CVS CVS Health Corporation

(1)

Excluding $21 million of pre-tax ($13 million after-tax) acquisition-related transaction costs and $36 million of pre-tax ($22 million after-tax) acquisition-related financing costs for the three months ended June 30, 2015, net income increased $61 million or 4.9% from $1,246 million for the three months ended June 30, 2014 to $1,307 million for the three months ended June 30, 2015.

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions, except per share amounts

2015

2014

2015

2014

Net revenues

$

37,169

$

34,602

$

73,501

$

67,291

Cost of revenues

30,767

28,278

60,935

55,025

Gross profit

6,402

6,324

12,566

12,266

Operating expenses

4,140

4,116

8,172

8,034

Operating profit

2,262

2,208

4,394

4,232

Interest expense, net

166

158

300

316

Income before income tax provision

2,096

2,050

4,094

3,916

Income tax provision

824

804

1,601

1,541

Net income

$

1,272

$

1,246

$

2,493

$

2,375

Net income per share:

Basic

$

1.13

$

1.07

$

2.20

$

2.03

Diluted

$

1.12

$

1.06

$

2.19

$

2.01

Weighted average shares outstanding:

Basic

1,124

1,165

1,126

1,172

Diluted

1,132

1,174

1,134

1,182

Dividends declared per share

$

0.350

$

0.275

$

0.700

$

0.550

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

June 30,

December 31,

In millions, except per share amounts

2015

2014

Assets:

Cash and cash equivalents

$

1,244

$

2,481

Short-term investments

160

34

Accounts receivable, net

10,892

9,687

Inventories

12,384

11,930

Deferred income taxes

989

985

Other current assets

732

866

Total current assets

26,401

25,983

Property and equipment, net

9,019

8,843

Goodwill

28,122

28,142

Intangible assets, net

9,683

9,774

Other assets

1,443

1,445

Total assets

$

74,668

$

74,187

Liabilities:

Accounts payable

$

6,370

$

6,547

Claims and discounts payable

6,961

5,404

Accrued expenses

5,543

5,816

Short-term debt

1,488

685

Current portion of long-term debt

24

575

Total current liabilities

20,386

19,027

Long-term debt

11,633

11,630

Deferred income taxes

4,026

4,036

Other long-term liabilities

1,490

1,531

Commitments and contingencies

—

—

Shareholders' equity:

CVS Health shareholders' equity:

Preferred stock, par value $0.01: 0.1 shares authorized; none issued or outstanding

—

—

Common stock, par value $0.01: 3,200 shares authorized; 1,697 shares issued and 1,118

shares outstanding at June 30, 2015 and 1,691 shares issued and 1,140 shares

outstanding at December 31, 2014

17

17

Treasury stock, at cost: 578 shares at June 30, 2015 and 550 shares at December 31, 2014

(26,988)

(24,078)

Shares held in trust: 1 share at June 30, 2015 and December 31, 2014

(31)

(31)

Capital surplus

30,840

30,418

Retained earnings

33,544

31,849

Accumulated other comprehensive income (loss)

(255)

(217)

Total CVS Health shareholders' equity

37,127

37,958

Noncontrolling interest

6

5

Total shareholders' equity

37,133

37,963

Total liabilities and shareholders' equity

$

74,668

$

74,187

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended

June 30,

In millions

2015

2014

Cash flows from operating activities:

Cash receipts from customers

$

71,014

$

62,932

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(58,129)

(50,268)

Cash paid to other suppliers and employees

(7,935)

(7,787)

Interest received

9

6

Interest paid

(311)

(331)

Income taxes paid

(1,627)

(1,483)

Net cash provided by operating activities

3,021

3,069

Cash flows from investing activities:

Purchases of property and equipment

(942)

(891)

Proceeds from sale-leaseback transactions

34

5

Proceeds from sale of property and equipment and other assets

14

7

Acquisitions (net of cash acquired) and other investments

(112)

(2,248)

Purchase of available-for-sale investments

(124)

(161)

Sale or maturity of available-for-sale investments

40

103

Net cash used in investing activities

(1,090)

(3,185)

Cash flows from financing activities:

Increase in short-term debt

803

—

Repayments of long-term debt

(550)

(41)

Dividends paid

(794)

(647)

Proceeds from exercise of stock options

211

266

Excess tax benefits from stock-based compensation

97

65

Repurchase of common stock

(2,934)

(2,001)

Net cash used in financing activities

(3,167)

(2,358)

Effect of exchange rates on cash and cash equivalents

(1)

(3)

Net decrease in cash and cash equivalents

(1,237)

(2,477)

Cash and cash equivalents at the beginning of the period

2,481

4,089

Cash and cash equivalents at the end of the period

$

1,244

$

1,612

Reconciliation of net income to net cash provided by operating activities:

Net income

$

2,493

$

2,375

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

Depreciation and amortization

978

965

Stock-based compensation

88

77

Deferred income taxes and other non-cash items

6

44

Change in operating assets and liabilities, net of effects of acquisitions:

Accounts receivable, net

(1,211)

(584)

Inventories

(465)

(235)

Other current assets

131

(74)

Other assets

(48)

(23)

Accounts payable and claims and discounts payable

1,383

521

Accrued expenses

(241)

33

Other long-term liabilities

(93)

(30)

Net cash provided by operating activities

$

3,021

$

3,069

Adjusted Earnings Per Share

(Unaudited)

For internal comparisons, management finds it useful to assess year-over-year performance by adjusting diluted earnings per share for amortization, which primarily relates to acquisition activities.

The Company defines adjusted earnings per share as income before income tax provision plus amortization, less adjusted income tax provision and other, which is comprised of earnings allocated to participating securities, divided by the weighted average diluted shares outstanding.

The following is a reconciliation of income before income tax provision to adjusted earnings per share:

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions, except per share amounts

2015

2014

2015

2014

Income before income tax provision⁽¹⁾

$

2,096

$

2,050

$

4,094

$

3,916

Amortization

131

133

260

264

Adjusted income before income tax provision

2,227

2,183

4,354

4,180

Adjusted income tax provision and other⁽²⁾

882

856

1,714

1,645

Adjusted net income

$

1,345

$

1,327

$

2,640

$

2,535

Weighted average diluted shares outstanding

1,132

1,174

1,134

1,182

Adjusted earnings per share

$

1.19

$

1.13

$

2.33

$

2.15

Adjustments for acquisition-related costs:

Add back: Per share acquisition-related transaction costs recorded during the three and six months ended June 30, 2015⁽¹⁾

0.01

—

0.01

—

Add back: Per share acquisition-related financing costs recorded during the three and six months ended June 30, 2015⁽¹⁾

0.02

—

0.02

—

Adjusted earnings per share (excluding acquisition-related transaction and financing costs)

$

1.22

$

1.13

$

2.36

$

2.15

(1)

Includes $21 million of acquisition-related transaction costs and $36 million of acquisition-related financing costs (for a total impact of approximately $0.03 per diluted share) during the three and six months ended June 30, 2015 related to the proposed acquisitions of Omnicare Inc. and the pharmacies and clinics of Target Corporation. Excluding these items, Adjusted EPS for the three and six months ended June 30, 2015 was $1.22 and $2.36, respectively, an increase of 7.7% and 9.9%, respectively, from the prior year.

(2)

The adjusted income tax provision is computed using the effective income tax rate computed from the condensed consolidated statement of income. "Other" includes earnings allocated to participating securities of $7 million and $12 million for the three and six months ended June 30, 2015, respectively.

Free Cash Flow

(Unaudited)

The Company defines free cash flow as net cash provided by operating activities less net additions to properties and equipment (i.e., additions to property and equipment plus proceeds from sale-leaseback transactions).

The following is a reconciliation of net cash provided by operating activities to free cash flow:

Six Months Ended

June 30,

In millions

2015

2014

Net cash provided by operating activities⁽¹⁾

$

3,021

$

3,069

Subtract: Additions to property and equipment

(942)

(891)

Add: Proceeds from sale-leaseback transactions

34

5

Free cash flow

$

2,113

$

2,183

(1)

Cash provided by operating activities for the six months ended June 30, 2015 includes $21 million of pre-tax acquisition-related transaction costs ($13 million after-tax).

Supplemental Information

(Unaudited)

The Company evaluates its Pharmacy Services and Retail Pharmacy Segment performance based on net revenue, gross profit and operating profit before the effect of nonrecurring charges and gains and certain intersegment activities. The Company evaluates the performance of its Corporate Segment based on operating expenses before the effect of nonrecurring charges and gains and certain intersegment activities. The following is a reconciliation of the Company's segments to the accompanying condensed consolidated financial statements:

In millions

Pharmacy

Services

Segment⁽¹⁾

Retail

Pharmacy

Segment

Corporate

Segment

Intersegment

Eliminations⁽²⁾

Consolidated

Totals

Three Months Ended

June 30, 2015:

Net revenues

$

24,442

$

17,242

$

—

$

(4,515)

$

37,169

Gross profit

1,241

5,322

—

(161)

6,402

Operating profit (loss)⁽³⁾

940

1,681

(215)

(144)

2,262

June 30, 2014:

Net revenues

21,836

16,871

—

(4,105)

34,602

Gross profit

1,195

5,299

—

(170)

6,324

Operating profit (loss)

878

1,705

(205)

(170)

