CVS
$81.06
CVS
$1.23
1.54%
Earnings Details
3rd Quarter September 2018
Tuesday, November 6, 2018 6:55:00 AM
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Summary

CVS Misses

CVS (CVS) reported 3rd Quarter September 2018 earnings of $1.73 per share on revenue of $47.3 billion. The consensus earnings estimate was $1.71 per share on revenue of $47.2 billion. The Earnings Whisper number was $1.74 per share. Revenue grew 2.4% on a year-over-year basis.

The company said it continues to expect 2018 earnings of $6.98 to $7.08 per share. The current consensus earnings estimate is $7.04 per share for the year ending December 31, 2018.

CVS Health Corp iis an integrated pharmacy health care provider. The Company has three segments: Pharmacy Services, Retail Pharmacy and Corporate.

Results
Reported Earnings
$1.73
Earnings Whisper
$1.74
Consensus Estimate
$1.71
Reported Revenue
$47.27 Bil
Revenue Estimate
$47.19 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

CVS Health Reports Third Quarter Results

WOONSOCKET, R.I., Nov. 6, 2018 /PRNewswire/ --

Third Quarter Year-over-Year Highlights:

  • Net revenues increased 2.4% to $47.3 billion
  • Same store prescription volume growth of 9.2%
  • Pharmacy Services claims growth of 5.7%
  • GAAP diluted EPS from continuing operations of $1.36
  • Adjusted EPS of $1.73

Year-to-date Highlights:

  • Generated cash flow from operations of $6.4 billion; free cash flow of $4.9 billion

Full Year Guidance:

  • GAAP operating profit decline of 39% to 41%, reflecting goodwill impairment in Q2
  • Adjusted operating profit change of down 0.75% to up 0.75%
  • GAAP diluted EPS from continuing operations of $1.40 to $1.50
  • Adjusted EPS of $6.98 to $7.08
  • Cash flow from operations of approximately $9.0 billion; free cash flow of approximately $7.0 billion

CVS Health Corporation (NYSE: CVS) today announced operating results for the three and nine months ended September 30, 2018.

President and Chief Executive Officer Larry Merlo stated, "Strong revenue and adjusted EPS, along with significant cash flow year-to-date, demonstrate our success in driving value. Our year-to-date results continue to validate our confidence in the strength of our model. As we approach the closing of our transformative acquisition of Aetna, our integration teams are making great progress to assure that once final approvals are obtained, we can begin to execute on our integration plans."

Mr. Merlo continued, "Given CVS Health's performance year-to-date and our confidence in our expectations for the remainder of this year, we are confirming our stand-alone consolidated operating profit, adjusted EPS and free cash flow guidance for 2018. While CVS and Aetna remain separate companies today, the performance of both companies highlights the very solid financial foundation on which we'll build our revolutionary new model that will transform the health care experience for consumers and, in the process, deliver substantial value for our shareholders."

Revenues

Net revenues for the three months ended September 30, 2018, increased 2.4%, or $1.1 billion, to approximately $47.3 billion, up from $46.2 billion in the three months ended September 30, 2017.

Revenues in the Pharmacy Services Segment increased 2.6% to approximately $33.8 billion in the three months ended September 30, 2018. This increase was primarily driven by growth in pharmacy network and mail choice claim volume as well as brand inflation, partially offset by continued price compression. Pharmacy network claims processed during the three months ended September 30, 2018 increased 5.4%, on a 30-day equivalent basis, to 394.5 million, compared to 374.2 million in the same quarter of the prior year. The increase in pharmacy network claim volume was primarily due to an increase in net new business. On a 30-day equivalent basis, mail choice claims processed during the three months ended September 30, 2018 increased 7.4% to 71.8 million, compared to 66.9 million in the same quarter of the prior year. The increase in mail choice claim volume was primarily driven by the continued adoption of our Maintenance Choice® offerings and an increase in specialty pharmacy claims. 

Revenues in the Retail/LTC Segment increased 6.4% to approximately $20.9 billion in the three months ended September 30, 2018. The increase was primarily due to an increase in same store prescription volume of 9.2%, on a 30-day equivalent basis, due to continued adoption of our Patient Care Programs, alliances with PBMs and health plans, our inclusion in a number of additional Medicare Part D networks this year, and brand inflation. This increase was partially offset by continued reimbursement pressure.

Same store sales increased 6.7% and pharmacy same store sales increased 8.7% in the three months ended September 30, 2018. The increase in pharmacy same store sales was principally driven by the increase in pharmacy same store prescription volumes described above, partially offset by continued reimbursement pressure and a negative impact of approximately 190 basis points due to recent generic introductions.

Front store same store sales increased 0.8% in the three months ended September 30, 2018, compared to the same quarter of the prior year. The increase in front store same store sales continued to benefit from strength in our consumer health care and beauty care categories.

For the three months ended September 30, 2018, the generic dispensing rate increased approximately 20 basis points to 87.2% in our Pharmacy Services Segment and increased approximately 10 basis points to 87.3% in our Retail/LTC Segment, compared to the same quarter in the prior year.

