Express Scripts Reports Third Quarter 2013 Results

 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) 

2013

2012

2013

2012

Revenues^(*)

$ 25,915.6

$ 26,761.6

$ 78,317.4

$ 66,349.2

Cost of revenues^(*)

23,921.4

24,658.7

72,246.0

61,335.0

    Gross profit 

1,994.2

2,102.9

6,071.4

5,014.2

Selling, general and administrative

1,118.7

1,282.2

3,348.5

3,127.2

Operating income

875.5

820.7

2,722.9

1,887.0

Other (expense) income:

    Equity income from joint venture 

6.3

5.1

23.1

9.4

    Interest income  

25.7

1.4

28.4

6.0

    Interest expense and other 

(127.4)

(155.2)

(470.4)

(461.6)

(95.4)

(148.7)

(418.9)

(446.2)

Income before income taxes

780.1

672.0

2,304.0

1,440.8

Provision for income taxes

326.5

256.1

896.0

602.5

Net income from continuing operations

453.6

415.9

1,408.0

838.3

Net loss from discontinued operations, net of tax

(15.5)

(20.0)

(41.3)

(19.2)

Net income

438.1

395.9

1,366.7

819.1

Less: Net income attributable to non-controlling interest

11.4

4.5

24.0

10.3

Net income attributable to Express Scripts

$      426.7

$      391.4

$   1,342.7

$      808.8

Weighted average number of common shares

 outstanding during the period: 

    Basic 

810.2

812.9

814.7

702.4

    Diluted 

822.9

829.6

828.0

718.9

Basic earnings per share:

     Continuing operations attributable to Express Scripts

$        0.55

$        0.51

$        1.70

$        1.18

     Discontinued operations attributable to Express Scripts

(0.02)

(0.02)

(0.05)

(0.03)

     Net earnings attributable to Express Scripts

0.53

0.48

1.65

1.15

Diluted earnings per share:

     Continuing operations attributable to Express Scripts

$        0.54

$        0.50

$        1.67

$        1.15

     Discontinued operations attributable to Express Scripts

(0.02)

(0.02)

(0.05)

(0.03)

     Net earnings attributable to Express Scripts

0.52

0.47

1.62

1.13

Amounts attributable to Express Scripts shareholders:

     Income from continuing operations, net of tax

$      442.2

$      411.4

$   1,384.0

$      828.0

     Discontinued operations, net of tax

(15.5)

(20.0)

(41.3)

(19.2)

     Net income attributable to Express Scripts shareholders

$      426.7

$      391.4

$   1,342.7

$      808.8

^(*) Includes retail pharmacy co-payments of $2,966.5 million and $3,348.9 million for the three months ended September 30, 2013 and 2012, respectively, and $9,845.2 million and $8,364.6 million for the nine months ended September 30, 2013 and 2012, respectively.

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Balance Sheet 

 September 30,  

   December 31, 

 (in millions) 

2013

2012

 Assets 

 Current assets: 

 Cash and cash equivalents 

$            1,722.3

$            2,793.1

 Restricted cash and investments 

19.2

19.6

 Receivables, net 

5,112.4

5,425.8

 Inventories 

1,643.6

1,652.1

 Deferred taxes 

422.7

400.6

 Prepaid expenses and other current assets 

179.0

194.3

 Current assets of discontinued operations 

125.0

271.4

    Total current assets 

9,224.2

10,756.9

 Property and equipment, net 

1,629.2

1,632.1

 Goodwill 

29,306.3

29,320.4

 Other intangible assets, net 

14,525.9

16,037.9

 Other assets 

56.6

56.1

 Noncurrent assets of discontinued operations 

20.8

307.8

    Total assets 

$          54,763.0

$          58,111.2

 Liabilities and Stockholders' Equity 

 Current liabilities: 

