CVS Health Reports Fourth Quarter and Full Year Results and Provides 2019 Full Year Guidance

_{____________________________________}

(1)

Effective for the fourth quarter of 2018, interest income was reclassified from interest expense, net to net investment income within revenues to conform with insurance company presentation. Accordingly, revenues and operating income have been revised for all prior periods presented to conform with the current presentation. See Supplemental Information starting on page 15.

(2)

In 2019, adjusted operating income will also exclude the amortization of intangible assets. See Supplemental Information on page 21.

Three Months Ended

Year Ended

December 31,

December 31,

In millions, except per share amounts

2018

2017

Change

2018

2017

Change

Revenues

$

54,424

$

48,391

$

6,033

$

194,579

$

184,786

$

9,793

Operating income

824

3,114

(2,290)

4,021

9,538

(5,517)

Adjusted operating income ⁽¹⁾

3,352

3,207

145

10,255

10,008

247

Net income (loss)

(421)

3,287

(3,708)

(596)

6,623

(7,219)

Diluted earnings (loss) per share from
continuing operations

$

(0.37)

$

3.22

$

(3.59)

$

(0.57)

$

6.45

$

(7.02)

Adjusted EPS ⁽¹⁾

$

2.14

$

1.92

$

0.22

$

7.08

$

5.90

$

1.18

Enterprise prescriptions ⁽²⁾

685.2

650.4

34.8

2,658.0

2,515.1

142.9

Medical membership as of December 31, 2018 ⁽³⁾

22.1

________________________________

(1)

Refer to additional information on non-GAAP financial measures later in this release.

(2)

Enterprise prescriptions include prescriptions dispensed through our retail pharmacies, long-term care pharmacies, and mail order pharmacies as well as prescription claims managed through our pharmacy benefit manager, with an elimination for managed prescription claims filled through CVS Health dispensing channels. Includes an 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.

(3)

Refer to page 20 for additional detail on medical membership.

Three Months Ended

Year Ended

December 31,

December 31,

In millions

2018

2017

Change

2018

2017

Change

Revenues

$

34,890

$

34,153

$

737

$

134,128

$

130,601

$

3,527

Operating income

1,495

1,457

38

4,699

4,657

42

Total pharmacy claims processed ⁽¹⁾

484.6

458.7

25.9

1,889.8

1,781.9

107.9

Pharmacy network

409.2

389.7

19.5

1,601.4

1,516.7

84.7

Mail choice

75.4

69.0

6.4

288.4

265.2

23.2

^{____________________________________________}

(1)

Includes an 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.

Three Months Ended

Year Ended

December 31,

December 31,

In millions

2018

2017

2018

2017

Change

Revenues

$

22,029

$

20,910

$

1,119

$

83,989

$

79,398

$

4,591

Operating income (loss)

(270)

2,116

(2,386)

620

6,558

(5,938)

Prescriptions filled ⁽¹⁾

349.4

321.8

27.6

1,339.1

1,230.5

108.6

______________________________

(1)

Includes an 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.

In millions

Revenues

$

5,549

Operating income

276

Medical membership as of December 31, 2018

22.1

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

December 31,

December 31,

In millions, except per share amounts

2018

2017 ⁽¹⁾

2018

2017 ⁽¹⁾

Revenues:

Products

$

47,875

$

47,234

$

183,910

$

180,063

Premiums

5,500

826

8,184

3,558

Services

874

325

1,825

1,144

Net investment income

175

6

660

21

Total revenues

54,424

48,391

194,579

184,786

Operating costs:

Cost of products sold

40,564

40,097

156,447

153,448

Benefit costs

4,195

395

6,594

2,810

Goodwill impairments

2,228

46

6,149

181

Operating expenses

6,613

4,739

21,368

18,809

Total operating costs

53,600

45,277

190,558

175,248

Operating income

824

3,114

4,021

9,538

Interest expense

733

303

2,619

1,062

Other expense (income)

(11)

2

(4)

208

Income before income tax provision

102

2,809

1,406

8,268

Income tax provision (benefit)

524

(478)

2,002

1,637

Income (loss) from continuing operations

(422)

3,287

(596)

6,631

Income (loss) from discontinued operations, net of tax

1

—

—

(8)

Net income (loss)

(421)

3,287

(596)

6,623

Net (income) loss attributable to noncontrolling interests

2

—

2

(1)

Net income (loss) attributable to CVS Health

$

(419)

$

3,287

$

(594)

$

6,622

Basic earnings (loss) per share:

Income (loss) from continuing operations attributable to CVS Health

$

(0.37)