Operating Profit

Consolidated operating profit for the three months ended September 30, 2018 decreased $146 million, or 5.8%, to $2.4 billion. The decrease in operating profit was driven by a $64 million increase in acquisition-related transaction and integration costs, an increase in operating expenses due to the investment of savings from the Tax Cuts and Jobs Act ("TCJA") in wages and benefits, as well as an increase in operating expenses associated with growth in the business. These increases were partially offset by improvements in gross profit dollars in both segments. The improvement in gross profit dollars in our Pharmacy Services Segment was primarily due to increased claims volume and improved purchasing economics, partially offset by continued pricing compression. The improvement in the Retail/LTC Segment gross profit dollars was primarily driven by increased volume, improved purchasing economics, partially offset by continued reimbursement pressure.

Net Income and Earnings Per Share

Net income for the three months ended September 30, 2018 increased $105 million, or 8.2%, to $1.4 billion.  The increase is primarily due to the $268 million decline in the income tax provision partially offset by the decline in pre-tax income of $163 million. Our effective income tax rate was 26.8% for the three months ended September 30, 2018, compared to 37.7% for the three months ended September 30, 2017. The difference in the effective income tax rate was primarily due to the enactment of the TCJA in December 2017, which lowered the 2018 federal corporate income tax rate from 35% to 21%.

The decrease in pre-tax income of $163 million was due to the $146 million decrease in operating profit discussed above and the $208 million increase in interest expense primarily due to the net interest expense on the 2018 financing associated with the proposed acquisition of Aetna Inc. ("Aetna"). The impact of these decreases in pre-tax income were mitigated by the absence in the current year of $187 million in losses on settlements of defined benefit pension plans incurred in the prior year that are included in other expense.

GAAP earnings per diluted share from continuing operations ("GAAP EPS") for the three months ended September 30, 2018 and 2017, was $1.36 and $1.26, respectively. Adjusted earnings per share ("Adjusted EPS") for the three months ended September 30, 2018 and 2017 was $1.73 and $1.50, respectively. Further detail is shown in the Adjusted EPS reconciliation later in this release.

Guidance

The Company continues to expect full year GAAP consolidated operating profit to decline 39% to 41%, reflecting the goodwill impairment in Q2, and the adjusted consolidated operating profit change for the full year to be down 0.75% to up 0.75%. The Company continues to expect to deliver GAAP diluted EPS of $1.40 to $1.50 and Adjusted EPS of $6.98 to $7.08.

In addition, the Company expects cash flow from operations of approximately $9.0 billion and free cash flow of approximately $7.0 billion.

Non-GAAP Financial Information

Adjusted Operating Profit, Adjusted EPS, and Free Cash Flow are non-GAAP financial measures. Reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP financial measure are presented in the tables at the end of this press release.

Aetna Transaction Progress

The regulatory approval process for the previously announced acquisition of Aetna by CVS Health is proceeding within a timeframe consistent with expectations. On October 10, 2018, the Company and Aetna entered into a consent decree with the United States Department of Justice ("DOJ") that allows the Company's proposed acquisition of Aetna to proceed, provided Aetna agreed to sell its individual standalone Medicare Part D prescription drug plans. As part of the agreement reached with the DOJ, Aetna entered into an asset purchase agreement with a subsidiary of WellCare Health Plans, Inc. for the divestiture of Aetna's standalone Medicare Part D prescription drug plans, which have an aggregate of approximately 2.2 million members. Closing of the divestiture is subject to the closing of the Company's proposed acquisition of Aetna. There are no remaining antitrust impediments to closing the proposed acquisition of Aetna.

All of the required change in control filings were submitted to 28 state insurance departments in January 2018. To date, the Company has received approval from 23 of the 28 states and we are well down the line with the remaining five. The transaction is expected to close prior to Thanksgiving.

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 at http://investors.cvshealth.com. This webcast will be archived and available on the website for a one-year period following the conference call.

About the Company

CVS Health is a pharmacy innovation company helping people on their path to better health. Through its more than 9,800 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 93 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year, expanding specialty pharmacy services, and a leading stand-alone Medicare Part D prescription drug plan, the Company enables people, businesses and communities to manage health in more affordable and effective ways. This unique integrated model increases access to quality care, delivers better health outcomes and lowers overall health care costs. Find more information about how CVS Health is shaping the future of health at https://www.cvshealth.com.

No Offer or Solicitation

This communication is for informational purposes only and not intended to and does not constitute an offer to subscribe for, buy or sell, the solicitation of an offer to subscribe for, buy or sell or an invitation to subscribe for, buy or sell any securities or the solicitation of any vote or approval in any jurisdiction pursuant to or in connection with the proposed transaction or otherwise, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in contravention of applicable law. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended, and otherwise in accordance with applicable law.

Additional Information and Where to Find It

In connection with the proposed transaction between CVS Health and Aetna, CVS Health filed a registration statement on Form S-4 with the Securities and Exchange Commission (the "SEC"), which includes a joint proxy statement of CVS Health and Aetna that also constitutes a prospectus of CVS Health. The registration statement was declared effective by the SEC on February 9, 2018, CVS Health and Aetna commenced mailing the definitive joint proxy statement/prospectus to stockholders of CVS Health and shareholders of Aetna on or about February 12, 2018, and the special meetings of the stockholders of CVS Health and the shareholders of Aetna were held on March 13, 2018. INVESTORS AND SECURITY HOLDERS OF CVS HEALTH AND AETNA ARE URGED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED OR THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain free copies of the registration statement and the definitive joint proxy statement/prospectus and other documents filed with the SEC by CVS Health or Aetna through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with the SEC by CVS Health are available free of charge within the Investors section of CVS Health's Web site at http://www.cvshealth.com/investors or by contacting CVS Health's Investor Relations Department at 800-201-0938. Copies of the documents filed with the SEC by Aetna are available free of charge on Aetna's internet website at http://www.Aetna.com or by contacting Aetna's Investor Relations Department at 860-273-0896.

