10-Q 1 cvs-20180331x10q.htm 10-Q cvs_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

FORM 10‑Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2018

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                   .

 

Commission File Number 001‑01011

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CVS HEALTH CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

05‑0494040

(State of Incorporation)

(I.R.S. Employer Identification Number)

 

One CVS Drive, Woonsocket, Rhode Island 02895

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (401) 765‑1500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☒

    

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Common Stock, $0.01 par value, issued and outstanding at April 25, 2018:

1,016,646,347 shares

 

 

 

 


 

INDEX

 

 

 

Page

Part I 

 

 

 

 

 

Item 1. 

Financial Statements

3

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited) – Three Months Ended March 31, 2018 and 2017

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three Months Ended March 31, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) – As of March 31, 2018 and December 31, 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

Report of Independent Registered Public Accounting Firm

28

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

Item 4. 

Controls and Procedures

46

 

 

 

Part II 

 

47

 

 

 

Item 1. 

Legal Proceedings

47

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

Item 6. 

Exhibits

48

 

 

 

Signatures 

49

 

 

 

 


 

 

 

 

 

Part I

Item 1

 

CVS Health Corporation

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

In millions, except per share amounts

    

    

2018

    

2017

 

 

 

 

 

 

 

 

Net revenues

 

 

$

45,693

 

$

44,514

Cost of revenues

 

 

 

38,834

 

 

37,943

Gross profit

 

 

 

6,859

 

 

6,571

Operating expenses

 

 

 

4,913

 

 

4,778

Operating profit

 

 

 

1,946

 

 

1,793

Interest expense, net

 

 

 

473

 

 

252

Other expense

 

 

 

 3

 

 

 7

Income before income tax provision

 

 

 

1,470

 

 

1,534

Income tax provision

 

 

 

472

 

 

572

Income from continuing operations

 

 

 

998

 

 

962

Loss from discontinued operations, net of tax

 

 

 

 —

 

 

(9)

Net income

 

 

 

998

 

 

953

Net income attributable to noncontrolling interest

 

 

 

 —

 

 

(1)

Net income attributable to CVS Health

 

 

$

998

 

$

952

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

Income from continuing operations attributable to CVS Health

 

 

$

0.98

 

$

0.93

Loss from discontinued operations attributable to CVS Health

 

 

$

 —

 

$

(0.01)

Net income attributable to CVS Health

 

 

$

0.98

 

$

0.92

Weighted average shares outstanding

 

 

 

1,016

 

 

1,030

Diluted earnings per share:

 

 

 

 

 

 

 

Income from continuing operations attributable to CVS Health

 

 

$

0.98

 

$

0.92

Loss from discontinued operations attributable to CVS Health

 

 

$

 —

 

$

(0.01)

Net income attributable to CVS Health

 

 

$

0.98

 

$

0.92

Weighted average shares outstanding

 

 

 

1,019

 

 

1,035

Dividends declared per share

 

 

$

0.50

 

$

0.50

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

CVS Health Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

In millions

    

2018

    

2017

 

 

 

 

 

 

 

Net income

 

$

998

 

$

953

Other comprehensive income:

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax

 

 

 1

 

 

 8

Net cash flow hedges, net of tax

 

 

343

 

 

 1

Total other comprehensive income

 

 

344

 

 

 9

Comprehensive income

 

 

1,342

 

 

962

Comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

(1)

Comprehensive income attributable to CVS Health

 

$

1,342

 

$

961

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

 

CVS Health Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

In millions, except per share amounts

    

2018

    

2017

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,023

 

$

1,696

Short-term investments

 

 

119

 

 

111

Accounts receivable, net

 

 

13,964

 

 

13,181

Inventories

 

 

14,824

 

 

15,296

Other current assets

 

 

868

 

 

945

Total current assets

 

 

71,798

 

 

31,229

Property and equipment, net

 

 

10,144

 

 

10,292

Goodwill

 

 

38,115

 

 

38,451

Intangible assets, net

 

 

13,388

 

 

13,630

Other assets

 

 

1,694

 

 

1,529

Total assets

 

$

135,139

 

$

95,131

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

7,741

 

$

8,863

Claims and discounts payable

 

 

11,241

 

 

10,355

Accrued expenses

 

 

7,724

 

 

6,609

Short-term debt

 

 

 —

 

 

1,276

Current portion of long-term debt

 

 

3,542

 

 

3,545

Total current liabilities

 

 

30,248

 

 

30,648

Long-term debt

 

 

61,552

 

 

22,181

Deferred income taxes

 

 

3,058

 

 

2,996

Other long-term liabilities

 

 

1,604

 

 

1,611

      Total liabilities

 

 

96,462

 

 

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; 1,714 shares issued and   

1,016 shares outstanding at March 31, 2018 and 1,712 shares issued and 1,014 shares  

outstanding at December 31, 2017

 

 

17

 

 

17

Capital surplus

 

 

32,191

 

 

32,079

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

 

 

(37,716)

 

 

(37,765)

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

 

 

(31)

 

 

(31)

Retained earnings

 

 

44,040

 

 

43,556

Accumulated other comprehensive income (loss)

 

 

172

 

 

(165)

Total CVS Health shareholders’ equity

 

 

38,673

 

 

37,691

Noncontrolling interest

 

 

 4

 

 

 4

Total shareholders’ equity

 

 

38,677

 

 

37,695

Total liabilities and shareholders’ equity

 

$

135,139

 

$

95,131

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

CVS Health Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

In millions

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Cash receipts from customers

 

$

43,369

 

$

43,913

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

 

 

(36,195)

 

 

(36,178)