$

3.23

$

(0.57)

$

6.48

Loss from discontinued operations attributable to CVS Health

$

—

$

—

$

—

$

(0.01)

Net income (loss) attributable to CVS Health

$

(0.37)

$

3.23

$

(0.57)

$

6.47

Weighted average basic shares outstanding

1,121

1,014

1,044

1,020

Diluted earnings (loss) per share:

Income (loss) from continuing operations attributable to CVS Health

$

(0.37)

$

3.22

$

(0.57)

$

6.45

Loss from discontinued operations attributable to CVS Health

$

—

$

—

$

—

$

(0.01)

Net income (loss) attributable to CVS Health

$

(0.37)

$

3.22

$

(0.57)

$

6.44

Weighted average diluted shares outstanding

1,121

1,018

1,044

1,024

Dividends declared per share

$

0.50

$

0.50

$

2.00

$

2.00

_______________________________

(1)

The condensed consolidated statements of operations for the three months and year ended December 31, 2017 have been retrospectively adjusted to reflect (i) a change to the Company's cost allocation methodology effective January 1, 2018 and (ii) the reclassification of interest income from interest expense, net to net investment income within revenues to conform with insurance company presentation. See Supplemental Information later in this press release for further discussion.

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

December 31,

December 31,

In millions

2018

2017

Assets:

Cash and cash equivalents

$

4,059

$

1,696

Investments

2,522

111

Accounts receivable, net

17,631

13,181

Inventories

16,450

15,296

Other current assets

4,581

945

Total current assets

45,243

31,229

Long-term investments

15,732

112

Property and equipment, net

11,349

10,292

Goodwill

78,678

38,451

Intangible assets, net

36,524

13,630

Separate accounts assets

3,884

—

Other assets

5,046

1,417

Total assets

$

196,456

$

95,131

Liabilities:

Accounts payable

$

8,925

$

8,863

Pharmacy claims and discounts payable

12,302

10,355

Health care costs payable

5,210

5

Policyholders' funds

2,939

—

Accrued expenses

10,711

6,581

Other insurance liabilities

1,937

23

Short-term debt

720

1,276

Current portion of long-term debt

1,265

3,545

Total current liabilities

44,009

30,648

Long-term debt

71,444

22,181

Deferred income taxes

7,677

2,996

Separate accounts liabilities

3,884

—

Other long-term insurance liabilities

8,119

334

Other long-term liabilities

2,780

1,277

Total liabilities

137,913

57,436

Shareholders' equity:

CVS Health shareholders' equity:

Preferred stock

—

—

Common stock and capital surplus

45,440

32,096

Treasury stock

(28,228)

(37,796)

Retained earnings

40,911

43,556

Accumulated other comprehensive income (loss)

102

(165)

Total CVS Health shareholders' equity

58,225

37,691

Noncontrolling interests

318

4

Total shareholders' equity

58,543

37,695

Total liabilities and shareholders' equity

$

196,456

$

95,131

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Year Ended

December 31,

In millions

2018

2017 ⁽¹⁾

Cash flows from operating activities:

Cash receipts from customers

$

186,519

$

176,594

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(148,821)

(146,469)

Insurance benefits paid

(7,057)

(2,810)

Cash paid to other suppliers and employees

(17,234)

(15,348)

Interest and investment income received

644

21

Interest paid

(2,803)

(1,072)

Income taxes paid

(2,383)

(2,909)

Net cash provided by operating activities

8,865

8,007

Cash flows from investing activities:

Proceeds from sales and maturities of investments

817

61

Purchases of investments

(692)

(137)

Purchases of property and equipment

(2,037)

(1,918)

Proceeds from sale-leaseback transactions

—

265

Acquisitions (net of cash acquired)

(42,226)

(1,181)

Proceeds from sale of subsidiary and other assets

832

—

Other

21

33

Net cash used in investing activities

(43,285)

(2,877)

Cash flows from financing activities:

Net repayments of short-term debt

(556)

(598)

Proceeds from issuance of long-term debt

44,343

—

Repayments of long-term debt

(5,522)

—

Derivative settlements

446

—

Repurchase of common stock

—

(4,361)

Dividends paid

(2,038)

(2,049)

Proceeds from exercise of stock options

242

329

Payments for taxes related to net share settlement of equity awards

(97)

(71)

Other

1

(1)

Net cash provided by (used in) financing activities

36,819

(6,751)

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

(4)

1

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

2,395

(1,620)

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

$

4,295

$

1,900

_____________________________

(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 $55 million restricted cash outflow, which was previously reported in "acquisitions (net of cash acquired)" 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."

