Express Scripts Reports First Quarter 2013 Results

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Operations 

 Three Months Ended
March 31, 

  (in millions, except per share data) 

2013

2012

Revenues^(*)

$ 26,063.0

$ 12,132.6

Cost of revenues^(*)

24,096.4

11,300.6

    Gross profit 

1,966.6

832.0

Selling, general and administrative

1,124.7

265.1

Operating income

841.9

566.9

Other (expense) income:

    Equity income from joint venture 

9.8

-

    Interest income  

1.6

2.3

    Interest expense and other 

(215.4)

(132.0)

(204.0)

(129.7)

Income before income taxes

637.9

437.2

Provision for income taxes

258.6

167.0

Net income from continuing operations

379.3

270.2

Net loss from discontinued operations, net of tax

(1.2)

-

Net income

378.1

270.2

Less: Net income attributable to non-controlling interest

5.1

2.4

Net income attributable to Express Scripts

$      373.0

$      267.8

Weighted average number of common shares outstanding during the period:

    Basic 

818.7

485.3

    Diluted 

832.5

489.7

Basic earnings per share:

     Continuing operations attributable to Express Scripts

$        0.46

$        0.55

     Discontinued operations attributable to Express Scripts

-

-

     Net earnings attributable to Express Scripts

0.46

0.55

Diluted earnings per share:

     Continuing operations attributable to Express Scripts

$        0.45

$        0.55

     Discontinued operations attributable to Express Scripts

-

-

     Net earnings attributable to Express Scripts

0.45

0.55

Amounts attributable to Express Scripts shareholders:

     Income from continuing operations, net of tax

$      374.2

$      267.8

     Discontinued operations, net of tax

(1.2)

-

     Net income attributable to Express Scripts shareholders

$      373.0

$      267.8

^(*) Includes retail pharmacy co-payments of $3,674.4 million and $1,496.6 million for the three months ended March 31, 2013 and 2012, respectively.

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Balance Sheet 

 March 31,  

   December 31, 

 (in millions) 

2013

2012

 Assets 

 Current assets: 

 Cash and cash equivalents 

$       1,990.0

$               2,793.9

 Restricted cash and investments 

17.7

19.6

 Receivables, net 

4,294.1

5,480.6

 Inventories 

1,657.4

1,661.9

 Deferred taxes 

381.9

408.5

 Prepaid expenses and other current assets 

195.7

194.4

 Current assets of discontinued operations 

171.1

198.0

    Total current assets 

8,707.9

10,756.9

 Property and equipment, net 

1,679.7

1,634.3

 Goodwill 

29,346.0

29,359.8

 Other intangible assets, net 

15,531.3

16,037.9

 Other assets 

65.1

56.6

 Noncurrent assets of discontinued operations 

255.7

265.7

    Total assets 

$     55,585.7

$             58,111.2

 Liabilities and Stockholders' Equity 

 Current liabilities: 

 Claims and rebates payable 

$       6,645.7

$               7,440.0

 Accounts payable 

2,573.7

2,909.1

 Accrued expenses 

1,535.4

1,630.0

 Current maturities of long-term debt 

631.6

934.9

 Current liabilities of discontinued operations 

137.7

143.4

    Total current liabilities 

11,524.1

13,057.4

 Long-term debt 

13,815.1

14,980.1

 Deferred taxes 

5,783.6

5,948.8

 Other liabilities 

775.8

692.9

 Noncurrent liabilities of discontinued operations 

59.6

36.3

    Total liabilities 

31,958.2

34,715.5

 Stockholders' Equity: 

 Preferred stock, 15.0 shares authorized, $0.01 par value per share; 

and no shares issued and outstanding

-

-

 Common stock, 2,985.0 shares authorized, $0.01 par value per share; shares issued: 822.6 and 818.1, respectively; shares outstanding: 817.5 and 818.1, respectively  

8.2

8.2

 Additional paid-in capital 

21,451.6

21,289.7

 Accumulated other comprehensive income 

16.8

18.9

 Retained earnings 

2,441.2

2,068.2

23,917.8

23,385.0

 Common stock in treasury at cost, 5.1 and zero shares, respectively 

(300.0)