Cash paid to other suppliers and employees

 

 

(4,271)

 

 

(3,823)

Interest received

 

 

50

 

 

 6

Interest paid

 

 

(545)

 

 

(328)

Income taxes paid

 

 

(53)

 

 

(57)

Net cash provided by operating activities

 

 

2,355

 

 

3,533

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(482)

 

 

(457)

Proceeds from sale of property and equipment and other assets

 

 

 2

 

 

 5

Acquisitions (net of cash acquired) and other investments

 

 

(368)

 

 

(93)

Purchase of available-for-sale investments

 

 

(18)

 

 

 —

Maturities of available-for-sale investments

 

 

10

 

 

 8

Proceeds from sale of subsidiary

 

 

725

 

 

 —

Net cash used in investing activities

 

 

(131)

 

 

(537)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Decrease in short-term debt

 

 

(1,276)

 

 

(106)

Proceeds from issuance of long-term debt

 

 

39,376

 

 

 —

Repayments of long-term debt

 

 

(1)

 

 

 —

Derivative settlements

 

 

446

 

 

 —

Repurchase of common stock

 

 

 —

 

 

(3,621)

Dividends paid

 

 

(508)

 

 

(516)

Proceeds from exercise of stock options

 

 

107

 

 

121

Payments for taxes related to net share settlement of equity awards

 

 

(4)

 

 

(11)

Net cash provided by (used in) financing activities

 

 

38,140

 

 

(4,133)

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

 

 

 —

 

 

 —

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

 

 

40,364

 

 

(1,137)

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

 

$

42,264

 

$

2,383

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Net income

 

$

998

 

$

953

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

 

 

 

 

 

 

Depreciation and amortization

 

 

644

 

 

619

Stock-based compensation

 

 

55

 

 

55

Deferred income taxes and other noncash items

 

 

62

 

 

14

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

 

 

 

 

 

 

Accounts receivable, net

 

 

(857)

 

 

48

Inventories

 

 

464

 

 

456

Other current assets

 

 

56

 

 

(74)

Other assets

 

 

(113)

 

 

(1)

Accounts payable and claims and discounts payable

 

 

(178)

 

 

(539)

Accrued expenses

 

 

1,231

 

 

1,848

Other long-term liabilities

 

 

(7)

 

 

154

Net cash provided by operating activities

 

$

2,355

 

$

3,533

 

See accompanying notes to condensed consolidated financial statements.

6


 

 

CVS Health Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 – Accounting Policies

 

Description of business   

CVS Health Corporation and its subsidiaries (collectively, “CVS Health” or the “Company”) together comprise the largest integrated pharmacy health care provider in the United States based upon revenues and prescriptions filled. The Company currently has three reportable business segments, Pharmacy Services, Retail/LTC and Corporate, which are described below.

Pharmacy Services Segment (the “PSS”) - The PSS provides a full range of pharmacy benefit management services including plan design offerings and administration, formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management. The Company’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, Medicare Part D, Managed Medicaid plans, plans offered on the public and private exchanges, and other sponsors of health benefit plans and individuals throughout the United States.

 

As a pharmacy benefits manager, the PSS manages the dispensing of pharmaceuticals through the Company’s mail order pharmacies and national network of more than 68,000 retail pharmacies, consisting of approximately 41,000 chain pharmacies and 27,000 independent pharmacies, to eligible members in the benefits plans maintained by the Company’s clients and utilizes its information systems to perform, among other things, safety checks, drug interaction screenings and brand to generic substitutions.

 

The PSS’ specialty pharmacies support individuals that require complex and expensive drug therapies. The specialty pharmacy business includes mail order and retail specialty pharmacies that operate under the CVS Caremark®, CarePlus CVS Pharmacy®, Navarro® Health Services and Advanced Care Scripts (“ACS Pharmacy”) names. The Company also provides specialty infusion services and enteral nutrition services through Coram LLC and its subsidiaries (collectively, “Coram”).

 

The PSS also provides health management programs, which include integrated disease management for 18 conditions, through the Company’s AccordantCareTM rare disease management offering.

 

In addition, through the Company’s SilverScript Insurance Company (“SilverScript”) subsidiary, the PSS is a national provider of prescription drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.

 

The PSS generates net revenues primarily by contracting with clients to provide prescription drugs to plan members. Prescription drugs are dispensed by the mail order pharmacies, specialty pharmacies and national network of retail pharmacies. Net revenues are also generated by providing additional services to clients, including administrative services such as claims processing and formulary management, as well as health care related services such as disease management.

 

The PSS operates under the CVS Caremark® Pharmacy Services, Caremark®, CVS Caremark®, CVS Specialty®, AccordantCareTM, SilverScript®, Wellpartner®, Coram®, CVS Specialty®, NovoLogix®, Navarro® Health Services and ACS Pharmacy names. As of March 31, 2018, the PSS operated 25 retail specialty pharmacy stores, 18 specialty mail order pharmacies, four mail order dispensing pharmacies, and 86 branches for infusion and enteral services, including approximately 74 ambulatory infusion suites and three centers of excellence, located in 43 states, Puerto Rico and the District of Columbia.

 

Retail/LTC Segment (the “RLS”) - The RLS sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, seasonal merchandise, greeting cards, and photo finishing services, through the Company’s CVS Pharmacy®, CVS®, CVS Pharmacy y más®, Longs Drugs®, Navarro Discount Pharmacy® and Drogaria OnofreTM retail stores and online through CVS.com®, Navarro.comTM and Onofre.com.brTM.

7


 

 

The RLS also provides health care services through its MinuteClinic® health care clinics. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and deliver vaccinations.

