Express Scripts Reports Second Quarter 2013 Results

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Operations 

 Three Months Ended
June 30, 

 Six Months Ended
June 30, 

  (in millions, except per share data) 

2013

2012

2013

2012

Revenues^(*)

$  26,425.0

$   27,504.6

$  52,488.0

$  39,637.2

Cost of revenues^(*)

24,307.4

25,417.5

48,403.8

36,718.1

    Gross profit 

2,117.6

2,087.1

4,084.2

2,919.1

Selling, general and administrative

1,127.3

1,587.7

2,252.0

1,852.8

Operating income

990.3

499.4

1,832.2

1,066.3

Other (expense) income:

    Equity income from joint venture 

7.0

4.3

16.8

4.3

    Interest income  

1.1

2.3

2.7

4.6

    Interest expense and other 

(127.6)

(174.4)

(343.0)

(306.4)

(119.5)

(167.8)

(323.5)

(297.5)

Income before income taxes

870.8

331.6

1,508.7

768.8

Provision for income taxes

305.0

178.2

563.6

345.2

Net income from continuing operations

565.8

153.4

945.1

423.6

Net loss from discontinued operations, net of tax

(15.3)

(0.4)

(16.5)

(0.4)

Net income

550.5

153.0

928.6

423.2

Less: Net income attributable to non-controlling interest

7.5

3.4

12.6

5.8

Net income attributable to Express Scripts

$       543.0

$        149.6

$       916.0

$       417.4

Weighted average number of common shares outstanding during the period: 

    Basic 

815.2

807.8

816.9

646.6

    Diluted 

828.4

823.9

830.5

663.2

Basic earnings per share:

     Continuing operations attributable to Express Scripts

$         0.68

$          0.19

$         1.14

$         0.65

     Discontinued operations attributable to Express Scripts

(0.02)

-

(0.02)

-

     Net earnings attributable to Express Scripts

0.67

0.19

1.12

0.65

Diluted earnings per share:

     Continuing operations attributable to Express Scripts

$         0.67

$          0.18

$         1.12

$         0.63

     Discontinued operations attributable to Express Scripts

(0.02)

-

(0.02)

-

     Net earnings attributable to Express Scripts

0.66

0.18

1.10

0.63

Amounts attributable to Express Scripts shareholders:

     Income from continuing operations, net of tax

$       558.3

$        150.0

$       932.5

$       417.8

     Discontinued operations, net of tax

(15.3)

(0.4)

(16.5)

(0.4)

     Net income attributable to Express Scripts shareholders

$       543.0

$        149.6

$       916.0

$       417.4

^(*) Includes retail pharmacy co-payments of $3,204.3 million and $3,519.1 million for the three months ended June 30, 2013 and 2012, respectively, and $6,878.7 million and $5,015.7 million for the six months ended June 30, 2013 and 2012, respectively.

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Balance Sheet 

 June 30,  

   December 31, 

 (in millions) 

2013

2012

 Assets 

 Current assets: 

 Cash and cash equivalents 

$   1,342.2

$            2,793.9

 Restricted cash and investments 

12.4

19.6

 Receivables, net 

4,552.8

5,480.6

 Inventories 

1,672.9

1,661.9

 Deferred taxes 

387.3

408.5

 Prepaid expenses and other current assets 

197.4

194.4

 Current assets of discontinued operations 

137.8

198.0

    Total current assets 

8,302.8

10,756.9

 Property and equipment, net 

1,663.6

1,634.3

 Goodwill 

29,345.2

29,359.8

 Other intangible assets, net 

15,021.3

16,037.9

 Other assets 

60.2

56.6

 Noncurrent assets of discontinued operations 

188.4

265.7

    Total assets 

$ 54,581.5

$          58,111.2

 Liabilities and Stockholders' Equity 

 Current liabilities: 

 Claims and rebates payable 

$   5,823.4

$            7,440.0

 Accounts payable 

2,639.3

2,909.1

 Accrued expenses 

1,403.1

1,630.0

 Current maturities of long-term debt 

631.6

934.9

 Current liabilities of discontinued operations 

120.9

143.4

    Total current liabilities 

10,618.3

13,057.4

 Long-term debt 

13,648.5

14,980.1

 Deferred taxes 

5,662.0

5,948.8

 Other liabilities 

734.2

692.9

 Noncurrent liabilities of discontinued operations 

41.8

36.3

    Total liabilities 

30,704.8

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: 827.5 and 818.1, respectively; 

 shares outstanding: 814.2 and 818.1, respectively 

8.2

8.2

 Additional paid-in capital 

21,662.2

21,289.7

 Accumulated other comprehensive income 

12.9

18.9

 Retained earnings 

2,984.2

2,068.2

24,667.5

23,385.0

 Common stock in treasury at cost, 13.3 and zero shares, respectively 

(801.0)