Cautionary Statement Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a safe harbor for forward-looking statements made by or on behalf of CVS Health or Aetna.  This communication may contain forward-looking statements within the meaning of the Reform Act.  You can generally identify forward-looking statements by the use of forward-looking terminology such as "anticipate," "believe," "can," "continue," "could," "estimate," "evaluate," "expect," "explore," "forecast," "guidance," "intend," "likely," "may," "might," "outlook," "plan," "potential," "predict," "probable," "project," "seek," "should," "view," or "will," or the negative thereof or other variations thereon or comparable terminology.  These forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond CVS Health's and Aetna's control.

Statements in this communication regarding CVS Health and Aetna that are forward-looking, including CVS Health's and Aetna's projections as to the closing date for the pending acquisition of Aetna (the "transaction"), the extent of, and the time necessary to obtain, the regulatory approvals required for the transaction, the anticipated benefits of the transaction, the impact of the transaction on CVS Health's and Aetna's businesses, the expected terms and scope of the expected financing for the transaction, the ownership percentages of CVS Health's common stock of CVS Health stockholders and Aetna shareholders at closing, the aggregate amount of indebtedness of CVS Health following the closing of the transaction, CVS Health's expectations regarding debt repayment and its debt to capital ratio following the closing of the transaction, CVS Health's and Aetna's respective share repurchase programs and ability and intent to declare future dividend payments, the number of prescriptions used by people served by the combined companies' pharmacy benefit business, the synergies from the transaction, and CVS Health's, Aetna's and/or the combined company's future operating results, are based on CVS Health's and Aetna's managements' estimates, assumptions and projections, and are subject to significant uncertainties and other factors, many of which are beyond their control.  In particular, projected financial information for the combined businesses of CVS Health and Aetna is based on estimates, assumptions and projections and has not been prepared in conformance with the applicable accounting requirements of Regulation S-X relating to pro forma financial information, and the required pro forma adjustments have not been applied and are not reflected therein.  None of this information should be considered in isolation from, or as a substitute for, the historical financial statements of CVS Health and Aetna.  Important risk factors related to the transaction could cause actual future results and other future events to differ materially from those currently estimated by management, including, but not limited to:  the timing to consummate the proposed transaction; the risk that a regulatory approval that may be required for the proposed transaction is delayed, is not obtained or is obtained subject to conditions that are not anticipated; the risk that a condition to the closing of the proposed transaction may not be satisfied; the outcome of litigation related to the transaction; the ability to achieve the synergies and value creation contemplated; CVS Health's ability to promptly and effectively integrate Aetna's businesses; and the diversion of and attention of management of both CVS Health and Aetna on transaction-related issues.

In addition, this communication may contain forward-looking statements regarding CVS Health's or Aetna's respective businesses, financial condition and results of operations.  These forward-looking statements also involve risks, uncertainties and assumptions, some of which may not be presently known to CVS Health or Aetna or that they currently believe to be immaterial also may cause CVS Health's or Aetna's actual results to differ materially from those expressed in the forward-looking statements, adversely impact their respective businesses, CVS Health's ability to complete the transaction and/or CVS Health's ability to realize the expected benefits from the transaction.  Should any risks and uncertainties develop into actual events, these developments could have a material adverse effect on the transaction and/or CVS Health or Aetna, CVS Health's ability to successfully complete the transaction and/or realize the expected benefits from the transaction.  Additional information concerning these risks, uncertainties and assumptions can be found in CVS Health's and Aetna's respective filings with the SEC, including the risk factors discussed in "Item 1.A. Risk Factors" in CVS Health's and Aetna's most recent Annual Reports on Form 10-K, as updated by their Quarterly Reports on Form 10-Q and future filings with the SEC.

You are cautioned not to place undue reliance on CVS Health's and Aetna's forward-looking statements.  These forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements.  Neither CVS Health nor Aetna assumes any duty to update or revise forward-looking statements, whether as a result of new information, future events or otherwise, as of any future date.

— Tables Follow —

 

 

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

















Three Months Ended


Nine Months Ended



September 30


September 30

In millions, except per share amounts


2018


2017 (1)


2018


2017 (1)














Net revenues


$

47,269


$

46,181


$

139,670


$

136,380

Cost of revenues



39,941



39,064



118,282



115,766

Gross profit



7,328



7,117



21,388



20,614

Operating expenses:













Goodwill impairments







3,921



135

Other operating expenses



4,975



4,618



14,755



14,070

Operating profit



2,353



2,499



2,712



6,409

Interest expense, net



453



245



1,401



744

Other expense



1



192



7



206

Income before income tax provision



1,899



2,062



1,304



5,459

Income tax provision



509



777



1,478



2,115

Income (loss) from continuing operations



1,390



1,285



(174)



3,344

Loss from discontinued operations, net of tax







(1)