 

The RLS also has long-term care (“LTC”) operations, which is comprised of providing the distribution of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings. Prior to January 2, 2018, the RLS also provided commercialization services under the name RxCrossroads® (“RxC”). See “Note 3 – Goodwill” for a discussion of the divestiture of RxC.

 

As of March 31, 2018, the RLS included 9,847 retail stores (of which 8,099 were our stores that operated a pharmacy and 1,699 were our pharmacies located within Target stores) located in 49 states, the District of Columbia, Puerto Rico and Brazil operating primarily under the CVS Pharmacy®, CVS®, CVS Pharmacy y más®, Longs Drugs®, Navarro Discount Pharmacy® and Drogaria OnofreTM names, 37 onsite pharmacies primarily operating under the CarePlus CVS PharmacyTM, CarePlus® and CVS Pharmacy® names, and 1,111 retail health care clinics operating under the MinuteClinic® name (of which 1,107 were located in our retail pharmacy stores or Target stores), and our online retail websites, CVS.com®, Navarro.comTM and Onofre.com.brTM. LTC operations are comprised of 163 spoke pharmacies that primarily handle new prescription orders, of which 30 are also hub pharmacies that use proprietary automation to support spoke pharmacies with refill prescriptions. LTC operates primarily under the Omnicare® and NeighborCare® names.

 

Corporate Segment - The Corporate Segment provides management and administrative services to support the Company. The Corporate Segment consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, information technology and finance departments.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of CVS Health Corporation and its subsidiaries have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. In accordance with such rules and regulations, certain information and accompanying note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in Exhibit 13 to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2017 (“2017 Form 10‑K”).

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Because of the influence of various factors on the Company’s operations, including business combinations, certain holidays and other seasonal influences, net income for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of income for the full year.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.

 

The Company continually evaluates its investments to determine if they represent variable interests in a VIE. If the Company determines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE. The evaluation is a qualitative assessment as to whether the Company has the ability to direct the activities of a VIE that most significantly impact the entity’s economic performance. The Company consolidates a VIE if it is considered to be the primary beneficiary.

 

8


 

Assets and liabilities of VIEs for which the Company is the primary beneficiary were not significant to the Company’s condensed consolidated financial statements. VIE creditors do not have recourse against the general credit of the Company.

 

Fair Value of Financial Instruments

 

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

 

·

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·

Level 2 – Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

 

·

Level 3 – Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.

 

As of March 31, 2018, the carrying value of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and the contingent consideration liability included in accrued expenses approximated their fair value due to the nature of these financial instruments. The Company invests in money market funds, commercial paper, time deposits and debt securities that are classified as cash and cash equivalents within the accompanying condensed consolidated balance sheets, as these funds are highly liquid and readily convertible to known amounts of cash. These investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Company’s short-term investments of $119 million at March 31, 2018 consist of certificates of deposit with initial maturities of greater than three months when purchased that mature within one year from the balance sheet date. These investments, which are classified within Level 1 of the fair value hierarchy, are carried at fair value, which approximated historical cost at March 31, 2018. The carrying amount and estimated fair value of the Company’s total long-term debt was $65.1 billion and $65.9 billion, respectively, as of March 31, 2018. The fair value of the Company’s long-term debt was estimated based on quoted prices currently offered in active markets for the Company’s debt, which is considered Level 1 of the fair value hierarchy.

 

Related Party Transactions

 

The Company has an equity method investment in SureScripts, LLC (“SureScripts”), which operates a clinical health information network. The PSS and RLS utilize this clinical health information network in providing services to its client plan members and retail customers. The Company expensed fees for the use of this network of approximately $22 million and $17 million in the three months ended March 31, 2018 and 2017, respectively. The Company’s investment in and equity in earnings of SureScripts for all periods presented is immaterial.

 

The Company has an equity method investment in Heartland Healthcare Services (“Heartland”). Heartland operates several long-term care pharmacies in four states. Heartland paid the Company approximately $35 million and $40 million for pharmaceutical inventory purchases during the three months ended March 31, 2018 and 2017, respectively. Additionally, the Company performs certain collection functions for Heartland and then passes those customer cash collections back to Heartland. The Company’s investment in and equity in earnings of Heartland for all periods presented is immaterial.

 

Discontinued Operations

 

In connection with certain business dispositions completed between 1991 and 1997, the Company retained guarantees on store lease obligations for a number of former subsidiaries, including Bob’s Stores and Linens ‘n Things, both of which subsequently filed for bankruptcy. See “Note 10 – Commitments and Contingencies” to the condensed consolidated financial statements. The Company’s discontinued operations include lease-related costs which the Company believes it will likely be required to satisfy pursuant to its lease guarantees.

9


 

 

Adoption of New Revenue Recognition Standard

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net),” which amends the principal-versus-agent implementation guidance and in April 2016 the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which amends the guidance in those areas in the new revenue recognition standard.

 

The Company adopted the new revenue recognition standard as of January 1, 2018 using the modified retrospective method and applying the new standard to all contracts. Therefore, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. One difference was identified between the previous accounting guidance and the new accounting guidance in the RLS related to the accounting for the Company’s ExtraBucks® Rewards customer loyalty program, which was previously accounted for under a cost deferral method. Under the new standard, this program is accounted for under a revenue deferral method. The Company recognized the cumulative effect of initially applying the new revenue recognition standard as an adjustment to beginning retained earnings. On January 1, 2018, the Company recorded an after-tax transition adjustment to reduce retained earnings by approximately $13 million ($17 million prior to tax effect). The Company expects the impact of the adoption of the new standard to be immaterial to its net revenue and net income on an ongoing basis.

