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CVS Health Reports Third Quarter Results

CVS Health Reports Third Quarter Results

2019 EPS Guidance Raised And Narrowed, Reflecting Strong Execution Of Strategic Long-Term Plan

WOONSOCKET, R.I., Nov. 6, 2019 /PRNewswire/ --

Third Quarter Year-over-Year Highlights:

  • Total revenues increased 36.5% to $64.8 billion
  • GAAP operating income increased 13.8% to $2.9 billion
  • Adjusted operating income (1) increased 48.9% to $3.9 billion
  • GAAP diluted earnings per share from continuing operations of $1.17
  • Adjusted EPS (2) of $1.84

Year-to-date Highlights:

  • Generated cash flow from operations of $10.2 billion

2019 Full Year Guidance:

  • Revised GAAP operating income guidance range to $11.77 billion to $11.95 billion from $11.82 billion to $12.02 billion
  • Raised and narrowed adjusted operating income (1) guidance range to $15.22 billion to $15.40 billion from $15.16 billion to $15.36 billion
  • Revised GAAP diluted EPS from continuing operations guidance range to $4.90 to $4.98 from $4.93 to $5.04
  • Raised and narrowed Adjusted EPS (2) guidance range to $6.97 to $7.05 from $6.89 to $7.00
  • Confirmed cash flow from operations guidance range of $10.1 billion to $10.6 billion

CVS Health Corporation (CVS) today announced operating results for the three months ended September 30, 2019.

President and Chief Executive Officer Larry Merlo stated, "Our third quarter results build on the positive momentum we have seen across the company since the beginning of the year. All of our core businesses performed in line with or above expectations, reflecting strong operational execution. As a result, we delivered strong growth and generated robust operating cash flow, which enabled us to continue to delever while returning capital to our shareholders."

Merlo continued, "Based on strong year-to-date performance, we are raising and narrowing our full-year 2019 Adjusted EPS guidance range to $6.97 to $7.05. As we approach the first anniversary of the Aetna acquisition, we are increasingly confident in the strength of our broad and differentiated assets as a combined company and our ability to deliver compelling value to our customers and the communities we serve. Looking ahead, we remain focused on successful execution of our strategic priorities and integration plans to unleash the full potential of our consumer-centric health care model and create value for all stakeholders."

______________________


The Company presents both GAAP and non-GAAP financial measures in this press release to assist in the comparison of the Company's past financial performance with its current financial performance. See "Non-GAAP Financial Information" on pages 11 through 12 and endnotes (1) through (4) on page 27 for explanations of non-GAAP financial measures presented in this press release. See pages 13 through 17 and 25 through 26 for reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measure.

Consolidated Third Quarter Results


Three Months Ended

September 30,


Nine Months Ended

September 30,

In millions, except per share amounts

2019


2018


Change


2019


2018


Change

Total revenues

$

64,810


$

47,490


$

17,320


$

189,887


$

140,155


$

49,732

Operating income

2,928


2,574


354


8,950


3,197


5,753

Adjusted operating income (1)

3,947


2,650


1,297


11,573


7,542


4,031

Net income (loss)

1,529


1,390


139


4,887


(175)


5,062

Diluted earnings (loss) per share from continuing operations

$

1.17


$

1.36


$

(0.19)


$

3.75


$

(0.17)


$

3.92

Adjusted EPS (2)

$

1.84


$

1.73


$

0.11


$

5.35


$

4.89


$

0.46

Enterprise prescriptions (5) (6)

686.6


657.0


29.6


2,049.5


1,973.6


75.9

  • Total revenues and adjusted revenues (3) increased 36.5% and 37.1%, respectively, for the three months ended September 30, 2019 compared to the prior year. Revenue growth was primarily driven by the impact of the acquisition (the "Aetna Acquisition") of Aetna Inc. ("Aetna"), which the Company acquired on November 28, 2018 (the "Aetna Acquisition Date"), as well as increased volume and brand name drug price inflation in both the Pharmacy Services and Retail/LTC segments. The revenue increase was partially offset by continued price compression in the Pharmacy Services segment, reimbursement pressure in the Retail/LTC segment and an increased generic dispensing rate.
  • Operating expenses and adjusted operating expenses (4) increased 72.8% and 61.5%, respectively, for the three months ended September 30, 2019 compared to the prior year. The increase in both operating expenses and adjusted operating expenses was primarily driven by the impact of the Aetna Acquisition. The increase in operating expenses also was due to (i) an increase in intangible asset amortization primarily related to the Aetna Acquisition, (ii) a $205 million pre-tax loss on the sale of the Company's Brazilian subsidiary, Drogaria Onofre Ltda. ("Onofre"), which occurred on July 1, 2019 and (iii) a $96 million store rationalization charge recorded in the three months ended September 30, 2019 primarily related to operating lease right-of-use asset impairment charges in connection with the planned closure of 22 underperforming retail pharmacy stores in the first quarter of 2020.
  • Operating income and adjusted operating income increased 13.8% and 48.9%, respectively, for the three months ended September 30, 2019 compared to the prior year. The increase in both operating income and adjusted operating income was primarily due to the impact of the Aetna Acquisition as well as increased claims volume and improved purchasing economics in the Pharmacy Services segment. These increases were partially offset by continued reimbursement pressure in the Retail/LTC segment and continued price compression in the Pharmacy Services segment. The increase in operating income was also partially offset by (i) an increase in intangible asset amortization primarily related to the Aetna Acquisition, (ii) the $205 million pre-tax loss on the sale of Onofre recorded in the three months ended September 30, 2019, (iii) the $96 million store rationalization charge recorded in the three months ended September 30, 2019 and (iv) the absence of $209 million in interest income on the proceeds from the financing for the Aetna Acquisition recorded in the three months ended September 30, 2018.
  • Net income increased 10.0% for the three months ended September 30, 2019 compared to the prior year primarily due to the higher operating income described above, partially offset by (i) higher interest expense primarily due to the assumption of Aetna's debt as of the Aetna Acquisition Date, (ii) the loss on early extinguishment of debt of $79 million related to the Company's repayment of $4.0 billion of its outstanding senior notes pursuant to its tender offers for such senior notes in August 2019 and (iii) higher income tax expense associated with the increase in pre-tax income.
  • The effective income tax rate was 28.3% for the three months ended September 30, 2019 compared to 26.8% for the three months ended September 30, 2018. The increase in the effective income tax rate was primarily due to the impact of the sale of Onofre in the three months ended September 30, 2019.

