Express Scripts : Announces 2018 Third Quarter Results

(in millions, except per claim data)

Q3 2018

Q3 2018 vs.
Q3 2017 Change

(Consolidated,
as reported)

Attributable to
Transitioning Clients1

Core (Excluding
Transitioning Clients)

Excluding

Transitioning Clients

Adjusted claims

334.6

54.5

280.1

(2.2%)

Revenues1

25,563.2

4,492.9

21,070.3

5.3%

Net Income

1,071.6

N/A

N/A

N/A

Adjusted EBITDA

2,037.7

643.5

1,394.2

4.1%

Adjusted EBITDA per adjusted claim

$6.09

N/A

$4.98

6.4%

See 'Footnotes to Press Release,' below. See Table 6.

¹ Each of net income, adjusted net income, earnings per diluted share, adjusted earnings per diluted share, EBITDA, adjusted EBITDA and adjusted EBITDA per adjusted claim amounts are presented as attributable to Express Scripts, excluding non-controlling interests. For a description of the financial measures presented herein which are not calculated or presented in accordance with accounting principles generally accepted in the United States ('GAAP'), see Supplemental Information Regarding Non-GAAP Financial Measures below.

² From the date the Company began tracking retention rate in 2006.

³ See Supplemental Information Regarding Non-GAAP Financial Measures and Supplemental Tables below for additional information.

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)

2018

2017

2018

2017

Revenues

$ 25,563.2

$ 24,683.4

$ 75,974.4

$ 74,685.8

Cost of revenues

23,211.8

22,445.7

69,539.4

68,414.2

Gross profit

2,351.4

2,237.7

6,435.0

6,271.6

Selling, general and administrative

862.8

759.3

2,672.6

2,360.0

Operating income

1,488.6

1,478.4

3,762.4

3,911.6

Other (expense) income:

Interest income and other

13.0

13.6

33.8

28.7

Interest expense and other

(151.0)

(147.7)

(456.3)

(439.9)

(138.0)

(134.1)

(422.5)

(411.2)

Income before income taxes

1,350.6

1,344.3

3,339.9

3,500.4

Provision for income taxes

276.8

499.3

760.8

1,299.6

Net income

1,073.8

845.0

2,579.1

2,200.8

Less: Net income attributable to non-controlling interest

2.2

3.3

7.0

11.0

Net income attributable to Express Scripts

$ 1,071.6

$ 841.7

$ 2,572.1

$ 2,189.8

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

Basic

562.9

571.8

562.5

585.1

Diluted

567.9

574.7

566.8

588.4

Earnings per share attributable to Express Scripts:

Basic

$ 1.90

$ 1.47

$ 4.57

$ 3.74

Diluted

$ 1.89

$ 1.46

$ 4.54

$ 3.72

EXPRESS SCRIPTS HOLDING COMPANY

Unaudited Consolidated Balance Sheet

September 30,

December 31,

(in millions)

2018

2017

Assets

Current assets:

Cash and cash equivalents

$ 3,705.7

$ 2,309.6

Receivables, net

7,824.1

7,056.3

Inventories

2,168.9

2,124.9

Prepaid expenses and other current assets

653.5

466.3

Total current assets

14,352.2

11,957.1

Property and equipment, net

490.9

551.3

Computer software, net

827.5

814.9

Goodwill

31,110.5

31,099.7

Other intangible assets, net

8,425.5

9,625.9

Other assets

235.0

206.9

Total assets

$ 55,441.6

$ 54,255.8

Liabilities and stockholders' equity

Current liabilities:

Claims and rebates payable

$ 10,190.2

$ 10,188.5

Accounts payable

4,412.9

3,755.7

Accrued expenses

2,067.0

2,869.3

Short-term debt and current maturities of long-term debt

2,021.3

1,032.9

Total current liabilities

18,691.4

17,846.4

Long-term debt

12,974.2

14,981.5

Deferred taxes

2,347.8

2,562.4

Other liabilities

855.4

740.2

Total liabilities

34,868.8

36,130.5

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: 866.9 and 862.3, respectively; shares outstanding: 563.6 and 564.4, respectively

8.7

8.6

Additional paid-in capital

23,826.8

23,537.8

Accumulated other comprehensive loss

(6.5)

(2.9)

Retained earnings

18,890.7

16,318.6

42,719.7

39,862.1

Common stock in treasury at cost, 303.3 and 297.9 shares, respectively

(22,153.8)

(21,742.5)