 

The following is a discussion of the Company’s revenue recognition policies by segment under the new revenue recognition accounting standard:

 

Pharmacy Services Segment

 

The PSS sells prescription drugs directly through its mail service dispensing pharmacies and indirectly through its retail pharmacy network. The Company’s pharmacy benefit arrangements are accounted for in a manner consistent with a master supply arrangement as there are no contractual minimum volumes and each prescription is considered a separate purchasing decision and distinct performance obligation transferred at a point in time. Pharmacy benefit management services performed in connection with each prescription claim are considered part of a single performance obligation which culminates in the dispensing of prescription drugs.

 

The Company recognizes revenue using the gross method at the contract price negotiated with its clients when the Company has concluded it controls the prescription drug before it is transferred to the client plan members. The Company controls prescriptions dispensed indirectly through its retail pharmacy network because it has separate contractual arrangements with those pharmacies, has discretion in setting the price for the transaction and assumes primary responsibility for fulfilling the promise to provide prescription drugs to its client plan members while also performing the related pharmacy benefit management services.

 

Net revenues include (i) the portion of the price the client pays directly to the PSS, net of any variable consideration, including volume-related or other discounts paid back to the client (see “Drug Discounts” and “Guarantees” below), (ii) the price paid to the PSS by client plan members for mail order prescriptions (“Mail Co-Payments”) and the price paid to retail network pharmacies by client plan members for retail prescriptions (“Retail Co-Payments”), and (iii) claims based administrative fees for retail pharmacy network contracts. Sales taxes are not included in revenue.

 

The PSS recognizes revenue when control of the prescription drugs are transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those prescription drugs. The following revenue recognition policies have been established for the PSS:

 

·

Revenues generated from prescription drugs sold by mail service dispensing pharmacies are recognized when the prescription drug is delivered to the client plan member. At the time of delivery, the PSS has performed substantially all of its performance obligations under its client contracts and does not experience a significant level of returns or reshipments.

 

10


 

·

Revenues generated from prescription drugs sold by third party pharmacies in the PSS’ retail pharmacy network and associated administrative fees are recognized at the PSS’ point-of-sale, which is when the claim is adjudicated by the PSS’ online claims processing system and the Company has transferred control of the prescription drug and performed all of its performance obligations.

 

For contracts under which the PSS acts as an agent or does not control the prescription drugs prior to transfer to the client, revenue is recognized using the net method.

 

Drug discounts – The PSS records revenue net of manufacturers’ rebates, earned by its clients based on their plan members’ utilization of brand-name formulary drugs. The PSS estimates these rebates at period-end based on actual and estimated claims data and its estimates of the manufacturers’ rebates earned by its clients. The estimates are based on the best available data at period-end and recent history for the various factors that can affect the amount of rebates due to the client. The PSS adjusts its rebates payable to clients to the actual amounts paid when these rebates are paid or as significant events occur. Any cumulative effect of these adjustments is recorded against revenues as identified. Adjustments generally result from contract changes with clients or manufacturers that have retroactive rebate adjustments, differences between the estimated and actual product mix subject to rebates, or whether the product was included in the applicable formulary. The effect of adjustments between estimated and actual amounts have not been material to the Company’s results of operations or financial position.

 

Guarantees – The PSS also adjusts revenues for refunds owed to the client resulting from pricing guarantees and performance against defined service and performance metrics. The inputs to these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual amounts have not been material to the Company’s results of operations or financial position.

 

Medicare Part D – The PSS participates in the federal government’s Medicare Part D program as a prescription drug plan (“PDP”) through its SilverScript subsidiary. Net revenues include insurance premiums earned by the PDP, which are determined based on the PDP’s annual bid and related contractual arrangements with the United States Centers for Medicare and Medicaid Services (“CMS”). The insurance premiums include a beneficiary premium, which is the responsibility of the PDP member, which is subsidized by CMS in the case of low-income members, and a direct premium paid by CMS. Premiums collected in advance are initially recorded within accrued expenses and other current liabilities and are then recognized ratably as revenue over the period in which members are entitled to receive benefits.

 

In addition to these premiums, net revenues include co-payments, coverage gap benefits, deductibles and co-insurance (collectively, the “Member Co-Payments”) related to PDP members’ actual prescription claims. In certain cases, CMS subsidizes a portion of these Member Co-Payments and the PSS is paid an estimated prospective Member Co-Payment subsidy, each month. If the prospective Member Co-Payment subsidies received differ from the amounts earned from actual prescriptions transferred, the difference is recorded in either accounts receivable or accrued expenses. The PSS accounts for Member Co-Payments (including the amounts subsidized by CMS) using the gross method consistent with revenue recognition policies for Mail Co-Payments and Retail Co-Payments. The Company estimates variable consideration in the form of amounts payable, or receivable from CMS under a risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor, and adjusts revenue based on calculations of additional subsidies to be received or owed to CMS at the end of the reporting year. The Company also estimates cost of revenues for claims that have been reported and are in the process of being paid or contested and for its estimate of claims that have been incurred but have not yet been reported. Historically, the effect of these adjustments has not been material to the Company’s results of operations or financial position.

 

Retail/LTC Segment

 

Retail Pharmacy - The retail drugstores recognize revenue at the time the customer takes possession of the merchandise. For pharmacy sales, each prescription claim is its own arrangement with the customer and is a performance obligation, separate and distinct from other prescription claims under other retail network arrangements. Revenues are adjusted for refunds owed to the third party payer for pricing guarantees and performance against defined value-based service and performance metrics. The inputs to most of these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual amounts have not been material to the Company’s results of operations or financial position.

