CVS Health's net revenues increase 9.7% to $35.0B in third quarter 2014

CVS Health Corporation (NYSE: CVS) today announced operating results for the three months ended September 30, 2014.

Third Quarter Year-over-year Highlights:

• Net revenues increased 9.7% to $35.0 billion
• Operating profit increased 4.3% to $2.2 billion
• Adjusted EPS of $0.88 and GAAP diluted EPS from continuing operations of $0.81, both of which include a $0.27 per share loss on early extinguishment of debt
• Adjusted EPS increased 9.0% to $1.15, excluding the loss on early extinguishment of debt in 2014 and a legal settlement gain in 2013

Year-to-date Highlights:

• Generated free cash flow of $3.6 billion
• Cash flow from operations of $4.7 billion

2014 Guidance:

• Full-year Adjusted EPS range narrowed to $4.47 to $4.50; excluding the $0.27 per share loss on early extinguishment of debt
• GAAP diluted EPS from continuing operations of $3.93 to $3.96
• Provided fourth quarter Adjusted EPS guidance of $1.18 to $1.21 and GAAP diluted EPS from continuing operations guidance of $1.12 to $1.15
• Full year free cash flow range raised to $5.7 to $6.0 billion; cash flow from operations raised to $7.4 to $7.7 billion

Revenues

Net revenues for the three months ended September 30, 2014, increased 9.7%, or approximately $3.1 billion, to $35.0 billion compared to the three months ended September 30, 2013.

Revenues in the Pharmacy Services Segment increased 15.7%, or $3.1 billion, to $22.5 billion in the three months ended September 30, 2014. The increase was driven by growth in specialty pharmacy including the acquisition of Coram and the impact of Specialty Connect^®, as well as increased volume in pharmacy network claims. Pharmacy network claims processed during the three months ended September 30, 2014 increased 4.3% to 209.6 million compared to 200.9 million in the prior year. The increase in the pharmacy network claim volume was primarily due to net new business and growth in Managed Medicaid, partially offset by a decrease in Medicare Part D claims. Mail choice claims processed during the three months ended September 30, 2014 decreased 1.3% to 20.7 million, compared to 21.0 million in the prior year. The decrease in mail choice claims was driven by a decline in traditional mail volumes, which was partially offset by growth in our Maintenance Choice^® program.

Revenues in the Retail Pharmacy Segment increased 3.1%, or $501 million, to $16.7 billion in the three months ended September 30, 2014. Same store sales increased 2.0% versus the third quarter of last year, with pharmacy same store sales up 4.8% and front store same store sales down 4.5%. Front store same store sales would have been approximately 480 basis points higher if tobacco and the estimated associated basket sales were excluded from the three months ended September 30, 2014 and 2013. Front store same store sales were negatively impacted by softer customer traffic, partially offset by an increase in basket size. Pharmacy same store prescription volumes rose 5.1% on a 30-day equivalent basis. Pharmacy same store sales were negatively impacted by approximately 190 basis points from recent generic drug introductions and by approximately 190 basis points from the implementation of Specialty Connect. Specialty Connect transitioned all specialty prescriptions to the Pharmacy Services Segment, as they are being processed through the Company's specialty mail order pharmacies. The implementation of Specialty Connect had a greater effect on revenues than prescription volumes due to the higher dollar value of specialty products.

For the three months ended September 30, 2014, the generic dispensing rate increased approximately 180 basis points in both the Pharmacy Services Segment and Retail Pharmacy Segment, to 82.5% and 83.3%, respectively, compared to the prior year.

Operating Profit and Net Income

Operating profit for the Pharmacy Services and Retail Pharmacy segments for the three months ended September 30, 2014, increased 7.3% and 4.3%, respectively. Both segments benefited from the impact of increased generic drugs dispensed, which improved operating margins. The Pharmacy Services Segment was also positively impacted by growth in specialty pharmacy and favorable purchasing economics, partially offset by price compression. The Retail Pharmacy Segment was also positively impacted by growth of prescription volumes combined with an improved pharmacy margin rate, partially offset by the loss of sales from tobacco and the associated basket as well as incremental store operating costs associated with operating more stores.

Net income for the three months ended September 30, 2014, decreased 24.1%, or approximately $301 million, to approximately $0.9 billion, primarily due to a $521 million pre-tax loss ($0.27 per share) on the early extinguishment of debt. Excluding the loss on early extinguishment of debt and a $72 million pre-tax gain ($0.04 per share) from a legal settlement in 2013, net income increased 5.0%⁽¹⁾. Adjusted earnings per share (Adjusted EPS) for the three months ended September 30, 2014 and 2013, was $0.88 and $1.09, respectively. Excluding the 2014 loss on early extinguishment of debt and the 2013 gain from the legal settlement, Adjusted EPS increased 9.0% to $1.15. Adjusted EPS in the three months ended September 30, 2014 and 2013, excludes $126 million and $124 million, respectively, of intangible asset amortization related to acquisition activity. GAAP earnings per diluted share for the three months ended September 30, 2014 and 2013, was $0.81 and $1.02, respectively.

President and Chief Executive Officer Larry Merlo stated, "I'm very pleased with our strong results in the third quarter, which reflect better-than-expected revenue growth across the enterprise and expanding retail gross margins. The 2015 PBM selling season continued to be highly successful with a significant number of new business wins across all lines of business. We also continued to deliver substantial free cash flow, enabling us to return more than $3.7 billion to our shareholders year to date. We are well on track to return more than $5 billion to our shareholders through dividends and share repurchases for the full year 2014."

Guidance

The Company narrowed its earnings guidance range for the full year 2014. The Company now expects to deliver Adjusted EPS of $4.47 to $4.50, from $4.43 to $4.51, excluding the $0.27 per share loss on early extinguishment of debt. GAAP diluted EPS from continuing operations is expected to be $3.93 to $3.96, including the loss on the early extinguishment of debt. The Company raised its 2014 free cash flow guidance range to $5.7 billion to $6.0 billion, from $5.5 billion to $5.8 billion, and raised the 2014 cash flow from operations range to $7.4 billion to $7.7 billion, from $7.2 billion to $7.5 billion. The Company expects to deliver Adjusted EPS of $1.18 to $1.21 and GAAP diluted EPS from continuing operations of $1.12 to $1.15 in the fourth quarter of 2014.

Real Estate Program

During the three months ended September 30, 2014, the Company opened 45 new and acquired 33 retail drugstores, and closed four retail drugstores. In addition, the Company relocated 13 retail drugstores. As of September 30, 2014, the Company operated 7,935 locations in 47 states, the District of Columbia, Puerto Rico and Brazil. These locations included 7,779 retail drugstores, 936 health care clinics, 17 onsite pharmacies, 26 retail specialty pharmacy stores, 11 specialty mail order pharmacies, four mail service dispensing pharmacies, and 84 branches and six centers of excellence for infusion and enteral services.

Teleconference and Webcast

The Company will be holding a conference call today for the investment community at 8:30 am (EST) to discuss its quarterly results. An audio webcast of the call will be broadcast simultaneously for all interested parties through the Investor Relations section of the CVS Health website. 

SOURCE CVS Health Corporation