(8)

Net income (loss)



1,390



1,285



(175)



3,336

Net income attributable to noncontrolling interests









(1)

Net income (loss) attributable to CVS Health


$

1,390


$

1,285


$

(175)


$

3,335














Basic earnings (loss) per share:













Income (loss) from continuing operations attributable to CVS Health


$

1.36


$

1.26


$

(0.17)


$

3.26

Loss from discontinued operations attributable to CVS Health


$


$


$


$

(0.01)

Net income (loss) attributable to CVS Health


$

1.36


$

1.26


$

(0.17)


$

3.25

Weighted average shares outstanding



1,020



1,016



1,018



1,022

Diluted earnings (loss) per share:













Income (loss) from continuing operations attributable to CVS Health


$

1.36


$

1.26


$

(0.17)


$

3.25

Loss from discontinued operations attributable to CVS Health


$


$


$


$

(0.01)

Net income (loss) attributable to CVS Health


$

1.36


$

1.26


$

(0.17)


$

3.24

Weighted average shares outstanding



1,022



1,020



1,018



1,026

Dividends declared per share


$

0.50


$

0.50


$

1.50


$

1.50

________________________

(1)

The condensed consolidated statement of operations for the three and nine months ended September 30, 2017 has been retrospectively adjusted to reflect a change to the Company's cost allocation methodology effective January 1, 2018. See supplemental information later in this press release for further discussion.

 

 

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)










September 30


December 31,

In millions, except per share amounts


2018


2017








Assets:







Cash and cash equivalents


$

41,587


$

1,696

Short-term investments



105



111

Accounts receivable, net



14,837



13,181

Inventories



14,818



15,296

Other current assets



634



945

Total current assets



71,981



31,229

Property and equipment, net



10,419



10,292

Goodwill



34,216



38,451

Intangible assets, net



13,166



13,630

Other assets



1,724



1,529

Total assets


$

131,506


$

95,131








Liabilities:







Accounts payable


$

8,813


$

8,863

Claims and discounts payable



12,348



10,355

Accrued expenses



6,160



6,609

Short-term debt





1,276

Current portion of long-term debt



2,139



3,545

Total current liabilities



29,460



30,648

Long-term debt



60,747



22,181

Deferred income taxes



3,052



2,996

Other long-term liabilities



1,625



1,611

   Total liabilities



94,884



57,436








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; 1,717 shares issued and 
     1,019 shares outstanding at September 30, 2018 and 1,712 shares issued and 1,014 
     shares outstanding at December 31, 2017



17



17

Capital surplus



32,360



32,079

Treasury stock, at cost: 697 shares at September 30, 2018 and December 31, 2017



(37,702)



(37,765)

Shares held in trust: 1 share at September 30, 2018 and December 31, 2017



(29)



(31)

Retained earnings



41,843



43,556

Accumulated other comprehensive income (loss)



129



(165)

Total CVS Health shareholders' equity



36,618



37,691

Noncontrolling interests



4



4

Total shareholders' equity



36,622



37,695

Total liabilities and shareholders' equity


$

131,506


$

95,131

 

 

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)










Nine Months Ended



September 30

In millions


2018


2017 (1)

Cash flows from operating activities:







Cash receipts from customers


$

132,275


$

133,055

Cash paid for inventory and prescriptions dispensed by retail network pharmacies



(110,320)



(110,788)

Cash paid to other suppliers and employees



(12,305)



(11,230)

Interest received



406



15

Interest paid



(1,759)



(869)

Income taxes paid



(1,911)



(2,040)

Net cash provided by operating activities



6,386



8,143








Cash flows from investing activities:







Purchases of property and equipment



(1,452)



(1,412)

Proceeds from sale-leaseback transactions





265

Proceeds from sale of property and equipment and other assets



11



20

Acquisitions (net of cash acquired) and other investments



(656)



(461)

Purchase of available-for-sale investments



(57)



Maturity of available-for-sale investments



43



21

Proceeds from sale of subsidiary



725



Net cash used in investing activities



(1,386)



(1,567)








Cash flows from financing activities:







Decrease in short-term debt



(1,276)



(1,764)

Proceeds from issuance of long-term debt



39,376



Repayments of long-term debt



(2,266)



Derivative settlements



446



Repurchase of common stock





(4,361)

Dividends paid



(1,528)



(1,539)

Proceeds from exercise of stock options



214



314

Payments for taxes related to net share settlement of equity awards



(39)



(70)

Other





(1)

Net cash provided by (used in) financing activities



34,927



(7,421)

Effect of exchange rate changes on cash, cash equivalents and restricted cash





Net increase (decrease) in cash, cash equivalents and restricted cash



39,927



(845)

Cash, cash equivalents and restricted cash at the beginning of the period



1,900



3,520

Cash, cash equivalents and restricted cash at the end of the period


$

41,827


$

2,675








Reconciliation of net income (loss) to net cash provided by operating activities:







Net income (loss)


$

(175)


$

3,336

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







Depreciation and amortization



1,911



1,857

Goodwill impairments



3,921



135

Losses on settlements of defined benefit pension plans





187

Stock-based compensation



172



173

Deferred income taxes and other noncash items



296



271

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







Accounts receivable, net



(1,725)



(280)

Inventories



472



620

Other current assets



116



(212)

Other assets



(119)



(15)

Accounts payable and claims and discounts payable



1,839



330

Accrued expenses



(341)



1,670

Other long-term liabilities



19



71

Net cash provided by operating activities


$

6,386


$

8,143

____________________________

(1)

Effective January 1, 2018, the Company adopted Accounting Standards Update 2016-18, Statement of Cash Flows, which requires entities to show the changes in the total of cash, cash equivalents, and restricted cash in the statement of cash flows. The adoption of this standard resulted in a retrospective reclassification of a $41 million restricted cash outflow, which was previously reported in "acquisitions (net of cash acquired) and other investments" within cash flows from investing activities on the Company's condensed consolidated statement of cash flows to "net increase (decrease) in cash, cash equivalents and restricted cash."