 

11


 

Revenue from CVS Health gift cards purchased by customers is deferred as a contract liability until goods or services are transferred. Any amounts not expected to be redeemed by customers (i.e., breakage) are recognized based on historical redemption patterns.

 

Customer returns are not material to the Company’s results of operations or financial position.

 

Loyalty Program - The Company’s customer loyalty program, ExtraCare®, is comprised of two components, ExtraSavingsTM and ExtraBucks® Rewards. ExtraSavings are coupons that are recorded as a reduction of revenue when redeemed as the Company concluded that they do not represent a promise to the customer to deliver additional goods or services at the time of issuance because they are not tied to a specific transaction or spending level. 

 

ExtraBucks Rewards are accumulated by customers based on their historical spending levels. Thus, the Company has determined that there is an additional performance obligation to those customers at the time of the initial transaction. The Company allocates the transaction price to the initial transaction and the ExtraBucks Rewards transaction based upon the relative standalone selling price, which considers historical redemption patterns for the rewards. Revenue allocated to  ExtraBucks Rewards is recognized as those rewards are redeemed. At the end of each period, unredeemed rewards are reflected as a contract liability.

 

Long-term Care - Revenue is recognized when control of the promised goods or services are transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Each prescription claim represents a separate performance obligation of the Company, separate and distinct from other prescription claims under customer arrangements. A significant portion of the revenue from sales of pharmaceutical and medical products are reimbursed by the federal Medicare Part D program and, to a lesser extent, state Medicaid programs. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third party insurance payors, and reduces revenue at the revenue recognition date, to properly account for the variable consideration due to anticipated differences between billed and reimbursed amounts. Accordingly, the total net revenues and receivables reported in the Company’s financial statements are recorded at the amount expected to be ultimately received from these payors.

 

Patient co-payments associated with Medicare Part D, certain state Medicaid programs, Medicare Part B and certain third party payors are typically not collected at the time products are delivered or services are rendered, but are billed to the individuals as part of normal billing procedures and subject to normal accounts receivable collections procedures.

 

Health Care Clinics - For services provided by the Company’s health care clinics, revenue recognition occurs for completed services provided to patients, with adjustments taken for third party payor contractual obligations and patient direct bill historical collection rates.

 

12


 

Disaggregation of Revenue

 

The following table disaggregates the Company’s revenue by major source in each segment for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy 

 

 

 

Intersegment

 

Consolidated

In millions

    

Services

    

Retail/LTC

    

Eliminations

    

Totals

Major goods/services lines:

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy

 

$

30,762

 

$

15,500

 

$

(6,957)

 

$

39,305

Front Store

 

 

 —

 

 

4,726

 

 

 —

 

 

4,726

Other

 

 

1,456

 

 

206

 

 

 —

 

 

1,662

Total

 

$

32,218

 

$

20,432

 

$

(6,957)

 

$

45,693

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy Services distribution channel:

 

 

 

 

 

 

 

 

 

 

 

 

Mail choice (1)

 

$

11,208

 

 

 

 

 

 

 

 

 

Retail network (2)

 

 

19,554

 

 

 

 

 

 

 

 

 

Other

 

 

1,456

 

 

 

 

 

 

 

 

 

Total

 

$

32,218

 

 

 

 

 

 

 

 

 


(1)

Pharmacy Services 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 Services retail network net revenues do not include Maintenance Choice® activity, which is included within the mail choice category. Retail 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.

 

Contract Balances

 

Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration, for example ExtraBucks® Rewards and unredeemed CVS Health gift cards. The consideration received remains a contract liability until goods or services have been provided to the retail customer. In addition, the Company recognizes breakage on CVS Health gift cards based on historical redemption patterns.

 

The following table provides information about receivables and contract liabilities from contracts with customers:

 

 

 

 

 

 

 

 

In millions

  

March 31, 

2018

 

December 31, 

2017

Receivables (included in accounts receivable, net)

 

$

6,875

 

$

7,873

Contract liabilities (included in accrued expenses)

 

 

71

 

 

53

 

During the three months ended March 31, 2018, the contract liabilities balance includes increases related to customers’ earnings in ExtraBucks Rewards or issuances of CVS Health gift cards and decreases for revenues recognized during the period as a result of the redemption of ExtraBucks Rewards or CVS Health gift cards and breakage of CVS Health gift cards. Below is a summary of the changes:

 

 

 

 

 

In millions

 

 

Balance, December 31, 2017

 

$

53

Adoption of ASU 2014-09

 

 

17

Loyalty program earnings and gift card issuances

 

 

79

Redemption and breakage

 

 

(78)

Balance, March 31, 2018

 

$

71

 

13


 

Impact of New Revenue Recognition Standard on Financial Statement Line Items

 

The Company adopted ASU 2014-09 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts was recorded as an adjustment to retained earnings as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the condensed consolidated balance sheet as of January 1, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Change in Accounting Policy

 

    

As Reported

    

 

 

    

Adjusted

In millions

 

December 31, 2017

 

Adjustments

 

January 1, 2018

Condensed Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

6,609

 

$

17

 

$

6,626

Deferred income taxes

 

 

2,996

 

 

(4)

 

 

2,992

Total liabilities

 

 

57,436

 

 

13

 

 

57,449

Retained earnings

 

 

43,556

 

 

(13)

 

 

43,543

Total CVS Health shareholders' equity

 

 

37,691

 

 

(13)

 

 

37,678

Total shareholders' equity

 

 

37,695

 

 

(13)

 

 

37,682

 