-

23,617.8

23,385.0

 Non-controlling interest 

9.7

10.7

    Total stockholders' equity 

23,627.5

23,395.7

    Total liabilities and stockholders' equity 

$     55,585.7

$             58,111.2

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Cash Flows 

 Three Months Ended
March 31, 

 (in millions) 

2013

2012

 Cash flows from operating activities: 

 Net income 

$    378.1

$    270.2

 Net loss from discontinued operations, net of tax 

1.2

-

      Net income from continuing operations 

379.3

270.2

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

 Depreciation and amortization 

600.6

65.0

 Non-cash adjustments to net income 

(91.3)

37.2

 Deferred financing fees 

6.2

18.1

 Changes in operating assets and liabilities:  

 Accounts receivable 

1,183.8

(96.4)

 Claims and rebates payable 

(794.3)

(223.7)

 Other net changes in operating assets and liabilities 

(320.6)

461.7

 Net cash provided by operating activities - continuing operations 

963.7

532.1

 Net cash used in operating activities - discontinued operations 

(0.3)

-

 Net cash flows provided by operating activities 

963.4

532.1

 Cash flows from investing activities: 

 Purchases of property and equipment 

(108.9)

(18.7)

 Other 

(4.4)

(10.3)

 Net cash used in investing activities - continuing operations 

(113.3)

(29.0)

 Net cash used in investing activities - discontinued operations 

(0.6)

-

 Net cash used in investing activities 

(113.9)

(29.0)

 Cash flows from financing activities: 

 Repayment of long-term debt 

(1,457.9)

-

 Treasury stock acquired 

(300.0)

-

 Net proceeds from employee stock plans 

105.9

2.1

 Excess tax benefit relating to employee stock compensation 

2.2

13.9

 Distributions paid to non-controlling interest 

(4.3)

(2.0)

 Proceeds from long-term debt, net of discounts 

-

3,458.9

 Other 

2.0

(19.8)

 Net cash (used in) provided by financing activities 

(1,652.1)

3,453.1

 Effect of foreign currency translation adjustment 

(1.5)

1.4

 Less: cash attributable to discontinued operations 

0.2

-

 Net (decrease) increase in cash and cash equivalents 

(803.9)

3,957.6

 Cash and cash equivalents at beginning of period 

2,793.9

5,620.1

 Cash and cash equivalents at end of period 

$ 1,990.0

$ 9,577.7

 Table 1 

  Express Scripts Holding Company Unaudited Consolidated Selected Information 

 (in millions) 

 Three Months Ended
March 31,  

2013

2012

Claims Volume

Continuing operations:

Network

282.8

153.0

Home delivery and specialty⁽¹⁾

36.8

14.0

   Total claims 

319.6

167.0

Total adjusted claims - continuing operations⁽²⁾

390.0

192.8

 Depreciation and Amortization (D&A):  

 Revenue amortization⁽³⁾

$   28.5

$ 28.5

 Cost of revenues depreciation 

27.7

11.6

 Selling, general and administrative depreciation 

71.5

14.7

 Selling, general and administrative amortization⁽³⁾

472.9

10.2

      Total D&A - continuing operations 

$ 600.6

$ 65.0

 Generic Fill Rate 

 Network 

81.3%

77.7%

 Home delivery 

74.0%

66.2%

 Overall 

80.5%

76.5%

 Note: See Appendix for Footnotes 

Table 2

Calculation of Express Scripts Holding Company Adjusted Gross Profit and SG&A - Continuing Operations

(in millions)

 Three Months Ended
March 31,  

2013

2012

Gross profit, as reported

$ 1,966.6

$ 832.0

Amortization of intangible assets ⁽³⁾

28.5

28.5

Non-recurring transaction and integration costs ⁽⁴⁾

44.5

-

Adjusted gross profit

$ 2,039.6

$ 860.5

Selling, general and administrative, as reported

$ 1,124.7

$ 265.1

Amortization of intangible assets ⁽³⁾

472.9

10.2

Non-recurring transaction and integration costs ⁽⁴⁾

110.1

26.7

Adjusted selling, general and administrative

$    541.7

$ 228.2

 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 non-recurring charges and amortization of intangible assets in order to compare the underlying financial performance to prior periods.