-

    Total Express Scripts stockholders' equity 

23,866.5

23,385.0

 Non-controlling interest 

10.2

10.7

    Total stockholders' equity 

23,876.7

23,395.7

    Total liabilities and stockholders' equity 

$ 54,581.5

$          58,111.2

 EXPRESS SCRIPTS HOLDING COMPANY 

 Unaudited Consolidated Statement of Cash Flows 

 Six Months Ended
June 30, 

 (in millions) 

2013

2012

 Cash flows from operating activities: 

 Net income 

$    928.6

$     423.2

 Net loss from discontinued operations, net of tax 

16.5

0.4

      Net income from continuing operations 

945.1

423.6

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

 Depreciation and amortization 

1,210.2

659.6

 Non-cash adjustments to net income 

(221.3)

94.9

 Deferred financing fees 

10.7

26.9

 Changes in operating assets and liabilities:  

 Accounts receivable 

868.4

180.5

 Claims and rebates payable 

(1,616.6)

(453.1)

 Other net changes in operating assets and liabilities 

(389.0)

324.8

 Net cash provided by operating activities - continuing operations 

807.5

1,257.2

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

(25.0)

2.4

 Net cash flows provided by operating activities 

782.5

1,259.6

 Cash flows from investing activities: 

 Purchases of property and equipment 

(195.0)

(63.9)

 Acquisitions, net of cash acquired 

-

(10,326.4)

 Proceeds from sale of business 

77.9

-

 Other 

1.3

(11.2)

 Net cash used in investing activities - continuing operations 

(115.8)

(10,401.5)

 Acquisitions, cash acquired - discontinued operations 

-

42.8

 Net cash used in investing activities - discontinued operations 

(2.0)

(2.7)

 Net cash used in investing activities 

(117.8)

(10,361.4)

 Cash flows from financing activities: 

 Repayment of long-term debt 

(1,615.8)

(2,500.1)

 Treasury stock acquired 

(801.0)

-

 Net proceeds from employee stock plans 

271.0

141.1

 Excess tax benefit relating to employee stock compensation 

14.8

15.6

 Distributions paid to non-controlling interest 

(13.4)

(3.4)

 Proceeds from long-term debt, net of discounts 

-

7,353.6

 Repayment of revolving credit line, net 

-

(600.0)

 Proceeds from accounts receivable financing facility 

-

600.0

 Other 

6.3

(103.2)

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

(2,138.1)

4,903.6

 Net cash used in financing activities - discontinued operations 

-

(1.7)

 Net cash (used in) provided by financing activities 

(2,138.1)

4,901.9

 Effect of foreign currency translation adjustment 

(5.2)

(0.2)

 Less: cash decrease (increase) attributable to discontinued operations 

26.9

(40.9)

 Net decrease in cash and cash equivalents 

(1,451.7)

(4,241.0)

 Cash and cash equivalents at beginning of period 

2,793.9

5,620.1

 Cash and cash equivalents at end of period 

$ 1,342.2

$  1,379.1

 Table 1 

  Express Scripts Holding Company Unaudited Consolidated Selected Information 

 (in millions) 

 Three Months Ended
June 30,  

 Six Months Ended
June 30,  

2013

2012

2013

2012

Claims Volume

Continuing operations:

Network

266.2

285.6

549.0

438.6

Home delivery and specialty⁽¹⁾

35.4

38.7

72.2

52.7

   Total claims 

301.6

324.3

621.2

491.3

Total adjusted claims - continuing operations⁽²⁾

369.4

398.3

759.4

591.1

 Depreciation and Amortization (D&A):  