 Claims and rebates payable 

$            6,459.7

$            7,440.0

 Accounts payable 

2,573.4

2,898.9

 Accrued expenses 

1,496.7

1,632.9

 Current maturities of long-term debt 

631.6

934.9

 Current liabilities of discontinued operations 

64.8

150.7

    Total current liabilities 

11,226.2

13,057.4

 Long-term debt 

13,482.0

14,980.1

 Deferred taxes 

5,589.0

5,936.5

 Other liabilities 

746.3

692.9

 Noncurrent liabilities of discontinued operations 

0.4

48.6

    Total liabilities 

31,043.9

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: 830.7 and 818.1, respectively; shares outstanding: 805.8 and 818.1, respectively 

8.3

8.2

 Additional paid-in capital 

21,820.2

21,289.7

 Accumulated other comprehensive income 

15.4

18.9

 Retained earnings 

3,410.9

2,068.2

25,254.8

23,385.0

 Common stock in treasury at cost, 24.9 and zero shares, respectively 

(1,552.5)

-

    Total Express Scripts stockholders' equity 

23,702.3

23,385.0

 Non-controlling interest 

16.8

10.7

    Total stockholders' equity 

23,719.1

23,395.7

    Total liabilities and stockholders' equity 

$          54,763.0

$          58,111.2

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Cash Flows 

 Nine Months Ended
September 30, 

 (in millions) 

2013

2012

 Cash flows from operating activities: 

 Net income 

$ 1,366.7

$     819.1

 Net loss from discontinued operations, net of tax 

41.3

19.2

      Net income from continuing operations 

1,408.0

838.3

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

       Depreciation and amortization 

1,824.0

1,270.0

       Deferred income taxes 

(376.2)

(338.0)

       Employee stock-based compensation expense 

131.2

341.6

       Other, net 

25.8

43.7

 Changes in operating assets and liabilities:  

       Accounts receivable 

194.5

417.1

       Inventories 

8.6

(358.1)

       Other current and noncurrent assets 

37.3

31.5

       Claims and rebates payable 

(980.3)

(647.2)

       Accounts payable 

(320.5)

142.7

       Other current and noncurrent liabilities 

(109.3)

303.8

 Net cash provided by operating activities - continuing operations 

1,843.1

2,045.4

 Net cash (used in) provided by operating activities - discontinued operations 

(20.7)

9.3

 Net cash flows provided by operating activities 

1,822.4

2,054.7

 Cash flows from investing activities: 

       Proceeds from sale of business 

313.0

31.5

       Purchases of property and equipment 

(274.6)

(101.9)

       Acquisitions, net of cash acquired 

(14.5)

(10,326.0)

       Other 

(11.8)

(16.2)

 Net cash provided by (used in) investing activities - continuing operations 

 Acquisitions, cash acquired - discontinued operations 

-

42.4

 Net cash used in investing activities - discontinued operations 

(2.1)

(4.1)

 Net cash provided by (used in) investing activities 

10.0

(10,374.3)

 Cash flows from financing activities: 

       Repayment of long-term debt 

(1,773.7)

(2,710.6)

       Treasury stock acquired 

(1,552.5)

-

       Net proceeds from employee stock plans 

383.6

276.5

       Excess tax benefit relating to employee stock compensation 

23.2

30.4

       Distributions paid to non-controlling interest 

(18.0)

(5.3)

       Proceeds from long-term debt, net of discounts 

-

7,458.9

       Repayment of revolving credit line, net 

-

(1,000.0)

       Proceeds from accounts receivable financing facility 

-

600.0

       Repayment of accounts receivable financing facility 

-

(600.0)

       Other 

15.4

(103.2)

 Net cash (used in) provided by financing activities - continuing operations 

(2,922.0)

3,946.7

 Net cash used in financing activities - discontinued operations 

-

(1.3)

 Net cash (used in) provided by financing activities 

(2,922.0)

3,945.4

 Effect of foreign currency translation adjustment 

(4.5)

2.6

 Less: cash decrease (increase) attributable to discontinued operations 

23.3

(47.3)

 Net decrease in cash and cash equivalents 

(1,070.8)

(4,418.9)

 Cash and cash equivalents at beginning of period 

2,793.1

5,620.1

 Cash and cash equivalents at end of period 

$ 1,722.3

$  1,201.2

 Table 1 

  Express Scripts Holding Company Unaudited Consolidated Selected Information 

 (in millions) 