 Table 3 

 Express Scripts Holding Company EBITDA Reconciliation 

 (in millions, except per claim data) 

The following is a reconciliation of net income from continuing operations attributable to Express Scripts to EBITDA from continuing operations 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,   

2013

2012

Net income from continuing operations, attributable to Express Scripts, as reported

$    374.2

$ 267.8

  Provision for income taxes

258.6

167.0

  Depreciation and amortization

600.6

65.0

  Interest expense, net

213.8

129.7

  Equity income from joint venture

(9.8)

-

EBITDA from continuing operations, attributable to Express Scripts, as reported

1,437.4

629.5

Non-recurring transaction and integration costs ⁽⁴⁾

154.6

26.7

Adjusted EBITDA from continuing operations, attributable to Express Scripts

$ 1,592.0

$ 656.2

Total adjusted claims - continuing operations

390.0

192.8

Adjusted EBITDA from continuing operations, attributable to Express Scripts, per adjusted claim

$      4.08

$   3.40

 Note: See Appendix for Footnotes 

The Company is providing EBITDA and adjusted EBITDA excluding the impact of non-recurring charges (both of which are non-GAAP financial measures) in order to compare the underlying financial performance to prior periods. 

EBITDA from continuing operations is earnings before other income (expense), interest, taxes, depreciation and amortization, or alternatively calculated as operating income from continuing operations plus depreciation and amortization.  EBITDA from continuing operations 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 from continuing operations, however, should not be considered as an alternative to net income from continuing operations, 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 from continuing operations may not be comparable to that used by other companies.

Adjusted EBITDA from continuing operations per adjusted claim is a supplemental measurement used by analysts and investors to help evaluate overall operating performance.  We have calculated adjusted EBITDA from continuing operations excluding certain charges recorded each year, as these charges are not considered an indicator of ongoing company performance.  Adjusted EBITDA from continuing operations per adjusted claim is calculated by dividing adjusted EBITDA from continuing operations by the adjusted claim volume for the period.  This measure is used as an indicator of EBITDA performance on a per-unit basis.  Adjusted EBITDA from continuing operations, and as a result, adjusted EBITDA from continuing operations 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.

 Table 4 

 Calculation of Express Scripts Holding Company Adjusted EPS  

 Three Months Ended
March 31,  

2013

2012

 (per diluted share) 

EPS from continuing operations attributable to Express Scripts, as reported

$ 0.45

$ 0.55

Non-recurring/transaction-related items: 

Transaction and integration costs ⁽⁴⁾

0.11

0.03

Debt redemption costs ⁽⁵⁾

0.05

-

Pre-close financing costs ⁽⁶⁾

-

0.10

Discrete tax items ⁽⁷⁾

0.01

-

Amortization of intangible assets ⁽³⁾

0.37

0.05

EPS from continuing operations attributable to Express Scripts, adjusted

$  0.99

$  0.73

EPS from discontinued operations attributable to Express Scripts, as reported

$       -

$       -

Non-recurring/transaction-related items: 

Amortization of intangible assets ⁽⁸⁾

-

-

EPS from discontinued operations attributable to Express Scripts, adjusted

$       -

$       -

Total EPS attributable to Express Scripts, adjusted

$ 0.99

$ 0.73

 Note: See Appendix for Footnotes 

The Company is providing EPS and EPS excluding the impact of transaction, integration and other non-recurring costs and amortization of intangible assets (which is a non-GAAP financial measure) in order to compare the underlying financial performance to prior periods.

Table 5

 Calculation of Express Scripts Holding Company Adjusted Effective Income Tax Rate 

 (in millions)

 Three Months Ended
March 31, 2013

Pre-Tax

Provision for Income Taxes

Adjusted Effective Income Tax Rate

Income from continuing operations, as reported

637.9

258.6

Loss from discontinued operations, as reported

(0.7)

0.5

637.2

259.1

Non-controlling interest

(5.1)

-

Total operations attributable to Express Scripts

632.1

259.1

Discrete tax items⁽⁷⁾

-

(10.6)

Total operations attributable to Express Scripts

632.1

248.5

39.3%

 Note: See Appendix for Footnotes.