The following table compares the reported condensed consolidated balance sheet, income statement, and statement of cash flows, as of and for the three months ended March 31, 2018, to the pro forma amounts had the previous revenue accounting guidance remained in effect:

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Change in Accounting Policy

 

 

As Reported

 

 

 

 

Balances

 

 

As of/For the

 

 

 

 

Without

 

    

Three Months Ended

    

 

 

    

Adoption of

In millions

 

March 31, 2018

 

Adjustments

 

Topic 606

Condensed Consolidated Statement of Income:

 

 

 

 

 

 

 

 

 

Net revenues

 

$

45,693

 

$

 7

 

$

45,700

Cost of revenues

 

 

38,834

 

 

 4

 

 

38,838

Gross profit

 

 

6,859

 

 

 3

 

 

6,862

Operating profit

 

 

1,946

 

 

 3

 

 

1,949

Income before income tax provision

 

 

1,470

 

 

 3

 

 

1,473

Income tax provision

 

 

472

 

 

 1

 

 

473

Income from continuing operations

 

 

998

 

 

 2

 

 

1,000

Net income

 

 

998

 

 

 2

 

 

1,000

Net income attributable to CVS Health

 

 

998

 

 

 2

 

 

1,000

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

7,724

 

 

(20)

 

 

7,704

Deferred income taxes

 

 

3,058

 

 

 5

 

 

3,063

Total liabilities

 

 

96,462

 

 

(15)

 

 

96,447

Retained earnings

 

 

44,040

 

 

15

 

 

44,055

Total CVS Health shareholders' equity

 

 

38,673

 

 

15

 

 

38,688

Total shareholders' equity

 

 

38,677

 

 

15

 

 

38,692

Total liabilities and shareholders' equity

 

 

135,139

 

 

 —

 

 

135,139

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flow:

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Net income

 

 

998

 

 

 2

 

 

1,000

Deferred income taxes and other noncash items

 

 

62

 

 

 1

 

 

63

Accrued expenses

 

 

1,231

 

 

(3)

 

 

1,228

 

14


 

Other Accounting Pronouncements Recently Adopted

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU requires equity investments, except those under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. This simplifies the impairment assessment of equity investments previously held at cost. Entities are required to apply the guidance retrospectively, with the exception of the amendments related to equity investments without readily determinable fair values, which must be applied on a prospective basis. Effective January 1, 2018, the Company adopted this new accounting guidance. The adoption of this new guidance did not have a material impact on the Company’s financial position or results of operations.

 

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. Effective January 1, 2018, the Company adopted this new accounting guidance. The adoption of this new guidance did not have a material impact on the Company’s financial position or results of operations.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, which amends Accounting Standard Codification (“ASC”) Topic 230. This ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities are no longer required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent balances. The guidance is required to be applied retrospectively. Effective January 1, 2018, the Company adopted this new accounting guidance. The following represents a reconciliation of cash and cash equivalents in the condensed consolidated balance sheet to total cash, cash equivalents and restricted cash in the condensed consolidated statement of cash flows:

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

In millions

 

2018

 

2017

Cash and cash equivalents

 

$

42,023

 

$

1,696

Restricted cash (included in other current assets)

 

 

14

 

 

14

Restricted cash (included in other assets)

 

 

227

 

 

190

Total cash, cash equivalents and restricted cash in the statement of cash flows

 

$

42,264

 

$

1,900

 

Restricted cash included in other current assets in the condensed consolidated balance sheets represents amounts held in escrow accounts in connection with certain recent acquisitions. Restricted cash included in other assets in the condensed consolidated balance sheets represents amounts held in a trust in the Company’s insurance captive to satisfy collateral requirements associated with the assignment of certain insurance policies. All restricted cash is invested in time deposits, money markets, and commercial paper, which are classified within Level 1 of the fair value hierarchy.

 

15


 

Restricted cash activity was previously reported in “acquisitions (net of cash acquired) and other investments” within investing cash flows on the Company’s condensed consolidated statement of cash flows. The following is a reconciliation of the effect on the relevant line items on the statement of cash flows for the three months ended March 31, 2017 as a result of adopting this new accounting guidance:

 

 

 

 

 

 

 

 

 

 

 

 

    

As Previously

    

 

 

    

 

 

In millions

 

Reported

 

Adjustments

 

As Revised

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

Acquisitions (net of cash acquired) and other investments

 

$

(110)

 

$

17

 

$

(93)

Net cash used in investing activities

 

 

(554)

 

 

17

 

 

(537)

Net decrease in cash, cash equivalents and restricted cash (1)

 

 

(1,154)

 

 

17

 

 

(1,137)

Cash, cash equivalents, and restricted cash at the beginning of the period (1)

 

 

3,371

 

 

149

 

 

3,520

Cash, cash equivalents, and restricted cash at the end of the period (1)

 

 

2,217

 

 

166

 

 

2,383


(1)

Prior to the adoption of ASU 2016-18, these financial statement captions excluded restricted cash. The financial statement captions have been renamed to reflect the inclusion of restricted cash subsequent to the adoption of ASU 2016-18 on January 1, 2018.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (“TCJA”) to retained earnings. The guidance states that because the adjustment of deferred income taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate was required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (“stranded tax effects”) are not reflected at the appropriate tax rate. During the first quarter of 2018, the Company elected to early adopt this new standard and decreased accumulated other comprehensive income and increased retained earnings in the period of adoption by $7 million due to the change in the U.S. federal corporate income tax rate in December 2017. See “Note 6 – Accumulated Other Comprehensive Income” to the condensed consolidated financial statements for the impact of the adoption of this standard on accumulated other comprehensive income for the three months ended March 31, 2018.