Total Express Scripts stockholders' equity

20,565.9

18,119.6

Non-controlling interest

6.9

5.7

Total stockholders' equity

20,572.8

18,125.3

Total liabilities and stockholders' equity

$ 55,441.6

$ 54,255.8

EXPRESS SCRIPTS HOLDING COMPANY

Unaudited Consolidated Statement of Cash Flows

Nine Months Ended
September 30,

(in millions)

2018

2017

Cash flows from operating activities:

Net income

$ 2,579.1

$ 2,200.8

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

Depreciation and amortization

1,500.2

1,344.2

Deferred income taxes

(207.3)

(247.5)

Employee stock-based compensation expense

89.7

78.0

Other, net

20.7

24.2

Changes in operating assets and liabilities:

Receivables

(792.5)

161.2

Inventories

(44.1)

(93.8)

Other current and noncurrent assets

(187.1)

(88.8)

Claims and rebates payable

(0.4)

642.6

Accounts payable

680.1

475.4

Accrued expenses

(750.9)

(659.3)

Other noncurrent liabilities

100.8

144.5

Net cash flows provided by operating activities

2,988.3

3,981.5

Cash flows from investing activities:

Capital expenditures for property and equipment and computer software

(241.3)

(177.3)

Acquisitions, net of cash acquired

(26.4)

(122.7)

Other, net

(28.3)

(11.3)

Net cash used in investing activities

(296.0)

(311.3)

Cash flows from financing activities:

Repayment of long-term debt

(831.4)

(650.0)

Treasury stock acquired

(420.7)

(2,735.7)

Net proceeds from employee stock plans

198.9

51.3

Commercial paper repayments, net

(195.0)

-

Other, net

(43.4)

(22.5)

Net cash used in financing activities

(1,291.6)

(3,356.9)

Effect of foreign currency translation adjustment

(4.6)

5.4

Net increase in cash and cash equivalents

1,396.1

318.7

Cash and cash equivalents at beginning of period

2,309.6

3,077.2

Cash and cash equivalents at end of period

$ 3,705.7

$ 3,395.9

Table 1

Express Scripts Holding Company Unaudited Consolidated Selected Information

(in millions)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

Claims Volume

Network

207.0

213.5

631.1

655.4

Home delivery and specialty⁽³⁾

25.6

28.8

78.2

87.3

Total claims

232.6

242.3

709.3

742.7

Adjusted network⁽²⁾

260.2

259.5

784.8

790.7

Adjusted home delivery and specialty⁽²⁾

74.4

84.1

227.8

254.6

Total adjusted claims⁽²⁾

334.6

343.6

1,012.6

1,045.3

Depreciation and Amortization (D&A):

Revenue amortization⁽⁴⁾

$ 55.4

$ 55.4

$ 166.2

$ 166.2

Cost of revenues depreciation

31.7

32.0

101.9

96.3

Selling, general and administrative depreciation

61.3

51.3

174.0

155.3

Selling, general and administrative amortization⁽⁴⁾

349.3

310.7

1,058.1

926.4

Total D&A

$ 497.7

$ 449.4

$ 1,500.2

$ 1,344.2

Generic Fill Rate*

Network

86.5%

86.5%

87.1%

86.9%

Home delivery

83.9%

83.5%

84.0%

82.8%

Overall

86.2%

86.1%

86.7%

86.4%

See Footnotes to Press Release

*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

Express Scripts Holding Company Unaudited Adjusted Gross Profit and Adjusted SG&A Reconciliation

Provided below are reconciliations of adjusted gross profit and adjusted selling, general and administrative expenses, which are non-GAAP measures, to gross profit and selling, general and administrative expenses, respectively, which are the most directly comparable measures calculated in accordance with GAAP.

(in millions)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

Gross profit, as reported

$ 2,351.4

$ 2,237.7

$ 6,435.0

$ 6,271.6

Amortization of intangible assets ⁽⁴⁾

55.4

55.4

166.2

166.2

Enterprise value initiative costs ⁽⁶⁾

7.2

2.4

39.9

2.4

Adjusted gross profit

$ 2,414.0

$ 2,295.5

$ 6,641.1

$ 6,440.2

Selling, general and administrative, as reported

$ 862.8

$ 759.3

$ 2,672.6

$ 2,360.0

Amortization of intangible assets ⁽⁴⁾

349.3

310.7

1,058.1

926.4

Transaction costs ⁽⁵⁾

26.0

-

82.4

-

Enterprise value initiative costs ⁽⁶⁾

21.0

20.9

51.6

20.9

Charitable contribution costs ⁽⁷⁾

-

-

30.0

-

Adjusted selling, general and administrative

$ 466.5

$ 427.7

$ 1,450.5

$ 1,412.7

See Footnotes to Press Release

Table 3

Express Scripts Holding Company Unaudited EBITDA and Adjusted EBITDA Reconciliation