The Company is providing adjusted effective income tax rate excluding the impact of discrete tax items (which is a non-GAAP financial measure) in order to compare the underlying financial performance to prior periods.

 Table 6 

 Express Scripts Holding Company 2013 Guidance Information 

 Estimated
Year Ending
December 31, 2013 

 (per diluted share) 

Updated adjusted EPS from continuing operations attributable to Express Scripts guidance

$4.23

 to 

$4.33

GAAP items not included in guidance:

Amortization of intangible assets ⁽⁹⁾

$1.49

Transaction, integration and other non-recurring costs⁽¹⁰⁾

 To be determined 

 Note: See Appendix for Footnotes 

The full-year impact of transaction, integration and other non-recurring costs have yet to be determined. Accordingly, the Company is unable to include these charges in the list of GAAP items not included in guidance for 2013 revised adjusted EPS from continuing operations or to provide a reconciliation to the corresponding GAAP measure.

 Appendix 

 Footnotes 

⁽¹⁾ Includes home delivery, specialty and other including:  (a) drugs distributed through patient assistance programs (b) drugs we distribute to other PBMs' clients 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 retail claims. 

⁽³⁾ Amortization of intangible assets includes the following items:

Amortization of legacy Express Scripts intangible assets include amounts in both revenues and selling, general and administrative expense. Revenue amortization is related to the customer contract with WellPoint which consummated upon closing of the NextRx acquisition in 2009.  Under U.S. GAAP standards, amortization of intangibles that arise in connection with consideration given to a customer by a vendor is characterized as a reduction of revenues.  Intangible amortization of $28.5 million ($17.3 million and $17.6 million net of tax in 2013 and 2012, respectively) is included as a reduction to revenue for the three months ended March 31, 2013 and 2012.   Other legacy Express Scripts intangible amortization of $10.1 million ($6.1 million net of tax) and $10.2 million ($6.3 million net of tax) is included in selling, general and administrative expense in the three months ended March 31, 2013 and 2012, respectively. 

Amortization of intangible assets related to the acquisition of Medco Health Solutions, Inc. ("Medco") of $462.8 million ($280.9 million net of tax) for the three months ended March 31, 2013 is included in selling, general and administrative expense. 

⁽⁴⁾ Non-recurring transaction and integration costs include those directly related to the acquisition of Medco. 

Costs of $44.5 million ($27.0 million net of tax) for the three months ended March 31, 2013, primarily composed of integration-related activities, are included in cost of revenues.

Costs of $113.6 million ($68.9 million net of tax) primarily composed of integration-related activities and severance costs, including stock compensation, and $26.7 million ($16.4 million net of tax) primarily composed of professional fees, are included in selling, general and administrative expense in the three months ended March 31, 2013 and 2012, respectively.

The Company recorded a net benefit of $3.5 million ($2.1 million net of tax) within selling, general and administrative expenses for the three months ended March 31, 2013 in conjunction with a final settlement related to the strategic decision to exit various businesses.  

⁽⁵⁾ Debt redemption costs and write-off of deferred financing fees incurred for the early redemption of senior notes totaled $68.5 million ($41.6 million net of tax) and is included in interest expense in the three months ended March, 31, 2013. 

⁽⁶⁾ Financing costs include fees related to the amortization of remaining bridge loan fees, commitment fees related to the new credit agreement and interest and fees on the senior notes issued in conjunction with the acquisition of Medco.  Costs of $79.5 million ($49.0 million net of tax) are included in interest expense in the three months ended March 31, 2012.    

⁽⁷⁾ Provision for income taxes includes discrete tax charges $10.6 million for the three months ended March 31, 2013 due to changes in unrecognized tax benefits.  

⁽⁸⁾ Net income from discontinued operations, net of tax includes $8.0 million ($4.9 million net of tax) of amortization of intangible assets related to the acquisition of Medco for the three months ended March, 31 2013.  

⁽⁹⁾ Adjusted EPS will exclude amortization of intangible assets.  

⁽¹⁰⁾ Adjusted EPS will exclude transaction, integration and other non-recurring costs. The full-year impact of these costs have yet to be determined.