 

New Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Lessees will be required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance leases. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company believes that the new standard will have a material impact on its consolidated balance sheet. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated results of operations, cash flows, financial position and related disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The new standard requires the use of a forward-looking expected loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. The new standard also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated results of operations, cash flows, financial position and related disclosures.

 

 

16


 

Note 2 – Proposed Aetna Acquisition

 

On December 3, 2017, the Company entered into a definitive merger agreement to acquire all of the outstanding shares of Aetna Inc. (“Aetna”) for a combination of cash and stock. Under the terms of the merger agreement, Aetna shareholders will receive $145.00 per share in cash and 0.8378 CVS Health shares for each Aetna share. The transaction values Aetna at approximately $207 per share or approximately $69 billion based on the Company’s 5-day volume weighted average price ending December 1, 2017 of $74.21 per share. Including the assumption of Aetna’s debt, the total value of the transaction is approximately $77 billion. The final purchase price will be determined based on the Company’s stock price on the date of closing of the transaction.

The proposed acquisition remains subject to customary closing conditions, including the expiration of the waiting period under the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 and approvals of state departments of insurance and U.S. and international regulators.

If the transaction is not completed, the Company could be liable to Aetna for a termination fee of $2.1 billion in connection with the merger agreement, depending on the reasons leading to such termination.

On February 1, 2018, CVS Health and Aetna each received a request for additional information (also known as a “second request”) from the U.S. Department of Justice (the “DOJ”) in connection with the DOJ’s review of the transactions contemplated by the definitive merger agreement.

Note 3 – Goodwill

 

Goodwill is not amortized, but is subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate there may be impairment.

 

Below is a summary of the changes in the carrying value of goodwill by segment for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy

 

 

 

 

 

 

In millions

    

Services

    

Retail/LTC

    

Total

Balance, December 31, 2017

 

$

21,819

 

$

16,632

 

$

38,451

Acquisitions

 

 

26

 

 

36

 

 

62

Divestiture of RxCrossroads subsidiary

 

 

 —

 

 

(398)

 

 

(398)

Balance, March 31, 2018

 

$

21,845

 

$

16,270

 

$

38,115

 

On January 2, 2018, the Company sold RxCrossroads (“RxC”) to McKesson Corporation for $725 million, at which time the remaining goodwill of this reporting unit was removed from the condensed consolidated balance sheet. This transaction is subject to a working capital adjustment. 

 

 

17


 

Note 4 – Borrowings and Credit Agreements

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

In millions

 

2018

 

2017

Short-term debt

 

 

 

 

 

 

Commercial paper

 

$

 —

 

$

1,276

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

3.25% senior exchange debentures due 2035

 

 

 —

 

 

 1

1.9% senior notes due 2018

 

 

2,250

 

 

2,250

2.25% senior notes due 2018

 

 

1,250

 

 

1,250

2.25% senior notes due 2019

 

 

850

 

 

850

2.8% senior notes due 2020

 

 

2,750

 

 

2,750

3.125% senior notes due 2020

 

 

2,000

 

 

 —

Floating rate notes due 2020

 

 

1,000

 

 

 —

2.125% senior notes due 2021

 

 

1,750

 

 

1,750

4.125% senior notes due 2021

 

 

550

 

 

550

3.35% senior notes due 2021

 

 

3,000

 

 

 —

Floating rate notes due 2021

 

 

1,000

 

 

 —

2.75% senior notes due 2022

 

 

1,250

 

 

1,250

3.5% senior notes due 2022

 

 

1,500

 

 

1,500

4.75% senior notes due 2022

 

 

399

 

 

399

4% senior notes due 2023

 

 

1,250

 

 

1,250

3.7% senior notes due 2023

 

 

6,000

 

 

 —

3.375% senior notes due 2024

 

 

650

 

 

650

5% senior notes due 2024

 

 

299

 

 

299

3.875% senior notes due 2025

 

 

2,828

 

 

2,828

4.1% senior notes due 2025

 

 

5,000

 

 

 —

2.875% senior notes due 2026

 

 

1,750

 

 

1,750

6.25% senior notes due 2027

 

 

372

 

 

372

4.3% senior notes due 2028

 

 

9,000

 

 

 —

4.875% senior notes due 2035

 

 

652

 

 

652

4.78% senior notes due 2038

 

 

5,000

 

 

 —

6.125% senior notes due 2039

 

 

447

 

 

447

5.75% senior notes due 2041

 

 

133

 

 

133

5.3% senior notes due 2043

 

 

750

 

 

750

5.125% senior notes due 2045

 

 

3,500

 

 

3,500

5.05% senior notes due 2048

 

 

8,000

 

 

 —

Capital lease obligations

 

 

672

 

 

670

Other

 

 

23

 

 

43

Total debt principal

 

 

65,875

 

 

27,170

Debt premiums

 

 

27

 

 

28

Debt discounts and deferred financing costs

 

 

(808)

 

 

(196)

 

 

 

65,094

 

 

27,002

Less:

 

 

 

 

 

 

Short-term debt (commercial paper)

 

 

 —

 

 

(1,276)

Current portion of long-term debt

 

 

(3,542)

 

 

(3,545)

Long-term debt

 

$

61,552

 

$

22,181

 

The Company did not have any commercial paper outstanding as of March 31, 2018. In connection with its commercial paper program, the Company maintains a $1.0 billion 364-day unsecured back-up credit facility, which expires on May 17, 2018, a $1.25 billion, five-year unsecured back-up credit facility, which expires on July 24, 2019, a $1.25 billion, five-year unsecured back-up credit facility, which expires on July 1, 2020, and a $1.0 billion, five-year unsecured back-up credit facility, which expires on May 18, 2022. The Company intends to renew its 364-day unsecured back-up credit facility prior to its expiration. The credit facilities allow for borrowings at various rates that are dependent, in part, on the Company’s public debt ratings and require the Company to pay a weighted average quarterly facility fee of

18


 

approximately 0.02%, regardless of usage. As of March 31, 2018 and December 31, 2017, there were no borrowings outstanding under the back-up credit facilities.