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Year Ended

December 31,

In millions

2018

2017

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

Net income (loss)

$

(596)

$

6,623

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

Depreciation and amortization

2,718

2,479

Goodwill impairments

6,149

181

Losses on settlements of defined benefit pension plans

—

187

Stock-based compensation

280

234

Deferred income taxes

87

(1,334)

Other noncash items

339

53

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

Accounts receivable, net

(1,139)

(941)

Inventories

(1,153)

(514)

Other assets

(3)

(338)

Accounts payable and pharmacy claims and discounts payable

2,489

1,710

Health care costs payable and other insurance liabilities

(471)

—

Other liabilities

165

(333)

Net cash provided by operating activities

$

8,865

$

8,007

Adjusted Operating Income

(Unaudited)

The following is a reconciliation of operating income to adjusted operating income:

Three Months Ended

Year Ended

December 31,

December 31,

In millions

2018

2017

2018

2017

Operating income ⁽¹⁾ (GAAP measure)

$

824

$

3,114

$

4,021

$

9,538

Non-GAAP adjustments:

Acquisition-related transaction and integration costs ⁽²⁾

340

34

492

65

Goodwill impairments ⁽³⁾

2,228

46

6,149

181

Impairment of long-lived assets ⁽⁴⁾

43

—

43

—

Loss on divestiture of subsidiary ⁽⁵⁾

—

9

86

9

Charges in connection with store rationalization ⁽⁶⁾

—

4

—

215

Interest income on financing for the acquisition of Aetna ⁽⁷⁾

(83)

—

(536)

—

Adjusted operating income

$

3,352

$

3,207

$

10,255

$

10,008

_____________________________

(1)

Effective for the fourth quarter of 2018, interest income was reclassified from interest expense, net to net investment income within revenues to conform with insurance company presentation. Accordingly, operating income for the three months and year ended December 31, 2017 has been revised to include net investment income.

(2)

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

(3)

In 2018, the goodwill impairments relate to the LTC reporting unit within the Retail/LTC segment. In 2017, the goodwill impairments relate to the RxCrossroads reporting unit within the Retail/LTC segment.

(4)

The impairment of long-lived assets primarily relates to the impairment of property and equipment within the Retail/LTC segment.

(5)

In 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company's RxCrossroads subsidiary for $725 million on January 2, 2018. In 2017, the loss on divestiture of subsidiary represents transaction costs associated with the sale of RxCrossroads.

(6)

Charges in connection with store rationalization primarily represent charges for noncancelable lease obligations associated with stores closed in connection with the Company's enterprise streamlining initiative.

(7)

The three months and year ended December 31, 2018 include interest income of $83 million and $536 million, respectively, related to the $40 billion of senior notes issued on March 9, 2018 ("2018 Senior Notes"). All such amounts are for the periods prior to the close of the acquisition of Aetna, which occurred on November 28, 2018.

Adjusted Earnings Per Share

(Unaudited)

The following is a reconciliation of income before income tax provision to adjusted income from continuing operations attributable to CVS Health and a calculation of Adjusted EPS:

Three Months Ended

Year Ended

December 31,

December 31,

In millions, except per share amounts

2018

2017

2018

2017

Income before income tax provision (GAAP measure)

$

102

$

2,809

$

1,406

$

8,268

Non-GAAP adjustments:

Amortization of intangible assets

367

209

1,006

817

Acquisition-related transaction and integration costs ⁽¹⁾

340

34

492

65

Goodwill impairments ⁽²⁾

2,228

46

6,149

181

Impairment of long-lived assets ⁽³⁾

43

—

43

—

Loss on divestiture of subsidiary ⁽⁴⁾

—

9

86

9

Charges in connection with store rationalization ⁽⁵⁾

—

4

—

215

Net interest expense on financing for the acquisition of Aetna ⁽⁶⁾

197

56

894

56

Losses on settlements of defined benefit pension plans

—

—

—

187

Adjusted income before income tax provision

3,277

3,167

10,076

9,798

Adjusted income tax provision ⁽⁷⁾

862

1,213

2,660

3,733

Adjusted income from continuing operations

2,415

1,954

7,416

6,065

(Income) loss from continuing operations attributable to noncontrolling interests

2

—

2

(1)

Adjusted income allocable to participating securities

(2)

(5)

(12)

(22)

Adjusted income from continuing operations attributable to CVS Health

$

2,415

$

1,949

$

7,406

$

6,042

Weighted average diluted shares outstanding ⁽⁸⁾

1,126

1,018

1,047

1,024

Adjusted EPS

$

2.14

$

1.92

$

7.08

$

5.90

______________________________

(1)

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

(2)

In 2018, the goodwill impairments relate to the LTC reporting unit within the Retail/LTC segment. In 2017, the goodwill impairments relate to the RxCrossroads reporting unit within the Retail/LTC segment.