 

Non-GAAP Financial Measures

The following provides reconciliations of certain non-GAAP financial measures presented in this Form 8-K to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company is also providing reconciliations of certain non-GAAP information on a prospective basis. The Company uses the non-GAAP measures "Adjusted Operating Profit,"  "Adjusted EPS" and "Free Cash Flow" to assess and analyze underlying business performance and trends. Management believes that providing these non-GAAP measures enhances investors' understanding of the Company's performance.

The Company defines Adjusted Operating Profit as operating profit excluding the impact of certain adjustments such as acquisition-related transaction and integration costs, goodwill impairments, gains and losses on divestitures of subsidiaries, and charges in connection with store rationalization, and any other items specifically identified herein. Management believes that this measure enhances investors' ability to compare past financial performance with its current and expected performance.

The Company defines Adjusted Earnings per Share, or Adjusted EPS, as income from continuing operations excluding the impact of certain adjustments such as the amortization of intangible assets, acquisition-related transaction and integration costs, goodwill impairments, gains and losses on divestitures of subsidiaries, net interest expense on financing associated with proposed acquisitions, losses on settlements of defined benefit pension plans, and charges in connection with store rationalization, and any other items specifically identified herein, divided by the Company's weighted average diluted shares outstanding. Management believes that this measure enhances investors' ability to compare the Company's past financial performance with its current performance.

The Company defines Free Cash Flow as net cash provided by operating activities less net additions to property and equipment (i.e., additions to property and equipment plus proceeds from sale-leaseback transactions). Management uses this non-GAAP financial measure for internal comparisons and finds it useful in assessing year-over-year cash flow performance.

These non-GAAP financial measures are provided as supplemental information to the financial measures presented in this press release that are calculated and presented in accordance with GAAP. Adjusted EPS should be considered in addition to, rather than as a substitute for, income before income tax provision as a measure of our performance. Free Cash Flow should be considered in addition to, rather than as a substitute for, net cash provided by operating activities as a measure of our liquidity. Adjusted Operating Profit should be considered in addition to, rather than a substitute for, operating profit. The Company's definitions of Adjusted EPS, Free Cash Flow and Adjusted Operating Profit may not be comparable to similarly titled measurements reported by other companies.

 

Adjusted Operating Profit

(Unaudited)


The following is a reconciliation of operating profit to Adjusted Operating Profit:
















Three Months Ended


Nine Months Ended



September 30


September 30

In millions


2018


2017


2018


2017














Operating profit


$

2,353


$

2,499


$

2,712


$

6,409

Non-GAAP adjustments:













Acquisition-related transaction and integration costs (1)



70



6



152



31

Goodwill impairments (2)







3,921



135

Loss on divestiture of subsidiary (3)







86



Charges in connection with store rationalization (4)





6





211

Adjusted operating profit


$

2,423


$

2,511


$

6,871


$

6,786

________________________

(1)

In 2018, transaction and integration costs relate to the proposed acquisition of Aetna and the acquisition of Omnicare. In 2017, integration costs relate to the acquisition of Omnicare.

(2)

In 2018, the goodwill impairment relates to the LTC reporting unit within the Retail/LTC Segment. In 2017, the goodwill impairment relates to the RxCrossroads reporting unit within the Retail/LTC Segment.

(3)

Represents the pre-tax loss on the sale of the RxCrossroads subsidiary for $725 million.

(4)

Primarily represents charges for noncancelable lease obligations associated with stores closed in connection with our enterprise streamlining initiative.

 

 

Adjusted Earnings Per Share

(Unaudited)


The following is a reconciliation of income before income tax provision to Adjusted EPS:

















Three Months Ended


Nine Months Ended



September 30


September 30

In millions, except per share amounts


2018


2017


2018


2017














Income before income tax provision


$

1,899


$

2,062


$

1,304


$

5,459

Non-GAAP adjustments:













Amortization of intangible assets



215



205



639



608

Acquisition-related transaction and integration costs (1)



70



6



152



31

Goodwill impairments (2)







3,921



135

Loss on divestiture of subsidiary (3)







86



Net interest expense on financing for the proposed acquisition of Aetna (4)



227





697



Losses on settlements of defined benefit pension plans





187





187

Charges in connection with store rationalization (5)





6





211

Adjusted income before income tax provision



2,411



2,466



6,799



6,631

Adjusted income tax provision (6)



641



935



1,798



2,520

Adjusted income from continuing operations



1,770



1,531



5,001



4,111

Income from continuing operations attributable to noncontrolling interests









(1)

Adjusted income allocable to participating securities



(2)



(3)



(10)



(15)

Adjusted income from continuing operations attributable to CVS Health


$

1,768


$

1,528


$

4,991


$

4,095














Weighted average diluted shares outstanding (7)



1,022



1,020



1,020



1,026

Adjusted EPS


$

1.73


$

1.50


$

4.89


$

3.99

_________________________

(1)

In 2018, transaction and integration costs relate to the proposed acquisition of Aetna and the acquisition of Omnicare. In 2017, integration costs relate to the acquisition of Omnicare.