 Three Months Ended
September 30,  

 Nine Months Ended
September 30,  

2013

2012

2013

2012

Claims Volume

Continuing operations:

Network

256.9

282.9

805.9

721.5

Home delivery and specialty⁽¹⁾

34.6

38.0

106.6

90.5

   Total claims 

291.5

320.9

912.5

812.0

Total adjusted claims - continuing operations⁽²⁾

358.1

393.7

1,117.3

984.6

 Depreciation and Amortization (D&A):  

 Revenue amortization⁽³⁾

$   28.5

$   28.5

$      85.5

$      85.5

 Cost of revenues depreciation 

31.4

37.3

88.7

72.7

 Selling, general and administrative depreciation 

77.3

47.2

222.7

120.5

 Selling, general and administrative amortization⁽³⁾

477.1

497.5

1,427.1

991.3

      Total D&A - continuing operations 

$ 614.3

$ 610.5

$ 1,824.0

$ 1,270.0

 Generic Fill Rate 

 Network 

81.6%

79.7%

81.6%

78.9%

 Home delivery 

74.8%

72.2%

74.5%

70.6%

 Overall 

80.8%

78.8%

80.7%

78.0%

 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
September 30, 

 Nine Months Ended
September 30,  

2013

2012

2013

2012

Gross profit, as reported

$ 1,994.2

$ 2,102.9

$ 6,071.4

$ 5,014.2

Amortization of intangible assets ⁽³⁾

28.5

28.5

85.5

85.5

Non-recurring transaction and integration costs ⁽⁴⁾

56.8

21.8

137.9

33.7

Adjusted gross profit

$ 2,079.5

$ 2,153.2

$ 6,294.8

$ 5,133.4

Selling, general and administrative, as reported

$ 1,118.7

$ 1,282.2

$ 3,348.5

$ 3,127.2

Amortization of intangible assets ⁽³⁾

477.1

497.5

1,427.1

991.3

Non-recurring transaction and integration costs ⁽⁴⁾

130.8

167.6

346.2

574.6

Adjusted selling, general and administrative

$    510.8

$    617.1

$ 1,575.2

$ 1,561.3

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

2013

2012

2013

2012

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

$    442.2

$    411.4

$ 1,384.0

$    828.0

  Provision for income taxes

326.5

256.1

896.0

602.5

  Depreciation and amortization

614.3

610.5

1,824.0

1,270.0

  Interest expense, net

101.7

153.8

442.0

455.6

  Equity income from joint venture

(6.3)

(5.1)

(23.1)

(9.4)

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

1,478.4

1,426.7

4,522.9

3,146.7

Non-recurring transaction and integration costs ^(4)(*)

178.5

189.4

473.0

608.3

Adjusted EBITDA from continuing operations, attributable to Express Scripts

$ 1,656.9

$ 1,616.1

$ 4,995.9

$ 3,755.0

Total adjusted claims - continuing operations

358.1

393.7

1,117.3

984.6

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

$      4.63

$      4.10

$      4.47

$      3.81

 Note: See Appendix for Footnotes 

The Company is providing EBITDA and adjusted EBITDA from continuing operations attributable to Express Scripts 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 attributable to Express Scripts is earnings before other income (expense), interest, taxes, depreciation and amortization, or alternatively calculated as operating income from continuing operations plus depreciation and amortization less non-controlling interest.  EBITDA from continuing operations 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 from continuing operations attributable to Express Scripts, 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 attributable to Express Scripts may not be comparable to that used by other companies.

Adjusted EBITDA from continuing operations 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 from continuing operations attributable to Express Scripts excluding certain charges recorded each year, as these charges are not considered an indicator of ongoing company performance.  Adjusted EBITDA from continuing operations attributable to Express Scripts per adjusted claim is calculated by dividing adjusted EBITDA from continuing operations attributable to Express Scripts by the adjusted claim volume for the period.  This measure is used as an indicator of adjusted EBITDA attributable to Express Scripts performance on a per-unit basis.  Adjusted EBITDA from continuing operations attributable to Express Scripts, and as a result, adjusted EBITDA from continuing operations 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.