2,208

Six Months Ended

June 30, 2015:

Net revenues

48,321

34,193

—

(9,013)

73,501

Gross profit

2,267

10,617

—

(318)

12,566

Operating profit (loss)⁽³⁾

1,675

3,408

(404)

(285)

4,394

June 30, 2014:

Net revenues

42,031

33,351

—

(8,091)

67,291

Gross profit

2,129

10,483

—

(346)

12,266

Operating profit (loss)

1,518

3,455

(395)

(346)

4,232

(1)

Net revenues of the Pharmacy Services Segment include approximately $2.2 billion and $2.0 billion of retail co-payments for the three months ended June 30, 2015 and 2014, respectively, as well as $4.7 billion and $4.2 billion of retail co-payments for the six months ended June 30, 2015 and 2014, respectively.

(2)

Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services Segment customers use Retail Pharmacy Segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue on a stand-alone basis, and (ii) Intersegment revenues, gross profit and operating profit that occur when Pharmacy Services Segment customers, through the Company's intersegment activities (such as the Maintenance Choice^® program), elect to pick-up their maintenance prescriptions at Retail Pharmacy Segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. The following amounts are eliminated in consolidation in connection with the intersegment activity described in item (ii) above: net revenues of $1.2 billion for both the three months ended June 30, 2015 and 2014, and $2.4 billion and $2.3 billion for the six months ended June 30, 2015 and 2014, respectively; gross profit of $161 million and $170 million for the three months ended June 30, 2015 and 2014, respectively, and $318 million and $346 million for the six months ended June 30, 2015 and 2014, respectively; and operating profit of $144 million and $170 million for the three months ended June 30, 2015 and 2014, respectively, and $285 million and $346 million for the six months ended June 30, 2015 and 2014, respectively.

(3)

The Corporate Segment operating loss includes $21 million of acquisition-related transaction costs for the three and six months ended June 30, 2015.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

The following table summarizes the Pharmacy Services Segment's performance for the respective periods:

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions

2015

2014

2015

2014

Net revenues

$

24,442

$

21,836

$

48,321

$

42,031

Gross profit

1,241

1,195

2,267

2,129

Gross profit % of net revenues

5.1

%

5.5

%

4.7

%

5.1

%

Operating expenses

301

317

592

611

Operating expense % of net revenues

1.2

%

1.5

%

1.2

%

1.5

%

Operating profit

940

878

1,675

1,518

Operating profit % of net revenues

3.8

%

4.0

%

3.5

%

3.6

%

Net revenues⁽¹⁾:

Mail choice⁽²⁾

$

9,107

$

7,753

$

17,857

$

14,587

Pharmacy network⁽³⁾

15,267

14,025

30,326

27,327

Other

68

58

138

117

Pharmacy claims processed⁽¹⁾:

Total

250.1

230.9

501.3

458.7

Mail choice⁽²⁾

21.3

20.5

41.7

40.3

Pharmacy network⁽³⁾

228.8

210.4

459.6

418.4

Generic dispensing rate⁽¹⁾:

Total

83.9

%

82.4

%

83.7

%

82.0

%

Mail choice⁽²⁾

76.3

%

74.6

%

76.2

%

72.5

%

Pharmacy network⁽³⁾

84.6

%

83.2

%

84.4

%

83.0

%

Mail choice penetration rate

20.7

%

21.6

%

20.2

%

21.4

%

(1)

Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice, which are included within the mail choice category.

(2)

Mail choice is defined as claims filled at a Pharmacy Services mail facility, which include specialty mail claims, as well as 90-day claims filled at retail under the Maintenance Choice program.

(3)

Pharmacy network is defined as claims filled at retail pharmacies, including our retail drugstores, but excluding Maintenance Choice activity.

Supplemental Information

(Unaudited)

Retail Pharmacy Segment

The following table summarizes the Retail Pharmacy Segment's performance for the respective periods:

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions

2015

2014

2015

2014

Net revenues

$

17,242

$

16,871

$

34,193

$

33,351

Gross profit

5,322

5,299

10,617

10,483

Gross profit % of net revenues

30.9%

31.4%

31.0%

31.4%

Operating expenses

3,641

3,594

7,209

7,028

Operating expense % of net revenues

21.1%

21.3%

21.1%

21.1%

Operating profit

1,681

1,705

3,408

3,455

Operating profit % of net revenues

9.7%

10.1%

10.0%

10.4%

Retail prescriptions filled (90 Day = 3 Rx) ⁽¹⁾

244.1

230.3

485.5

457.4

Net revenue increase (decrease):