(2)

In 2018, the goodwill impairment relates to the LTC reporting unit within the Retail/LTC Segment. In 2017, the goodwill impairment relates to the RxCrossroads reporting unit within the Retail/LTC Segment.

(3)

Represents the pre-tax loss on the sale of the RxCrossroads subsidiary for $725 million.

(4)

The three and nine months ended September 30, 2018 include $2 million and $171 million, respectively, of bridge financing costs, plus $434 million and $979 million, respectively, of interest expense on the $40 billion of senior notes issued on March 9, 2018 ("2018 Senior Notes") and the $5 billion term loan facility, less related interest income of $209 million and $453 million, respectively, earned on the proceeds of the 2018 Senior Notes.

(5)

Primarily represents charges for noncancelable lease obligations associated with stores closed in connection with our enterprise streamlining initiative.

(6)

The Company computes its adjusted income tax provision by determining the annual expected effective tax rate after taking into account items excluded from adjusted income before income tax provision. The nature of each of our non-GAAP adjustments are evaluated to determine whether a discrete adjustment should be made to our adjusted income tax provision.

(7)

Adjusted earnings per share for the nine months ended September 30, 2018 is calculated utilizing weighted average diluted shares outstanding, which include 2 million of potential common shares, as the impact of the potential common shares was dilutive. The potential common shares were excluded from the calculation of GAAP loss per share for the nine months ended September 30, 2018, as the shares would have had an anti-dilutive effect as a result of the GAAP net loss incurred.


 

 

Free Cash Flow

(Unaudited)


The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:










Nine Months Ended



September 30

In millions


2018


2017








Net cash provided by operating activities


$

6,386


$

8,143

Subtract: Additions to property and equipment



(1,452)



(1,412)

Add: Proceeds from sale-leaseback transactions





265

Free cash flow


$

4,934


$

6,996


 

Supplemental Information
(Unaudited)

The Company evaluates its Pharmacy Services and Retail/LTC segment performance based on net revenues, 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.

In conjunction with the Company's implementation of a new enterprise resource planning system in the first quarter of 2018, the Company changed the manner in which certain shared functional costs are allocated to its reportable segments. Segment financial information for the three and nine months ended September 30, 2017, has been retrospectively adjusted to reflect this change to the cost allocation methodology as shown below:

 



















Three Months Ended September 30, 2017



Pharmacy 






Intersegment


Consolidated

In millions


Services


Retail/LTC


Corporate


Eliminations


Totals

Cost of revenues, as previously reported


$

31,251


$

13,908





$

(6,104)


$

39,055

Adjustments



13



(4)








9

Cost of revenues, as adjusted


$

31,264


$

13,904





$

(6,104)


$

39,064

















Gross profit, as previously reported


$

1,645


$

5,685





$

(204)


$

7,126

Adjustments



(13)



4








(9)

Gross profit, as adjusted


$

1,632


$

5,689





$

(204)


$

7,117

















Operating expenses, as previously reported


$

292


$

4,132


$

220


$

(17)


$

4,627

Adjustments



13



(24)



2





(9)

Operating expenses, as adjusted


$

305


$

4,108


$

222


$

(17)


$

4,618

















Operating profit (loss), as previously reported


$

1,353


$

1,553


$

(220)


$

(187)


$

2,499

Adjustments



(26)



28



(2)





Operating profit (loss), as adjusted


$

1,327


$

1,581


$

(222)


$

(187)


$

2,499






















Nine Months Ended September 30, 2017



Pharmacy








Intersegment


Consolidated

In millions


Services


Retail/LTC


Corporate


Eliminations


Totals

Cost of revenues, as previously reported


$

92,234


$

41,452





$

(17,947)


$

115,739

Adjustments



39



(12)








27

Cost of revenues, as adjusted


$

92,273


$

41,440





$

(17,947)


$

115,766

















Gross profit, as previously reported


$

4,210


$

17,036





$

(605)


$

20,641

Adjustments



(39)



12








(27)

Gross profit, as adjusted


$

4,171


$

17,048





$

(605)


$

20,614

















Operating expenses, as previously reported


$

938


$

12,661


$

686


$

(53)


$

14,232

Adjustments



37



(55)



(9)





(27)

Operating expenses, as adjusted


$

975


$

12,606


$

677


$

(53)


$

14,205

















Operating profit (loss), as previously reported


$

3,272


$

4,375


$

(686)


$

(552)


$

6,409

Adjustments



(76)



67



9





Operating profit (loss), as adjusted


$

3,196


$

4,442


$

(677)


$

(552)


$

6,409

 

The following is a reconciliation of the Company's segments to the accompanying condensed consolidated financial statements:




















Pharmacy 








Intersegment


Consolidated

In millions


Services(1)