 *  Non-recurring transaction and integration costs presented in this table exclude $9.1 million for the three months and $11.1 million for the nine months ended September 30, 2013 related to depreciation which does not impact the calculation of EBITDA.  

 Table 4 

 Calculation of Express Scripts Holding Company Adjusted EPS from Continuing Operations 

 Three Months Ended
September 30,  

 Nine Months Ended
September 30, 

2013

2012

2013

2012

 (per diluted share) 

EPS from continuing operations attributable to Express Scripts, as reported

$ 0.54

$ 0.50

$ 1.67

$ 1.15

Non-recurring items: 

Transaction and integration costs ⁽⁴⁾

0.14

0.14

0.36

0.50

Interest payment⁽⁵⁾

(0.02)

-

(0.02)

-

Debt redemption costs ⁽⁶⁾

-

-

0.05

-

Pre-close financing costs ⁽⁷⁾

-

-

-

0.07

Discrete tax items ⁽⁸⁾

0.05

-

0.04

0.06

Amortization of intangible assets ⁽³⁾

0.37

0.39

1.11

0.90

EPS from continuing operations attributable to Express Scripts, adjusted

$ 1.08

$ 1.03

$ 3.21

$ 2.68

 Note: See Appendix for Footnotes 

The Company is providing EPS and adjusted EPS, which excludes the impact of certain non-recurring items 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 for Continuing Operations 

 (in millions) 

 Three Months Ended
September 30, 2013 

 Nine Months Ended
September 30, 2013 

Income before income taxes

Provision for income taxes

Adjusted effective income tax rate

Income before income taxes

Provision for income taxes

Adjusted effective income tax rate

Income from continuing operations, as reported

780.1

326.5

2,304.0

896.0

Non-controlling interest

(11.4)

-

(24.0)

-

Total continuing  operations attributable to Express Scripts, as reported

768.7

326.5

2,280.0

896.0

Non-recurring items: 

Transaction and integration costs⁽⁴⁾

187.6

72.2

484.1

188.8

Interest payment ⁽⁵⁾

(24.9)

(9.7)

(24.9)

(9.7)

Debt redemption costs⁽⁶⁾

-

-

68.5

26.9

Discrete tax items⁽⁸⁾

(38.7)

-

(29.7)

Amortization of intangible assets⁽³⁾

505.6

194.3

1,512.6

590.1

Total continuing operations attributable to Express Scripts, as adjusted

1,437.0

544.6

37.9%

4,320.3

1,662.4

38.5%

 Note: See Appendix for Footnotes. 

The Company is providing adjusted effective income tax rate for continuing operations attributable to Express Scripts excluding the impact of non-recurring items and amortization of intangible assets (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 

 Current Guidance 

Adjusted EPS from continuing operations attributable to Express Scripts*

$4.30 - $4.34

$4.26 - $4.34

Year over year growth

15% - 16%

14% - 16%

Total adjusted claims

Up 5-6% from 2012

Up 5-6% from 2012

Depreciation

$395 - $405 million

$410 - $425 million

Selling, general and administrative

Approximately 8% decline**

Approximately 8% decline

Non-controlling interest

$30 million

$25 million

Effective income tax rate on continuing operations

Approximately 38.5%

Approximately 38.8%

EBITDA from continuing operations attributable to Express Scripts  per adjusted claim

Up 15-18% from 2012

Up 15-18% from 2012

Diluted weighted average shares outstanding during the period

Lower end of 825-835 million shares

Lower end of 825-835 million shares

Cash flow from continuing operations

 $4.0 billion - $4.5 billion***

$4.5 billion - $5.0 billion

(*) GAAP items not included in guidance:

Amortization of intangible assets ⁽⁹⁾

$1.50

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

 To be determined 

*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.

 ** Selling, general and administrative expense is expected to decline approximately 8% from $2,338.2 million on an adjusted basis in 2012 (as recast for discontinued operations).  

*** Due to delays in certain non-client integration activities, including the migration of Medco's legacy payment cycles to Express Scripts' cycles, the Company has adjusted its 2013 cash flow guidance range to $4.0 billion to $4.5 billion from the previous range of $4.5 billion to $5.0 billion.  