(3)

The impairment of long-lived assets primarily relates to the impairment of property and equipment within the Retail/LTC segment.

(4)

In 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company's RxCrossroads subsidiary for $725 million on January 2, 2018. In 2017, the loss on divestiture of subsidiary represents transaction costs associated with the sale of RxCrossroads.

(5)

Charges in connection with store rationalization primarily represent charges for noncancelable lease obligations associated with stores closed in connection with the Company's enterprise streamlining initiative.

(6)

The three months and year ended December 31, 2018 include interest expense of $280 million and $1.4 billion, respectively, related to (i) bridge financing costs, (ii) interest expense on the $40 billion of 2018 Senior Notes and (iii) the $5 billion term loan facility. The interest expense was reduced by related interest income of $83 million and $536 million, respectively, earned on the proceeds of the 2018 Senior Notes. The three months and year ended December 31, 2017 each include interest expense of $56 million related to bridge financing costs. All amounts are for the periods prior to the close of the acquisition of Aetna, which occurred on November 28, 2018.

(7)

The Company computes its adjusted income tax provision after taking into account items excluded from adjusted income before income tax provision. The nature of each non-GAAP adjustment is evaluated to determine whether a discrete adjustment should be made to the adjusted income tax provision. The adjusted income tax provision for the three months and year ended December 31, 2017, excludes the approximately $1.5 billion income tax benefit associated with the enactment of the TCJA in December 2017.

(8)

Adjusted earnings per share for the three months and year ended December 31, 2018 are calculated utilizing weighted average diluted shares outstanding, which include 5 million and 3 million, respectively, 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 three months and year ended December 31, 2018, as the shares would have had an anti-dilutive effect as a result of the GAAP net loss incurred in both periods.

Free Cash Flow

(Unaudited)

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

Year Ended

December 31,

In millions

2018

2017

Net cash provided by operating activities (GAAP measure)

$

8,865

$

8,007

Subtract: Additions to property and equipment

(2,037)

(1,918)

Add: Proceeds from sale-leaseback transactions

—

265

Free cash flow

$

6,828

$

6,354

Three Months Ended December 31, 2017

Pharmacy

Retail/

Corporate/

Intersegment

Consolidated

In millions

Services

LTC

Other

Eliminations

Totals

Revenues, as previously reported

$

34,152

$

20,910

$

—

$

(6,677)

$

48,385

Adjustments

1

—

5

—

6

Revenues, as adjusted

$

34,153

$

20,910

$

5

$

(6,677)

$

48,391

Cost of products sold ⁽¹⁾

$

31,927

$

14,629

$

—

$

(6,470)

$

40,086

Adjustments

14

(3)

—

—

11

Cost of products sold

$

31,941

$

14,626

$

—

(6,470)

$

40,097

Benefit costs ⁽¹⁾

$

395

$

—

$

—

$

—

$

395

Adjustments

—

—

—

—

—

Benefit costs

$

395

$

—

$

—

$

—

$

395

Operating expenses, as previously reported

$

347

$

4,187

$

280

$

(18)

$

4,796

Adjustments

13

(19)

(5)

—

(11)

Operating expenses, as adjusted

$

360

$

4,168

$

275

$

(18)

$

4,785

Operating income (loss), as previously reported

$

1,483

$

2,094

$

(280)

$

(189)

$

3,108

Adjustments

(26)

22

10

—

6

Operating income (loss), as adjusted

$

1,457

$

2,116

$

(270)

$

(189)

$

3,114

_______________________________

(1)

The total of cost of products sold and benefit costs were previously reported as cost of revenues.

Year Ended December 31, 2017

Pharmacy

Retail/

Corporate/

Intersegment

Consolidated

In millions

Services

LTC

Other

Eliminations

Totals

Revenues, as previously reported

$

130,596

$

79,398

$

—

$

(25,229)

$

184,765

Adjustments

5

—

16

—

21

Revenues, as adjusted

$

130,601

$

79,398

$

16

$

(25,229)

$

184,786

Cost of products sold ⁽¹⁾

$

121,746

$

56,081

$

—

$

(24,417)

$

153,410

Adjustments

53

(15)

—

—

38

Cost of products sold

$

121,799

$

56,066

$

—

$

(24,417)

