

1,046.9

38.1%

Excluding items indicated: 

Transaction and integration costs⁽⁴⁾

113.4

42.6

337.8

127.0

Legal settlement⁽⁵⁾

-

-

60.0

22.5

Debt redemption costs ⁽⁶⁾

-

-

9.2

3.5

Discrete tax items⁽⁷⁾

-

12.7

-

(13.0)

Amortization of intangible assets⁽³⁾

432.8

162.8

1,298.3

488.2

Income before income taxes attributable to Express Scripts, as adjusted

$   1,586.1

$      596.3

37.6%

$   4,455.1

$   1,675.1

37.6%

Adjusted net income attributable to Express Scripts

$      989.8

$   2,780.0

 Note: See Appendix for Footnotes 

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

 Table 5A 

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

 (in millions) 

 Three Months Ended
September 30, 2014 

 Nine Months Ended
September 30, 2014 

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes

Provision for income taxes

Effective income tax rate

Income before income taxes, as reported

$      798.3

$      209.2

$   2,235.7

$      789.4

Net income attributable to non-controlling interest

(6.8)

-

(20.5)

-

Income before income taxes attributable to Express Scripts

791.5

209.2

26.4%

2,215.2

789.4

35.6%

Excluding items indicated: 

Transaction and integration costs⁽⁴⁾

222.7

82.1

694.2

261.6

Debt redemption costs⁽⁶⁾

71.5

26.9

75.9

28.6

Discrete tax items⁽⁷⁾

-

83.6

-

45.6

Amortization of intangible assets⁽³⁾

441.7

163.1

1,317.6

496.6

Income before income taxes attributable to Express Scripts, as adjusted

$   1,527.4

$      564.9

37.0%

$   4,302.9

$   1,621.8

37.7%

Adjusted net income attributable to Express Scripts

$      962.5

$   2,681.1

 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 2015 Guidance Information 

Estimated

Year Ending 

December 31, 2015 

Estimated

Year Ending

December 31, 2015 

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

 Current Guidance 

 Previous Guidance 

Adjusted Diluted EPS attributable to Express Scripts*

$5.51 to $5.55

$5.46 to $5.54

Year over year growth 

13%-14%

12%-14%

Total adjusted claims

1,290 to 1,310

1,280 to 1,320

Adjusted selling, general and administrative*

$2,000 to $2,075

$1,950 to $2,025

Depreciation**

$415 to $435

$420 to $440

Effective income tax rate 

37.5% to 37.7%

37.5% to 37.7%

Adjusted EBITDA*

$7,000 to $7,100

$6,960 to $7,120

Adjusted EBITDA per adjusted claim*

$5.37 to $5.47

$5.30 to $5.50

Diluted weighted average shares outstanding during the period

693 to 703

695 to 705

Cash flow from operations

$4,500 to $5,000

$4,500 to $5,000

Capital expenditures

$300 to $330

$300 to $350

GAAP items not included in guidance (*) 

The Company anticipates full-year 2015 integration costs to be approximately $275 million, but the exact amount is indeterminable.  Accordingly, the Company is unable to include these charges in the list of GAAP items not included in guidance for 2015 full-year adjusted earnings per diluted share attributable to Express Scripts, adjusted selling, general and administrative, adjusted EBITDA and adjusted EBITDA per adjusted claim or to provide a reconciliation to the corresponding GAAP measure.  In addition, full-year 2015 integration costs excludes a non-cash adjustment to depreciation and amortization of approximately $144 million related to the acceleration of remaining useful lives for Medco acquired assets.  2015 Adjusted EPS will exclude amortization of intangible assets per diluted share in the range of $1.53 to $1.57. 

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

 Appendix 

 Footnotes 

⁽¹⁾Includes home delivery, specialty and other including:  (a) drugs distributed through patient assistance programs, (b) drugs distributed to clients of other PBMs under limited distribution contracts with pharmaceutical manufacturers and (c) FreedomFP claims. 

⁽²⁾ Total adjusted claims (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 $23.8 million ($14.9 million net of tax) and $28.5 million ($18.0 million net of tax) is included as a reduction to revenue for the three months ended September 30, 2015 and 2014, respectively.  Intangible amortization of $71.4 million ($44.6 million net of tax) and $85.5 million ($53.3 million net of tax) is included as a reduction to revenue for the nine months ended September 30, 2015 and 2014, respectively.    

Other legacy ESI intangible amortization of $9.5 million ($5.8 million net of tax) and $9.5 million ($5.9 million net of tax) for the three months ended September 30, 2015 and 2014, is included in selling, general and administrative expense, respectively.   Other legacy ESI intangible amortization of $28.3 million ($17.6 million net of tax) and $28.3 million ($17.6 million net of tax) for the nine months ended September 30, 2015 and 2014, is included in selling, general and administrative expense, respectively.  

Amortization of intangible assets related to the acquisition of Medco of $399.5million ($249.3 million net of tax) and $403.7 million ($254.7 million net of tax) for the three months ended September 30, 2015 and 2014, is included in selling, general and administrative expense, respectively.  Amortization of intangible assets related to the acquisition of Medco of $1,198.6 million ($747.9 million net of tax) and $1,203.8 million ($750.1 million net of tax) for the nine months ended September 30, 2015 and 2014, is included in selling, general and administrative expense, respectively.    

⁽⁴⁾Transaction and integration costs include those costs directly related to the acquisition of Medco. 

Costs of $45.2 million ($28.2 million net of tax) and $65.0 million ($41.4 million net of tax) are primarily composed of integration-related activities, and are included in gross profit for the three months ended September 30, 2015 and 2014, respectively.  Costs of $140.6 million ($87.7 million net of tax) and $281.4 million ($175.4 million net of tax) are primarily composed of integration-related activities, and are included in gross profit for the nine months ended September 30, 2015 and 2014, respectively.    

Costs of $68.2 million ($42.6 million net of tax) and $157.7 million ($99.2 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 September 30, 2015 and 2014, respectively.  Costs of $197.2 million ($123.1 million net of tax) and $412.8 million ($257.2 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 nine months ended September 30, 2015 and 2014, respectively.  

⁽⁵⁾  Charge related to a legal settlement of $60.0 million ($37.5 million net of tax) is included in selling, general and administrative expense for the nine months ended September 30, 2015.

⁽⁶⁾ Debt redemption costs, which include write-off of deferred financing fees incurred for the early repayment of the 2011 term loan, totaled $9.2 million ($5.7 million net of tax) and are included in interest expense for the nine months ended September 30, 2015. Debt redemption costs, which include write-off of deferred financing fees incurred for the early redemption of senior notes, totaled $71.5 million ($44.6 million net of tax) and $75.9 million ($47.3 million net of tax) and are included in interest expense for the three and nine months ended September 30, 2014, respectively.

⁽⁷⁾ Provision for income taxes includes discrete tax benefits of $12.7 million and net discrete tax charges of $13.0 million for the three and nine months ended September 30, 2015, compared to net discrete tax benefits of $83.6 million and $45.6 million for the three and nine months ended September 30, 2014.  The 2015 net discrete tax benefits and charges relate primarily to the deferred tax implications of changes to future state tax rate due in part to state laws enacted during the year, as well as changes in unrecognized tax benefits. The 2014 net discrete tax benefits relate primarily to a change in estimate resulting in the recognition of tax benefits for a permanent deduction related to domestic production activities, offset by charges related to interest on and changes in our unrecognized tax benefits and the deferred tax implications of newly enacted state laws.