 Revenue amortization⁽³⁾

$   28.5

$   28.5

$      57.0

$   57.0

 Cost of revenues depreciation 

30.0

24.0

57.7

35.6

 Selling, general and administrative depreciation 

74.0

58.5

145.5

73.2

 Selling, general and administrative amortization⁽³⁾

477.1

483.6

950.0

493.8

      Total D&A - continuing operations 

$ 609.6

$ 594.6

$ 1,210.2

$ 659.6

 Generic Fill Rate 

 Network 

81.7%

78.7%

81.5%

78.4%

 Home delivery 

74.6%

70.5%

74.3%

69.4%

 Overall 

80.9%

77.8%

80.7%

77.4%

 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
June 30, 

 Six Months Ended
June 30,  

2013

2012

2013

2012

Gross profit, as reported

$ 2,117.6

$ 2,087.1

$ 4,084.2

$ 2,919.1

Amortization of intangible assets ⁽³⁾

28.5

28.5

57.0

57.0

Non-recurring transaction and integration costs ⁽⁴⁾

36.6

11.9

81.1

11.9

Adjusted gross profit

$ 2,182.7

$ 2,127.5

$ 4,222.3

$ 2,988.0

Selling, general and administrative, as reported

$ 1,127.3

$ 1,587.7

$ 2,252.0

$ 1,852.8

Amortization of intangible assets ⁽³⁾

477.1

483.6

950.0

493.8

Non-recurring transaction and integration costs ⁽⁴⁾

105.3

380.3

215.4

407.0

Adjusted selling, general and administrative

$    544.9

$    723.8

$ 1,086.6

$    952.0

 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
June 30,   

 Six Months Ended
June 30,  

2013

2012

2013

2012

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

$    558.3

$    150.0

$    932.5

$    417.8

  Provision for income taxes

305.0

178.2

563.6

345.2

  Depreciation and amortization

609.6

594.6

1,210.2

659.6

  Interest expense, net

126.5

172.1

340.3

301.8

  Equity income from joint venture

(7.0)

(4.3)

(16.8)

(4.3)

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

1,592.4

1,090.6

3,029.8

1,720.1

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

139.9

392.2

294.5

418.9

Adjusted EBITDA from continuing operations, attributable to Express Scripts

$ 1,732.3

$ 1,482.8

$ 3,324.3

$ 2,139.0

Total adjusted claims - continuing operations

369.4

398.3

759.4

591.1

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

$      4.69

$      3.72

$      4.38

$      3.62

 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 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 $2.0 million for the three and six months ended June 30, 2013 related to depreciation which does not impact the calculation of EBITDA.  

 Table 4 

 Calculation of Express Scripts Holding Company Adjusted EPS  

 Three Months Ended
June 30,  

 Six Months Ended
June 30, 

2013

2012

2013

2012

(per diluted share)

EPS from continuing operations attributable to Express Scripts, as reported

$  0.67

$ 0.18

$  1.12

$ 0.63

Non-recurring items: 

Transaction and integration costs ⁽⁴⁾

0.10

0.28

0.21

0.38

Debt redemption costs ⁽⁵⁾

-

-

0.05

-

Pre-close financing costs ⁽⁶⁾

-

-

-

0.08

Discrete tax items ⁽⁷⁾

(0.02)

0.05

(0.01)

0.07

Amortization of intangible assets ⁽³⁾

0.37

0.36

0.74

0.50

EPS from continuing operations attributable to Express Scripts, adjusted

$  1.12

$ 0.87

$  2.11

$ 1.66

EPS from discontinued operations attributable to Express Scripts, as reported

$ (0.02)

$       -

$(0.02)

$       -

Amortization of intangible assets and other net items ⁽⁸⁾

0.01

0.01

0.02

0.01

EPS from discontinued operations attributable to Express Scripts, adjusted

$ 0.01

$      -

$ 0.01

Total EPS attributable to Express Scripts, adjusted

$  1.11

$ 0.88

$  2.11

$ 1.67

 Note: See Appendix for Footnotes 

The Company is providing EPS and EPS 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 5 

 Calculation of Express Scripts Holding Company Adjusted Effective Income Tax Rate for Continuing Operations 

 (in millions) 

 Three Months Ended
June 30, 2013 

 Six Months Ended
June 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

870.8

305.0

1,508.7

563.6

Non-controlling interest

(7.5)

-

(12.6)

-

Total continuing  operations attributable to Express Scripts, as reported

863.3

305.0

1,496.1

563.6

Non-recurring items: 

Transaction and integration costs⁽⁴⁾

141.9

55.8

296.5

116.6

Debt redemption costs⁽⁵⁾

-

-

68.5

26.9

Discrete tax items⁽⁷⁾

-

19.6

-

9.0

Amortization of intangible assets⁽³⁾

505.6

198.7

1,007.0

395.8

Total continuing operations attributable to Express Scripts, as adjusted

1,510.8

579.1

38.3%

2,868.1

1,111.9

38.8%

 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*

$4.26 - $4.34

$4.23 - $4.33

Year over year growth

14% - 16%

13% - 16%

Total adjusted claims

Up 5-6% from 2012

Up 5-7% from 2012

Depreciation

$410 - $425 million

$385 - $400 million

Selling, general and administrative

Approximately 8% decline

8% - 10% decline - closer to 8% decline

Non-controlling interest

$25 million

$20 million

Effective income tax rate on continuing operations

Approximately 38.8%

Approximately 39%

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 number of commons shares outstanding during the period

Lower end of 825-835 million shares

Lower end of 825-835 million shares

Cash flow from continuing operations

$4.5 billion - $5.0 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.

