10-Q 1 cvs-20180930x10q.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 September 30, 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 every Interactive Data File required to be submitted 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 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 ☐ 

 

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 October 31, 2018:

1,018,799,080 shares

 

 

 

 


 

INDEX

 

 

 

Page

Part I 

 

 

 

 

 

Item 1. 

Financial Statements

3

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2018 and 2017

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) – As of September 30, 2018 and December 31, 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

Report of Independent Registered Public Accounting Firm

31

 

 

 

Item 2. 

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

32

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

Item 4. 

Controls and Procedures

50

 

 

 

Part II 

 

51

 

 

 

Item 1. 

Legal Proceedings

51

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

Item 6. 

Exhibits

52

 

 

 

Signatures 

53

 

 

 

 


 

 

 

 

 

Part I

Item 1

 

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

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

CVS Health Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

In millions

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,390

 

$

1,285

 

$

(175)

 

$

3,336

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax

 

 

(8)

 

 

 8

 

 

(34)

 

 

 6

Net cash flow hedges, net of tax

 

 

(4)

 

 

 —

 

 

335

 

 

 1

Pension and other postretirement benefits, net of tax

 

 

 —

 

 

151

 

 

 —

 

 

151

Total other comprehensive income (loss)

 

 

(12)

 

 

159

 

 

301

 

 

158

Comprehensive income

 

 

1,378

 

 

1,444

 

 

126

 

 

3,494

Comprehensive income attributable to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

(1)

Comprehensive income attributable to CVS Health

 

$

1,378

 

$

1,444

 

$

126

 

$

3,493

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

 

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

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

CVS Health Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

In millions

    

2018

    

2017

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)

 

 

 —

Maturities 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

 

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 prescription drugs to plan members through mail order pharmacies, specialty pharmacies and a national network of retail pharmacies. Additional services are also offered to clients, including administration and formulary management, Medicare Part D services, infusion 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 plans, 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 primarily under the CVS Caremark®, Navarro® Health Services and Advanced Care ScriptsTM (“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 19 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 primarily under the CVS Caremark® Pharmacy Services, Caremark®, CVS Caremark®, CVS Specialty®, AccordantCareTM, SilverScript®, Wellpartner®, Coram®, NovoLogix®, Navarro® Health Services and ACS PharmacyTM names. As of September 30, 2018, the PSS operated 25 retail specialty pharmacy stores, 17 specialty mail order pharmacies, four mail order dispensing pharmacies, and 86 branches for infusion and enteral services, including approximately 68 ambulatory infusion suites and three centers of excellence, located in 42 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 distribute prescription drugs and provide 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 and Intangible Assets” to the condensed consolidated financial statements for a discussion of the divestiture of RxC.

 

As of September 30, 2018, the RLS included 9,905 retail stores (of which 8,149 were our stores that operated a pharmacy and 1,709 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 Pharmacy®, CarePlus® and CVS Pharmacy® names, and 1,102 retail health care clinics operating under the MinuteClinic® name (of which 1,098 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 155 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 September 30, 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 $105 million at September 30, 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 September 30, 2018. The carrying amount and estimated fair value of the Company’s total long-term debt was $62.9 billion and $62.8 billion, respectively, as of September 30, 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.

 

Accounts Receivable, Net

 

Included within accounts receivable, net are the following, which are reflected net of allowance for doubtful accounts, customer credit allowances, and contractual allowances:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

In millions

    

2018

    

2017

Trade receivables

 

$

7,258

 

$

7,873

Vendor and manufacturer receivables

 

 

6,991

 

 

5,109

Other receivables

 

 

588

 

 

199

  Total accounts receivable, net

 

$

14,837

 

$

13,181

 

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 $4 million and $5 million in the three months ended September 30, 2018 and 2017, respectively, and expensed fees for the use of this network of approximately $34 million and $29 million in the nine months ended September 30, 2018 and 2017, respectively. The Company’s investment in and equity in earnings of SureScripts for all periods presented is immaterial.

 

9


 

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 $34 million and $36 million for pharmaceutical inventory purchases during the three months ended September 30, 2018 and 2017, respectively, and $105 million and $106 million for pharmaceutical inventory purchases during the nine months ended September 30, 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 11 – 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.

 

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.

 

10


 

Net revenues include (i) the portion of the price the client pays directly to the PSS, net of any discounts earned on brand drugs or other discounts and refunds 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 is 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.

 

·

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, and can be 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

11


 

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 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.

 

Revenue from Company 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 and nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy

 

 

 

Intersegment

 

Consolidated

In millions

    

Services

    

Retail/LTC

    

Eliminations

    

Totals

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Major goods/services lines:

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy

 

$

32,995

 

$

16,123

 

$

(7,350)

 

$

41,768

Front Store

 

 

 —

 

 

4,557

 

 

 —

 

 

4,557

Other

 

 

768

 

 

176

 

 

 —

 

 

944

Total

 

$

33,763

 

$

20,856

 

$

(7,350)

 

$

47,269

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy Services distribution channel:

 

 

 

 

 

 

 

 

 

 

 

 

Mail choice (1)

 

$

11,812

 

 

 

 

 

 

 

 

 

Pharmacy network (2)

 

 

21,183

 

 

 

 

 

 

 

 

 

Other

 

 

768

 

 

 

 

 

 

 

 

 

Total

 

$

33,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Major goods/services lines:

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy

 

$

96,110

 

$

47,428

 

$

(21,518)

 

$

122,020

Front Store

 

 

 —

 

 

13,990

 

 

 —

 

 

13,990

Other

 

 

3,118

 

 

542

 

 

 —

 

 

3,660

Total

 

$

99,228

 

$

61,960

 

$

(21,518)

 

$

139,670

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy Services distribution channel:

 

 

 

 

 

 

 

 

 

 

 

 

Mail choice (1)

 

$

34,807

 

 

 

 

 

 

 

 

 

Pharmacy network (2)

 

 

61,303

 

 

 

 

 

 

 

 

 

Other

 

 

3,118

 

 

 

 

 

 

 

 

 

Total

 

$

99,228

 

 

 

 

 

 

 

 

 


(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 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, which is included within the mail choice category.

 

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 Company 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 Company gift cards based on historical redemption patterns.

 

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

In millions

    

2018

    

2017

Trade receivables (included in accounts receivable, net)

 

$

7,258

 

$

7,873

Contract liabilities (included in accrued expenses)

 

 

63

 

 

53

 

13


 

During the nine months ended September 30, 2018, the contract liabilities balance includes increases related to customers’ earnings in ExtraBucks Rewards or issuances of Company gift cards and decreases for revenues recognized during the period as a result of the redemption of ExtraBucks Rewards or Company gift cards and breakage of Company 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

 

 

236

Redemption and breakage

 

 

(243)

Balance, September 30, 2018

 

$

63

 

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 tables compare the reported condensed consolidated balance sheet, statements of operations, and statement of cash flows to the pro forma amounts had the previous revenue accounting guidance remained in effect:

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Change in Accounting Policy

 

 

As Reported

 

 

 

 

Balances

 

 

For the

 

 

 

 

Without

 

 

Three Months Ended

 

 

 

 

Adoption of

In millions

 

September 30, 2018

 

Adjustments

 

Topic 606

Condensed Consolidated Statement of Operations:

 

 

 

 

 

 

 

 

 

Net revenues

 

$

47,269

 

$

(6)

 

$

47,263

Cost of revenues

 

 

39,941

 

 

(3)

 

 

39,938

Gross profit

 

 

7,328

 

 

(3)

 

 

7,325

Operating profit

 

 

2,353

 

 

(3)

 

 

2,350

Income before income tax provision

 

 

1,899

 

 

(3)

 

 

1,896

Income tax provision

 

 

509

 

 

(1)

 

 

508

Income from continuing operations

 

 

1,390

 

 

(2)

 

 

1,388

Net income

 

 

1,390

 

 

(2)

 

 

1,388

Net income attributable to CVS Health

 

 

1,390

 

 

(2)

 

 

1,388

 

 

 

 

14


 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Change in Accounting Policy

 

 

As Reported

 

 

 

 

Balances

 

 

As of/For the

 

 

 

 

Without

 

 

Nine Months Ended

 

 

 

 

Adoption of

In millions

 

September 30, 2018

 

Adjustments

 

Topic 606

Condensed Consolidated Statement of Operations:

 

 

 

 

 

 

 

 

 

Net revenues

 

$

139,670

 

$

 4

 

$

139,674

Cost of revenues

 

 

118,282

 

 

 3

 

 

118,285

Gross profit

 

 

21,388

 

 

 1

 

 

21,389

Operating profit

 

 

2,712

 

 

 1

 

 

2,713

Income before income tax provision

 

 

1,304

 

 

 1

 

 

1,305

Income tax provision

 

 

1,478

 

 

 —

 

 

1,478

Loss from continuing operations

 

 

(174)

 

 

 1

 

 

(173)

Net loss

 

 

(175)

 

 

 1

 

 

(174)

Net loss attributable to CVS Health

 

 

(175)

 

 

 1

 

 

(174)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

6,160

 

 

(18)

 

 

6,142

Deferred income taxes

 

 

3,052

 

 

 4

 

 

3,056

Total liabilities

 

 

94,884

 

 

(14)

 

 

94,870

Retained earnings

 

 

41,843

 

 

14

 

 

41,857

Total CVS Health shareholders' equity

 

 

36,618

 

 

14

 

 

36,632

Total shareholders' equity

 

 

36,622

 

 

14

 

 

36,636

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flow:

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Net loss

 

 

(175)

 

 

 1

 

 

(174)

Accrued expenses

 

 

(341)

 

 

(1)

 

 

(342)

 

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 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

15


 

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:

 

 

 

 

 

 

 

 

 

    

September 30, 

 

December 31, 

In millions

 

2018

 

2017

Cash and cash equivalents

 

$

41,587

 

$

1,696

Restricted cash (included in other current assets)

 

 

11

 

 

14

Restricted cash (included in other assets)

 

 

229

 

 

190

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

 

$

41,827

 

$

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.

 

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 nine months ended September 30, 2017 as a result of adopting this new accounting guidance:

 

 

 

 

 

 

 

 

 

 

 

 

    

As Previously

    

 

 

    

 

 

In millions

 

Reported

 

Adjustments

 

As Revised

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

Acquisitions (net of cash acquired) and other investments

 

$

(502)

 

$

41

 

$

(461)

Net cash used in investing activities

 

 

(1,608)

 

 

41

 

 

(1,567)

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

 

 

(886)

 

 

41

 

 

(845)

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