Retail/LTC


Corporate


Eliminations(2)


Totals

Three Months Ended
















September 30, 2018:
















  Net revenues


$

33,763


$

20,856


$


$

(7,350)


$

47,269

  Gross profit



1,737



5,814





(223)



7,328

  Operating profit (loss) (4)(6)



1,345



1,491



(287)



(196)



2,353

September 30, 2017:
















  Net revenues



32,896



19,593





(6,308)



46,181

  Gross profit (5)



1,632



5,689





(204)



7,117

  Operating profit (loss) (3)(4)(6)



1,327



1,581



(222)



(187)



2,499

Nine Months Ended
















September 30, 2018:
















  Net revenues



99,228



61,960





(21,518)



139,670

  Gross profit



4,370



17,642





(624)



21,388

  Operating profit (loss) (3)(4)(6)



3,194



890



(814)



(558)



2,712

September 30, 2017:
















  Net revenues



96,444



58,488





(18,552)



136,380

  Gross profit (5)



4,171



17,048





(605)



20,614

  Operating profit (loss) (3)(4)(6)



3,196



4,442



(677)



(552)



6,409

_________________________

(1)

Net revenues of the Pharmacy Services Segment include approximately $2.7 billion and $2.6 billion of retail co-payments for the three months ended September 30, 2018 and 2017, respectively, as well as $8.8 billion and $8.4 billion of retail co-payments for the nine months ended September 30, 2018 and 2017, respectively.

(2)

Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services Segment and the Retail/LTC Segment. These occur in the following ways: when members of Pharmacy Services Segment clients ("members") fill prescriptions at the Company's retail pharmacies to purchase covered products, when members enrolled in programs such as Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company's retail pharmacies instead of receiving them through the mail, or when members have prescriptions filled at the Company's long-term care pharmacies. When these occur, both the Pharmacy Services and Retail/LTC segments record the revenues, gross profit and operating profit on a stand-alone basis.

(3)

The Retail/LTC Segment operating profit for the nine months ended September 30, 2018 and 2017 include goodwill impairment charges of $3.9 billion related to the LTC reporting unit and $135 million related to the RxCrossroads reporting unit, respectively. The Retail/LTC Segment operating profit for the nine months ended September 30, 2018 also includes an $86 million loss on the divestiture of the RxCrossroads subsidiary. The Retail/LTC Segment operating profit for the three and nine months ended September 30, 2017 also includes $6 million and $211 million, respectively, of charges associated with store closures.

(4)

The Corporate Segment operating loss for the three and nine months ended September 30, 2018 include $66 million and $145 million, respectively, in acquisition-related transaction and integration costs related to the proposed acquisition of Aetna. The Corporate Segment operating loss for the three and nine months ended September 30, 2017 include $3 million reduction in integration costs for a change in estimate related to the acquisition of Omnicare.

(5)

The Retail/LTC Segment gross profit for the three and nine months ended September 30, 2017 include $2 million and $7 million, respectively, of acquisition-related integration costs related to the acquisition of Omnicare.

(6)

The Retail/LTC Segment operating profit for the three months ended September 30, 2018 and 2017 include $4 million and $9 million, respectively, of acquisition-related integration costs. The Retail/LTC Segment operating profit for the nine months ended September 30, 2018 and 2017 include $7 million and $34 million, respectively, of acquisition-related integration costs. The integration costs are related to the acquisition of Omnicare.

 

 

Supplemental Information

(Unaudited)


Pharmacy Services Segment


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




















Three Months Ended


Nine Months Ended



September 30


September 30

In millions


2018


2017


2018


2017

Net revenues


$

33,763



$

32,896



$

99,228



$

96,444


Gross profit



1,737




1,632




4,370




4,171


Gross profit % of net revenues



5.1

%



5.0

%



4.4

%



4.3

%

Operating expenses



392




305




1,176




975


Operating expenses % of net revenues



1.2

%



0.9

%



1.2

%



1.0

%

Operating profit



1,345




1,327




3,194




3,196


Operating profit % of net revenues



4.0

%



4.0

%



3.2

%



3.3

%

Net revenues:

















Mail choice (1)


$

11,812



$

11,590



$

34,807



$

33,950


Pharmacy network (2)(4)



21,183




20,519




61,303




59,447


Other (4)



768




787




3,118




3,047


Pharmacy claims processed (90 Day = 3 prescriptions) (3):

















Total



466.3




441.1




1,405.2




1,323.2


Mail choice (1)



71.8




66.9




213.0




196.2


Pharmacy network (2)



394.5




374.2




1,192.2




1,127.0


Generic dispensing rate (3):

















Total



87.2

%



87.0

%



87.5

%



87.1

%

Mail choice (1)



83.9

%



83.3

%



84.0

%



83.1

%

Pharmacy network (2)



87.8

%



87.7

%



88.1

%



87.8

%

Mail choice penetration rate (3)



15.4

%



15.2

%



15.2

%



14.8

%

_________________________

(1)

Mail choice is defined as claims filled at a Pharmacy Services mail facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at retail, as well as prescriptions filled at our retail pharmacies under the Maintenance Choice® program.

(2)

Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice activity, which is included within the mail choice category. Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including our retail pharmacies and long-term care pharmacies, but excluding Maintenance Choice activity.