 

On March 9, 2018, the Company issued an aggregate of $40.0 billion of floating rate notes and unsecured senior notes, collectively the “Notes”, for total proceeds of approximately $39.4 billion, net of discounts and underwriting fees, comprised of the following:

 

 

 

 

 

In millions

 

 

 

3.125% senior notes due 2020

 

$

2,000

Floating rate notes due 2020

 

 

1,000

3.35% senior notes due 2021

 

 

3,000

Floating rate notes due 2021

 

 

1,000

3.7% senior notes due 2023

 

 

6,000

4.1% senior notes due 2025

 

 

5,000

4.3% senior notes due 2028

 

 

9,000

4.78% senior notes due 2038

 

 

5,000

5.05% senior notes due 2048

 

 

8,000

Total debt principal

 

$

40,000

 

The Notes pay interest semi-annually and contain redemption terms which allow or require the Company to redeem the Notes at a defined redemption price plus accrued and unpaid interest at the redemption date. The net proceeds of the Notes will be used to fund the proposed acquisition of Aetna.

 

If the Aetna acquisition has not been completed by September 3, 2019 (the “Outside Date”) or if, prior to such date, the merger agreement is terminated or the Company otherwise publicly announces that the merger will not be consummated, then the Company will be required to redeem all outstanding 2020 Floating Rate Notes, 2021 Floating Rate Notes, 2020 Notes, 2021 Notes, 2023 Notes, 2025 Notes, 2028 Notes and 2038 Notes at a redemption price equal to 101% of the aggregate principal amount of those notes plus accrued and unpaid interest. The 2048 Notes are not subject to this mandatory redemption provision.

 

On December 3, 2017, in connection with the proposed acquisition of Aetna, the Company entered into a $49.0 billion unsecured bridge loan facility. The Company paid approximately $221 million in fees upon entering into the agreement. The fees were capitalized in other current assets and are being amortized as interest expense over the period the bridge facility is outstanding. The bridge loan facility was reduced to $44.0 billion on December 15, 2017 upon the Company entering into a $5.0 billion term loan agreement. As discussed above, on March 9, 2018, the Company issued unsecured senior notes with an aggregate principal of $40.0 billion. At this time, the bridge loan facility was reduced to $4.0 billion and the Company paid approximately $8 million in fees to retain the bridge loan facility through the date of the proposed Aetna acquisition. These fees were capitalized in other current assets and will be amortized as interest expense over the period the bridge facility is outstanding. The Company recorded $161 million of amortization of the bridge loan facility fees during the three months ended March 31, 2018, which was recorded in “Interest expense, net” on the condensed consolidated income statement.

 

Note 5 – Share Repurchase Programs

 

The following share repurchase programs were authorized by the Company’s Board of Directors:

 

 

 

 

 

 

 

 

In billions

    

 

 

    

Remaining as of

Authorization Date

 

Authorized

 

March 31, 2018

November 2, 2016 (“2016 Repurchase Program”)

 

$

15.0

 

$

13.9

December 15, 2014 (“2014 Repurchase Program”)

 

 

10.0

 

 

 —

 

The share Repurchase Programs, each of which was effective immediately, permit the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase (“ASR”) transactions, and/or other derivative transactions. The 2016 Repurchase Program can be modified or terminated by the Board of Directors at any time.

 

During the three months ended March 31, 2018, the Company did not repurchase any shares of common stock pursuant to the 2016 Repurchase Program.

19


 

 

Pursuant to the authorization under the 2014 Repurchase Program, effective August 29, 2016, the Company entered into two fixed dollar ASRs with Barclays Bank PLC (“Barclays”) for a total of $3.6 billion. Upon payment of the $3.6 billion purchase price on January 6, 2017, the Company received a number of shares of its common stock equal to 80% of the $3.6 billion notional amount of the ASRs or approximately 36.1 million shares, which were placed into treasury stock in January 2017. The ASRs were accounted for as an initial treasury stock transaction for $2.9 billion and a forward contract for $0.7 billion. In April 2017, the Company received 9.9 million shares of common stock, representing the remaining 20% of the $3.6 billion notional amount of the ASRs, thereby concluding the ASRs. The remaining 9.9 million shares of common stock delivered to the Company by Barclays were placed into treasury stock and the forward contract was reclassified from capital surplus to treasury stock in April 2017.

 

At the time they were received, the initial and final receipt of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share.

 

Note 6 – Accumulated Other Comprehensive Income

 

Accumulated other comprehensive income consists of foreign currency translation adjustments, cash flow hedges associated with the forecasted issuance of long-term debt, and changes in the net actuarial gains and losses associated with pension and other postretirement benefit plans. The following table summarizes the activity within the components of accumulated other comprehensive income.

 

Changes in accumulated other comprehensive income (loss) by component is shown on the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018 (1)

 

  

 

 

  

 

  

Pension and

  

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Foreign

 

Cash Flow

 

Postretirement

 

 

 

In millions

 

Currency

 

Hedges

 

Benefits

 

Total

Balance, December 31, 2017

 

$

(129)

&nb