$

153,448

Benefit costs ⁽¹⁾

$

2,810

$

—

$

—

$

—

$

2,810

Adjustments

—

—

—

—

—

Benefit costs

$

2,810

$

—

$

—

$

—

$

2,810

Operating expenses, as previously reported

$

1,285

$

16,848

$

966

$

(71)

$

19,028

Adjustments

50

(74)

(14)

—

(38)

Operating expenses, as adjusted

$

1,335

$

16,774

$

952

$

(71)

$

18,990

Operating income (loss), as previously reported

$

4,755

$

6,469

$

(966)

$

(741)

$

9,517

Adjustments

(98)

89

30

—

21

Operating income (loss), as adjusted

$

4,657

$

6,558

$

(936)

$

(741)

$

9,538

Pharmacy

Retail/

Health Care

Corporate/

Intersegment

Consolidated

In millions

Services⁽¹⁾

LTC

Benefits

Other

Eliminations⁽²⁾

Totals

Three Months Ended

December 31, 2018

Revenues ⁽³⁾

$

34,890

$

22,029

$

5,549

$

131

$

(8,175)

$

54,424

Operating income (loss) ⁽⁴⁾⁽⁵⁾

1,495

(270)

276

(466)

(211)

824

December 31, 2017

Revenues

34,153

20,910

—

5

(6,677)

48,391

Operating income (loss) ⁽⁶⁾⁽⁷⁾

1,457

2,116

—

(270)

(189)

3,114

Year Ended

December 31, 2018

Revenues ⁽³⁾

134,128

83,989

5,549

606

(29,693)

194,579

Operating income (loss) ⁽⁴⁾⁽⁵⁾

4,699

620

276

(805)

(769)

4,021

December 31, 2017

Revenues

130,601

79,398

—

16

(25,229)

184,786

Operating income (loss) ⁽⁶⁾⁽⁷⁾

4,657

6,558

—

(936)

(741)

9,538

_____________________________

(1)

Revenues of the Pharmacy Services segment include approximately $2.6 billion and $2.5 billion of retail co-payments for the three months ended December 31, 2018 and 2017, respectively, as well as $11.4 billion and $10.8 billion of retail co-payments for the year ended December 31, 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 for 2018 and 2017. Effective November 28, 2018, intersegment eliminations also relate to intersegment revenue generating activities that occur between the Health Care Benefits segment and the Pharmacy Services segment and/or the Retail/LTC segment.

(3)

Corporate/Other segment revenues for the three months and year ended December 31, 2018 include interest income of $83 million and $536 million, respectively, related to the $40 billion of 2018 Senior Notes. All such amounts are for the periods prior to the close of the acquisition of Aetna, which occurred on November 28, 2018.

(4)

Retail/LTC segment operating income (loss) for the three months and year ended December 31, 2018 include goodwill impairment charges of $2.2 billion and $6.1 billion, respectively, related to the LTC reporting unit. Retail/LTC segment operating income (loss) for the three months and year ended December 31, 2018 also include a $43 million loss on impairment of long-lived assets primarily related to the impairment of property and equipment. Retail/LTC segment operating income for the year ended December 31, 2018 also includes an $86 million loss on the divestiture of the Company's RxCrossroads subsidiary and $7 million of acquisition-related integration costs related to the acquisition of Omnicare.

(5)

Corporate/Other segment operating loss for the three months and year ended December 31, 2018 include $340 million and $485 million, respectively, of acquisition-related transaction and integration costs related to the acquisition of Aetna, which are included in operating expenses in the condensed consolidated statement of operations.

(6)

Retail/LTC segment operating income for the three months and year ended December 31, 2017 include $4 million and $215 million, respectively, of charges associated with store closures. Retail/LTC segment operating income for the three months and year ended December 31, 2017 include goodwill impairment charges of $46 million and $181 million, respectively, related to the RxCrossroads reporting unit. Retail/LTC segment operating income for the year ended December 31, 2017 includes $34 million of acquisition-related integration costs related to the acquisition of Omnicare.

(7)

Corporate/Other segment operating loss for the three months and year ended December 31, 2017 each include $34 million in acquisition-related transaction costs related to the acquisitions of Aetna and Omnicare and $9 million of transaction costs related to the divestiture of RxCrossroads, which are included in operating expenses in the condensed consolidated statement of operations. Corporate/Other segment operating loss for the year ended December 31, 2017 also includes a $3 million reduction in integration costs for a change in estimate related to the acquisition of Omnicare, which is included in operating expenses in the condensed consolidated statement of operations.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

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

Three Months Ended

Year Ended

December 31,

December 31,

In millions, except percentages

2018

2017