(3)

Includes the adjustment to convert 90-day 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.

(4)

Amounts revised for the three and nine months ended September 30, 2017 to reflect the reclassification of Medicare Part D premium revenues from pharmacy network revenues to other revenues.

 

 

Supplemental Information

(Unaudited)


Retail/LTC Segment


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




















Three Months Ended


Nine Months Ended



September 30


September 30

In millions


2018


2017


2018


2017

Net revenues


$

20,856



$

19,593



$

61,960



$

58,488


Gross profit (1)



5,814




5,689




17,642




17,048


Gross profit % of net revenues



27.9

%



29.0

%



28.5

%



29.1

%

Operating expenses (2)(3)



4,323




4,108




16,752




12,606


Operating expenses % of net revenues



20.7

%



21.0

%



27.0

%



21.6

%

Operating profit



1,491




1,581




890




4,442


Operating profit % of net revenues



7.1

%



8.1

%



1.4

%



7.6

%

Net revenues:

















Pharmacy


$

16,123



$

14,868




47,428




43,901


Front Store



4,557




4,469




13,990




13,788


Other



176




256




542




799


Prescriptions filled (90 Day = 3 prescriptions) (4)



331.2




304.0




989.7




908.7


Net revenue increase (decrease):

















Total



6.4

%



(2.7)

%



5.9

%



(2.9)

%

Pharmacy



8.4

%



(2.9)

%



8.0

%



(3.1)

%

Front Store



2.0

%



(2.1)

%



1.5

%



(2.4)

%

Total prescription volume (90 Day = 3 prescriptions) (4)



8.9

%



0.4

%



8.9

%



0.0

%

Same store sales increase (decrease) (5):

















Total



6.7

%



(3.2)

%



6.2

%



(3.5)

%

Pharmacy



8.7

%



(3.4)

%



8.1

%



(3.6)

%

Front Store



0.8

%



(2.8)

%



0.5

%



(3.3)

%

Prescription volume (90 Day = 3 prescriptions) (4)



9.2

%



0.3

%



9.1

%



(0.4)

%

Generic dispensing rates (4)



87.3

%



87.2

%



87.8

%



87.4

%

________________________

(1)

Gross profit for the three and nine months ended September 30, 2017 each include $2 million and $7 million, respectively, of acquisition-related integration costs related to the acquisition of Omnicare.

(2)

Operating expenses for the three and nine months ended September 30, 2018 include $4 million and $7 million, respectively, of acquisition-related integration costs. Operating expenses for the three and nine months ended September 30, 2017 include $7 million and $27 million, respectively, of acquisition-related integration costs. The integration costs are related to the acquisition of Omnicare.

(3)

Operating expenses for the nine months ended September 30, 2018 and 2017 include goodwill impairment charges of $3.9 billion related to the LTC reporting unit and $135 million related to the RxCrossroads reporting unit, respectively. The operating expenses for the nine months ended September 30, 2018 also includes an $86 million loss on the divestiture of the RxCrossroads subsidiary. Operating expenses for the three and nine months ended September 30, 2017 also include $6 million and $211 million, respectively, of charges associated with store closures.

(4)

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.

(5)

Same store sales and prescriptions exclude revenues from MinuteClinic, and revenue and prescriptions from stores in Brazil, LTC operations and, in 2017, from commercialization services provided through RxCrossroads.

 

 

Adjusted Operating Profit Guidance

(Unaudited)


The following reconciliation of estimated operating profit to estimated adjusted operating profit 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. See also previous discussion at "Non-GAAP Financial Measures" for more information on how we calculate Adjusted Operating Profit.










Year Ending

In millions


December 31, 2018








Operating profit


$

5,570


$

5,720

Non-GAAP adjustments:







Acquisition-related transaction and integration costs



333



333

Goodwill impairment



3,921



3,921

Loss on divestiture of subsidiary



86



86

Adjusted operating profit


$

9,910


$

10,060

 

 

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. See also previous discussion at "Non-GAAP Financial Measures" for more information on how we calculate Adjusted EPS.










Year Ending

In millions, except per share amounts


December 31, 2018








Income before income tax provision


$

3,499


$

3,646

Non-GAAP adjustments:







Amortization of intangible assets



850



850

Acquisition-related transaction and integration costs



333



333

Goodwill impairment



3,921



3,921

Loss on divestiture of subsidiary



86



86

Net interest expense on financing for the proposed acquisition of Aetna



1,075



1,075

Adjusted income before income tax provision



9,764



9,911

Adjusted income tax provision



2,620



2,667

Adjusted income from continuing operations



7,144



7,244

Income from continuing operations attributable to noncontrolling interests



(1)



(1)

Adjusted income allocable to participating securities



(13)



(13)

Adjusted income from continuing operations attributable to CVS Health


$

7,130


$

7,230








Weighted average diluted shares outstanding



1,021



1,021

Adjusted earnings per share


$

6.98



7.08

 

 

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. See also previous discussion at "Non-GAAP Financial Measures" for more information on how we calculate Free Cash Flow.







Year Ending

In millions


December 31, 2018

Net cash provided by operating activities


$

9,050

Subtract: Additions to property and equipment



(2,150)

Add: Proceeds from sale-leaseback transactions



Free cash flow


$

6,900

 

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SOURCE CVS Health Corporation