(in millions, except per claim data)

Provided below is a reconciliation of EBITDA and Adjusted EBITDA attributable to Express Scripts, which are non-GAAP financial measures, from net income attributable to Express Scripts. The Company believes net income is the most directly comparable measure under GAAP.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

Net income attributable to Express Scripts, as reported

$ 1,071.6

$ 841.7

$ 2,572.1

$ 2,189.8

Provision for income taxes ⁽⁸⁾

276.8

499.3

760.8

1,299.6

Depreciation and amortization^(4),*

497.7

449.4

1,500.2

1,344.2

Other expense (income), net

138.0

134.1

422.5

411.2

EBITDA attributable to Express Scripts

$ 1,984.1

$ 1,924.5

$ 5,255.6

$ 5,244.8

Adjustments to EBITDA

Transaction costs ⁽⁵⁾

26.0

-

82.4

-

Enterprise value initiative costs⁽⁶⁾

27.6

22.9

89.5

22.9

Charitable contribution costs⁽⁷⁾

-

-

30.0

-

Adjusted EBITDA attributable to Express Scripts

$ 2,037.7

$ 1,947.4

$ 5,457.5

$ 5,267.7

Total adjusted claims⁽²⁾

334.6

343.6

1,012.6

1,045.3

Adjusted EBITDA attributable to Express Scripts, per adjusted claim

$ 6.09

$ 5.67

$ 5.39

$ 5.04

See Footnotes to Press Release

* Depreciation and amortization presented above includes accelerated depreciation of $0.6 million and $2.0 million for the three and nine months ended September 30, 2018, respectively, and $0.4 million for each of the three and nine months ended September 30, 2017, related to our enterprise value initiative.

Table 4

Express Scripts Holding Company Unaudited Adjusted Diluted EPS Reconciliation

Provided below is a reconciliation of Adjusted Diluted EPS attributable to Express Scripts, which is a non-GAAP measure, to diluted EPS attributable to Express Scripts, which is its most directly comparable measure calculated in accordance with GAAP.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

(per diluted share)

Diluted EPS attributable to Express Scripts, as reported

$ 1.89

$ 1.46

$ 4.54

$ 3.72

Excluding items indicated:

Amortization of intangible assets ^(4),*

0.71

0.64

2.16

1.86

Transaction costs ^(5),*

0.05

-

0.15

-

Enterprise value initiative costs ^(6),*

0.05

0.04

0.16

0.04

Charitable contribution costs ^(7),*

-

-

0.05

-

Discrete tax items ⁽⁸⁾

(0.07)

0.01

(0.04)

0.03

Tax impact of excluded items ⁽¹⁰⁾

(0.20)

(0.25)

(0.60)

(0.70)

Diluted EPS attributable to Express Scripts, adjusted

$ 2.43

$ 1.90

$ 6.42

$ 4.95

See Footnotes to Press Release

*Presented on a pre-tax basis.

Table 5

Express Scripts Holding Company Unaudited Adjusted Net Income and
Adjusted Effective Income Tax Rate Reconciliation

(in millions)

Presented below is a reconciliation of adjusted net income attributable to Express Scripts, which is a non-GAAP financial measure, to income before income taxes, which is its most directly comparable measure calculated in accordance with GAAP.

Three Months Ended
September 30, 2018

Nine Months Ended
September 30, 2018

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

$ 1,350.6

$ 276.8

$ 3,339.9

$ 760.8

Net income attributable to non-controlling interest

(2.2)

-

(7.0)

-

Income before income taxes attributable to Express Scripts

1,348.4

276.8

20.5%

3,332.9

760.8

22.8%

Excluding items indicated:

Discrete tax items⁽⁸⁾

-

41.5

-

25.8

Transaction costs ⁽⁵⁾

26.0

6.1

82.4

19.4

Enterprise value initiative costs⁽⁶⁾

28.2

6.7

91.5

21.6

Charitable contribution costs ⁽⁷⁾

-

-

30.0

7.1

Loss on Disposal ⁽⁹⁾

-

-

1.8

0.4

Amortization of intangible assets⁽⁴⁾

404.7

95.5

1,224.3

288.9

Income before income taxes attributable to Express Scripts, as adjusted

$ 1,807.3

$ 426.6

23.6%

$ 4,762.9

$ 1,124.0

23.6%

Adjusted net income attributable to Express Scripts

$ 1,380.7

$ 3,638.9

See Footnotes to Press Release

Table 5A

Express Scripts Holding Company Unaudited Adjusted Net Income and
Adjusted Effective Income Tax Rate Reconciliation

(in millions)

Presented below is a reconciliation of adjusted net income attributable to Express Scripts, which is a non-GAAP financial measure, to income before income taxes, which is its most directly comparable measure calculated in accordance with GAAP.