 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 ($17.3 million and $16.5 million net of tax in 2013 and 2012, respectively) is included as a reduction to revenue for the three months ended June 30, 2013 and 2012.   Intangible amortization of $57.0 million ($34.6 million and $34.5 million net of tax in 2013 and 2012, respectively) is included as a reduction to revenue for the six months ended June 30, 2013 and 2012.  

Other legacy Express Scripts intangible amortization of $10.2 million ($6.2 million  and $5.9 million net of tax in 2013 and 2012, respectively) is included in selling, general and administrative expense for the three months ended June 30, 2013 and 2012, respectively.  Other legacy Express Scripts intangible amortization of $20.3 million ($12.3 million net of tax) and $20.4 million ($12.4 million net of tax) is included in selling, general and administrative expense for the six months ended June 30, 2013 and 2012, respectively. 

Amortization of intangible assets related to the acquisition of Medco Health Solutions, Inc. ("Medco") of $466.9 million ($283.4 million net of tax) and $473.4 million ($274.2 million net of tax) for the three months ended June 30, 2013  and 2012, respectively, is included in selling, general and administrative expense. Amortization of intangible assets related to the acquisition of Medco of $929.7 million ($564.3 million net of tax) and $473.4 million ($287.0 million net of tax) for the six months ended June 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 $36.6 million ($22.2 million net of tax) and $11.9 million ($6.9 million net of tax) primarily composed of integration-related activities, are included in cost of revenues for the three months ended June 30, 2013 and 2012, respectively.  Costs of $81.1 million ($49.2 million net of tax)  and $11.9 million ($7.2 million net of tax) primarily composed of integration-related activities, are included in cost of revenues for the six months ended June 30, 2013 and 2012, respectively. 

Costs of $105.3 million ($63.9 million net of tax) and $380.3 million ($220.4 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 June 30, 2013 and 2012, respectively.  Costs of $218.9 million ($132.8 million net of tax) and $407.0 million ($245.8 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 six months ended June 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 six months ended June 30, 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 six months ended June 30, 2013. 

⁽⁶⁾ Financing costs include fees related to the amortization of fees relating to 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 $5.7 million ($3.3 million net of tax) and $85.2 million ($51.6 million net of tax) are included in interest expense in the three months and six months ended June 30, 2012, respectively.    

⁽⁷⁾ Provision for income taxes includes discrete tax benefits for continuing operations of $19.6 million and $9.0 million for the three months and six months ended June 30, 2013 due to changes in unrecognized tax benefits 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 charges of $39.6 million and $44.8 million for the three months and six months ended June 30, 2012 due to changes in unrecognized tax benefits. 

⁽⁸⁾ Net income from discontinued operations includes charges related to European operations of $16.0 million, amortization of intangible assets related to the acquisition of Medco of $7.5 million and $1.7 million discrete tax charges, offset by a gain recognized on the disposal of portions of the UBC business of $18.3 million for the three months ended June 30, 2013.    Net income from discontinued operations, net of tax includes amounts related to these items totaling $4.8 million net of tax for the three months ended June 30, 2013.

Net income from discontinued operations includes charges related to European operations of $16.0 million, amortization of intangible assets related to the acquisition of Medco of $15.5 million, and $1.7 million discrete tax charges,  offset by a gain recognized on the disposal of portions of the UBC business of $18.3 million for the six months ended June 30, 2013.    Net income from discontinued operations, net of tax includes amounts relating to these items totaling $9.7 million net of tax for the six months ended June 30, 2013.

Net income from discontinued operations includes amortization of intangible assets related to the acquisition of Medco of $8.5 million for the three months and six months ended June 30, 2012.    Net income from discontinued operations, net of tax includes amounts relating to this item, totaling $4.9 million net of tax for the three months and six months ended June 30, 2012. 

⁽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.