 Note: See Appendix for Footnotes 

 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 ($17.5 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 September, 2013 and 2012.   Intangible amortization of $85.5 million ($52.1 million and $51.2 million net of tax in 2013 and 2012, respectively) is included as a reduction to revenue for the nine months ended September 30, 2013 and 2012.

Other legacy Express Scripts intangible amortization of $10.2 million ($6.3 million net of tax) and $10.1 million ($6.3 million net of tax) is included in selling, general and administrative expense for the three months ended September 30, 2013 and 2012, respectively.  Other legacy Express Scripts intangible amortization of $30.5 million ($18.6 million and $18.3 million net of tax in 2013 and 2012, respectively) is included in selling, general and administrative expense for the nine months ended September 30, 2013 and 2012, respectively. 

Amortization of intangible assets related to the acquisition of Medco Health Solutions, Inc. ("Medco") of $466.9 million ($287.5 million net of tax) and $487.4 million ($301.7 million net of tax) for the three months ended September 30, 2013  and 2012, respectively, is included in selling, general and administrative expense. Amortization of intangible assets related to the acquisition of Medco of $1,396.6 million ($851.8 million net of tax) and $960.8 million ($575.5 million net of tax) for the nine months ended September 30, 2013 and 2012, respectively, is included in selling, general and administrative expense.

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

Costs of $56.8 million ($34.9 million net of tax) and $21.8 million ($13.5 million net of tax) primarily composed of integration-related activities, are included in gross profit for the three months ended September 30, 2013 and 2012, respectively.  Costs of $137.9 million ($84.1 million net of tax) and $33.7 million ($20.2 million net of tax) primarily composed of integration-related activities, are included in gross profit for the nine months ended September 30, 2013 and 2012, respectively. 

Costs of $130.8 million ($80.5 million net of tax) and $158.9 million ($98.4 million net of tax) primarily composed of professional fees, integration-related activities and severance costs, including stock compensation, are included in selling, general and administrative expense in the three months ended September 30, 2013 and 2012, respectively.  Costs of $349.7 million ($213.3 million net of tax) and $565.9 million ($339.0 million net of tax) primarily composed of professional fees, integration-related activities and severance costs, including stock compensation, are included in selling, general and administrative expense in the nine months ended September 30, 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 nine months ended September 30, 2013 in conjunction with a final settlement related to the strategic decision to exit various businesses.

The Company recorded net charges of $8.7 million ($5.4 million and $5.0 million net of tax in the three months and nine months, respectively) within selling, general and administrative expenses for the three months and nine months ended September 30, 2012 in conjunction with the strategic decision to exit various businesses.  

⁽⁵⁾ Interest income includes a contractual interest payment received from a client of $24.9 million ($15.2 million net of tax) for the three months and nine months ended September 30, 2013. 

⁽⁶⁾ 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 nine months ended September 30, 2013. 

⁽⁷⁾ Financing costs include fees related to the amortization of fees relating to the August 2011 bridge loan, commitment fees related to the August 2011 credit agreement and interest and fees on the senior notes issued in conjunction with the acquisition of Medco.  Costs of $85.2 million ($51.0 million net of tax) are included in interest expense in the nine months ended September 30, 2012, respectively.    

⁽⁸⁾ Provision for income taxes includes discrete tax charges for continuing operations of $38.7 million and $29.7 million for the three months and nine months ended September 30, 2013 due to changes in unrecognized tax benefits, the deferred tax implications of newly enacted state laws, and the deferred tax implications related to investments in certain foreign subsidiaries for which the Company expects to realize in the foreseeable future.  Provision for income taxes includes discrete tax benefits of $1.3 million and discrete tax charges of $43.5 million for the three months and nine months ended September 30, 2012 due to changes in unrecognized tax benefits and the reversal of the deferred tax asset previously established for transaction-related costs that became nondeductible upon the consummation of the Merger. 

⁽⁹⁾ 2013 Adjusted EPS will exclude amortization of intangible assets.  

⁽¹⁰⁾ 2013 Adjusted EPS will exclude transaction, integration and other non-recurring costs as well as any gains recognized on the sale of businesses considered discontinued operations. The full-year impact of these costs have yet to be determined.