Three Months Ended
September 30, 2017

Nine Months Ended
September 30, 2017

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

$ 1,344.3

$ 499.3

$ 3,500.4

$ 1,299.6

Net income attributable to non-controlling interest

(3.3)

-

(11.0)

-

Income before income taxes attributable to Express Scripts

1,341.0

499.3

37.2%

3,489.4

1,299.6

37.2%

Excluding items indicated:

Amortization of intangible assets⁽⁴⁾

366.1

134.8

1,092.6

402.1

Enterprise value initiative costs⁽⁶⁾

23.3

8.5

23.3

8.5

Discrete tax items⁽⁸⁾

-

(5.8)

-

(15.5)

Income before income taxes attributable to Express Scripts, as adjusted

$ 1,730.4

$ 636.8

36.8%

$ 4,605.3

$ 1,694.7

36.8%

Adjusted net income attributable to Express Scripts

$ 1,093.6

$ 2,910.6

See Footnotes to Press Release

Table 6

Express Scripts Holding Company Operating Results Excluding Estimate of Contribution related to Transitioning Clients

(amounts in millions except per claim figures)

(Three months ended)

September 30, 2018

September 30, 2017

Change

Consolidated
As Reported

Transitioning
Clients⁽¹⁾

Core business⁽¹⁾

Consolidated
As Reported

Transitioning
Clients⁽¹⁾

Core business⁽¹⁾

As Reported

Core business⁽¹⁾

Adjusted claims⁽²⁾

Table 1

334.6

54.5

280.1

343.6

57.2

286.4

-2.6%

-2.2%

Revenues

$ 25,563.2

$ 4,492.9

$ 21,070.3

$ 24,683.4

$ 4,665.7

$ 20,017.7

3.6%

5.3%

Net income

$ 1,071.6

N/A

N/A

$ 841.7

N/A

N/A

27.3%

N/A

Adjusted EBITDA

Table 3

$ 2,037.7

$ 643.5

$ 1,394.2

$ 1,947.4

$ 607.9

$ 1,339.5

4.6%

4.1%

Adjusted EBITDA/adjusted claim

Table 3

$ 6.09

N/A

$ 4.98

$ 5.67

N/A

$ 4.68

7.4%

6.4%

(Nine months ended)

September 30, 2018

September 30, 2017

Change

Consolidated
As Reported

Transitioning
Clients⁽¹⁾

Core business⁽¹⁾

Consolidated
As Reported

Transitioning
Clients⁽¹⁾

Core business⁽¹⁾

As Reported

Core business⁽¹⁾

Adjusted claims⁽²⁾

Table 1

1,012.6

166.0

846.6

1,045.3

176.2

869.1

-3.1%

-2.6%

Revenues

$ 75,974.4

$ 13,449.2

$ 62,525.2

$ 74,685.8

$ 14,289.2

$ 60,396.6

1.7%

3.5%

Net income

$ 2,572.1

N/A

N/A

$ 2,189.8

N/A

N/A

17.5%

N/A

Adjusted EBITDA

Table 3

$ 5,457.5

$ 1,713.3

$ 3,744.2

$ 5,267.7

$ 1,810.5

$ 3,457.2

3.6%

8.3%

Adjusted EBITDA/adjusted claim

Table 3

$ 5.39

N/A

$ 4.42

$ 5.04

N/A

$ 3.98

6.9%

11.1%

See Footnotes to Press Release.

Footnotes to Press Release

(1) The Company's core business excludes the contributions from Anthem, as well as Coventry and Catamaran, to which we refer together as the 'Transitioning Clients.' Amounts attributable to each of the Transitioning Clients are based on management's estimates regarding, among other items, cost allocation and may not be indicative of costs actually incurred as a result of servicing each of the Transitioning Clients. Both direct and indirect costs were allocated based on management's best estimates of costs attributable to servicing each of the Transitioning Clients, and, where appropriate, are based on actual cost or adjusted claims attributable to each of the Transitioning Clients.