Total

2.2%

4.5%

2.5%

3.6%

Pharmacy

5.2%

5.4%

5.2%

4.8%

Front store

(5.1)%

1.1%

(4.4)%

(0.6)%

Total prescription volume (90 Day = 3 Rx) ⁽¹⁾

6.0%

4.8%

6.1%

3.8%

Same store increase (decrease)⁽²⁾:

Total sales

0.5%

3.3%

0.8%

2.4%

Pharmacy sales

4.1%

5.0%

4.2%

4.4%

Front store sales⁽³⁾

(7.8)%

(0.4)%

(7.0)%

(2.1)%

Prescription volume (90 Day = 3 Rx) ⁽¹⁾

4.8%

3.9%

4.9%

3.0%

Generic dispensing rate

85.0%

83.5%

84.7%

83.2%

Pharmacy % of total revenues

71.6%

69.6%

71.6%

69.8%

Third party % of pharmacy revenue

98.8%

98.7%

98.7%

98.5%

(1)

Includes the adjustment to convert 90-day, non-specialty prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

(2)

Same store sales exclude revenues from MinuteClinic and stores in Brazil.

(3)

On a comparable basis, front store same store sales would have been approximately 780 and 790 basis points higher for the three and six months ended June 30, 2015, respectively, if tobacco and the estimated associated basket sales were excluded from the three and six months ended June 30, 2014.

Adjusted Earnings Per Share Guidance

(Unaudited)

The following reconciliation of estimated income before income tax provision to estimated adjusted earnings per share contains forward-looking information. All forward-looking information involves risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking information for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q. For internal comparisons, management finds it useful to assess year-over-year performance by adjusting diluted earnings per share for amortization, which primarily relates to acquisition activities.

In millions, except per share amounts

Year Ending

December 31, 2015

Income before income tax provision^(2)(3)(4)

$

8,638

$

8,776

Amortization

522

521

Adjusted income before income tax provision

9,160

9,297

Adjusted income tax provision and other⁽¹⁾

3,622

3,676

Adjusted net income

$

5,538

$

5,621

Weighted average diluted shares outstanding

1,126

1,126

Adjusted earnings per share

$

4.92

$

4.99

Adjustments for acquisition-related costs:

Add back: Per share acquisition-related transaction and financing costs recorded during the six months ended June 30, 2015⁽²⁾

0.03

0.03

Add back: Per share acquisition-related transaction and financing costs estimated from July 1, 2015 to December 31, 2015⁽³⁾⁽⁴⁾

0.16

0.16

Adjusted earnings per share (excluding acquisition-related transaction and financing costs)

$

5.11

$

5.18

In millions, except per share amounts

Three Months Ending

September 30, 2015

Income before income tax provision

$

2,103

$

2,165

Amortization

131

131

Adjusted income before income tax provision

2,234

2,296

Adjusted income tax provision and other⁽¹⁾

889

914

Adjusted net income

$

1,345

$

1,382

Weighted average diluted shares outstanding

1,122

1,122

Adjusted earnings per share

$

1.20

$

1.23

Adjustments for acquisition-related costs:

Add back: Financing costs estimated for the third quarter⁽⁵⁾

0.07

0.07

Adjusted earnings per share (excluding acquisition-related financing costs)

$

1.27

$

1.30

(1)

The adjusted income tax provision is computed using the effective income tax rate from the consolidated statement of income. Other includes earnings allocated to participating securities.

(2)

During the three and six months ended June 30, 2015, the Company recorded $21 million of acquisition-related transaction costs and $36 million of acquisition-related financing costs related to the proposed acquisitions of Omnicare, Inc. and the pharmacies and clinics of Target Corporation. The total impact of these costs was approximately $0.03 per share.

(3)

The acquisition-related transaction costs for the proposed acquisition of Omnicare, Inc. for the period from July 1, 2015 through December 31, 2015 are estimated to be $0.03 per share. Depending on the timing of the close of the proposed acquisition of the pharmacies and clinics of Target Corporation, there could be another $0.02 of transaction costs.

(4)

The acquisition-related financing costs for the period from July 1, 2015 to December 31, 2015 are estimated to be $0.13 per share.

(5)

The acquisition-related financing costs for the three months ending September 30, 2015 are estimated to be $0.07 per share.

Free Cash Flow Guidance

(Unaudited)

The following reconciliation of net cash provided by operating activities to free cash flow contains forward-looking information. All forward-looking information involves risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking information for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q. For internal comparisons, management finds it useful to assess year-over-year cash flow performance by adjusting cash provided by operating activities, by capital expenditures and proceeds from sale-leaseback transactions.

In millions

Year Ending

December 31, 2015

Net cash provided by operating activities

$

7,550

$

7,949

Subtract: Additions to property and equipment                              

(2,300)

(2,200)

Add: Proceeds from sale-leaseback transactions

600

500

Free cash flow

$

5,850

$

6,249