Consolidated revenues and Transitioning Clients revenues include intangible amortization related to the customer contract with Anthem of $55.4 million for each of the three months ended September 30, 2018 and 2017. Consolidated revenues and Transitioning Clients revenues include intangible amortization related to the customer contract with Anthem of $166.2 million for each of the nine months ended September 30, 2018 and 2017.

(2) Total adjusted network claims includes an adjustment to reflect non-specialty network claims filled through our 90-day programs. These claims are multiplied by three, as these claims, on average, typically cover a time period three times longer than other network claims. Home delivery claims are also multiplied by three, as home delivery claims typically cover a time period three times longer than unadjusted network claims.

(3) Includes home delivery and specialty claims including drugs distributed to other PBMs' clients under limited distribution contracts with pharmaceutical manufacturers and Freedom Fertility claims.

(4) Amortization of intangible assets includes amounts in both revenues and selling, general and administrative expense.

Revenue amortization is related to the customer contract with Anthem, which commenced upon closing 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 $55.4 million ($42.3 million net of tax) and $55.4 million ($34.9 million net of tax) is included as a reduction to revenue for the three months ended September 30, 2018 and 2017, respectively. Intangible amortization of $166.2 million ($127.0 million net of tax) and $166.2 million ($105.0 million net of tax) is included as a reduction to revenue for the nine months ended September 30, 2018 and 2017, respectively.

Selling, general, and administrative expense includes the amortization of other intangible assets and computer software acquired through business combinations, of $349.3 million ($266.9 million net of tax) and $310.7 million ($196.4 million net of tax) for the three months ended September 30, 2018 and 2017, respectively. Selling, general, and administrative expense includes the amortization of other intangible assets and computer software acquired through business combinations, of $1,058.1 million ($808.4 million net of tax) and $926.4 million ($585.5 million net of tax) for the nine months ended September 30, 2018 and 2017, respectively.

(5) Transaction costs include those costs directly related to the acquisition of eviCore and the proposed transaction with Cigna. Costs of $26.0 million ($19.9 million net of tax) and $82.4 million ($63.0 million net of tax) are primarily composed of professional fees and other compensation costs, and are included in selling, general and administrative expense for the three and nine months ended September 30, 2018, respectively.

(6) Costs included in cost of revenues (gross profit), primarily comprised of professional fees, severance and other business activity charges in connection with the enterprise value initiative, are $7.2 million ($5.5 million net of tax) and $39.9 million ($30.5 million net of tax) for the three and nine months ended September 30, 2018, respectively, and $2.4 million for both the three and nine months ended September 30, 2017.

Costs included in selling, general and administrative, primarily comprised of professional fees, severance and other business activity charges in connection with the enterprise value initiative, are $21.0 million ($16.0 million net of tax) and $51.6 million ($39.4 million net of tax) for the three and nine months ended September 30, 2018, respectively, and $20.9 million for both the three and nine months ended September 30, 2017.

(7) Costs included in selling, general and administrative, related to certain charitable contributions made as a result of the tax savings received as part of the 2017 federal tax reform, are $30.0 million ($22.9 million net of tax) for the nine months ended September 30, 2018.

(8) Provision for income taxes includes discrete income tax benefits of $41.5 million and $25.8 million for the three months and nine months ended September 30, 2018, respectively, and includes discrete income tax charges of $5.8 million and $15.5 million for the three months and nine months ended September 30, 2017, respectively. The 2018 net discrete income tax benefits primarily relate to changes in our unrecognized tax benefits as a result of lapses of statutes of limitations. The 2017 discrete income tax charges primarily relate to additions in our unrecognized tax benefits on prior year tax positions and a revaluation of our deferred tax attributes due to changes in effective tax rates offset by a reduction in our unrecognized tax benefits due to settlement of prior year examinations and prior year claims.

(9) In December 2017, the Company sold UBC for approximately $150.0 million, which included both cash and a note receivable. The Company recorded a $1.8 million ($1.4 million net of tax) loss on disposal which is reported within interest expense and other for the nine months ended September 30, 2018. The loss on disposal has an immaterial impact to the adjusted diluted earnings per share reconciliation, see Table 4.

(10) Represents adjustment for the tax impact related to non-GAAP items excluded from adjusted diluted EPS. See Table 5 and 5A for calculation of adjusted effective income tax rate.