Pharmacy Services Segment

The Pharmacy Services segment provides a full range of pharmacy benefit management services to employers, health plans, government employee groups and government sponsored programs. The segment results for the three and nine months ended September 30, 2019 and 2018 were as follows:


Three Months Ended

September 30,


Nine Months Ended

September 30,

In millions

2019


2018


Change


2019


2018


Change

Total revenues

$

36,018


$

33,864


$

2,154


$

104,418


$

99,837


$

4,581

Operating income

1,340


1,275


65


3,387


3,268


119

Adjusted operating income (1)

1,439


1,362


77


3,682


3,530


152

Total pharmacy claims processed (6)

509.5


466.3


43.2


1,480.3


1,405.2


75.1

Pharmacy network (7)

430.2


394.5


35.7


1,250.0


1,192.2


57.8

Mail choice (8)

79.3


71.8


7.5


230.3


213.0


17.3

  • Total revenues increased 6.4% for the three months ended September 30, 2019 compared to the prior year primarily due to brand name drug price inflation as well as increased total pharmacy claims volume, partially offset by continued price compression and an increased generic dispensing rate.
  • Total pharmacy claims processed increased 9.3% on a 30-day equivalent basis for the three months ended September 30, 2019 compared to the prior year primarily driven by net new business and the continued adoption of Maintenance Choice® offerings.
  • Operating income and adjusted operating income increased 5.1% and 5.7%, respectively, for the three months ended September 30, 2019 compared to the prior year primarily driven by increased claims volume, the addition of Aetna's mail order and specialty pharmacy operations and improved purchasing economics, partially offset by continued price compression. The increase in operating income also was partially offset by increased intangible asset amortization related to Aetna's mail order and specialty pharmacy operations.

See the supplemental information on page 21 for additional information regarding the performance of the Pharmacy Services segment.

Retail/LTC Segment

The Retail/LTC segment fulfills prescriptions for medications, provides patient care programs, sells a wide-assortment of general merchandise, provides health care services through walk-in clinics and provides services to long-term care facilities. The segment results for the three and nine months ended September 30, 2019 and 2018 were as follows:


Three Months Ended

September 30,


Nine Months Ended

September 30,

In millions

2019


2018


Change


2019


2018


Change

Total revenues

$

21,466


$

20,856


$

610


$

64,028


$

61,960


$

2,068

Operating income

1,095


1,491


(396)


3,884


890


2,994

Adjusted operating income (1)

1,516


1,622


(106)


4,674


5,279


(605)

Prescriptions filled (6)

352.3


331.2


21.1


1,048.2


989.7


58.5

  • Total revenues increased 2.9% for the three months ended September 30, 2019 compared to the prior year. The increase was primarily driven by increased prescription volume and brand name drug price inflation, partially offset by continued reimbursement pressure and an increased generic dispensing rate.
  • Front store revenues represent approximately 21.5% of total Retail/LTC segment revenues. Front store revenues increased in the three months ended September 30, 2019 compared to the prior year primarily driven by increases in health and beauty product sales, which benefited from continued strength in cough and cold products.
  • Total prescription volume grew 6.4% on a 30-day equivalent basis for the three months ended September 30, 2019 compared to the prior year. The growth was driven primarily by the continued adoption of patient care programs.
  • Operating income and adjusted operating income decreased 26.6% and 6.5%, respectively, for the three months ended September 30, 2019. Operating income and adjusted operating income were both negatively impacted by continued reimbursement pressure, partially offset by increased prescription volume and improved front store margin. The decrease in operating income also was driven by the $205 million pre-tax loss on the sale of Onofre and the $96 million store rationalization charge, each recorded in the three months ended September 30, 2019.

See the supplemental information on page 22 for additional information regarding the performance of the Retail/LTC segment.

Health Care Benefits Segment

The Health Care Benefits segment provides a full range of insured and self-insured ("ASC") medical, pharmacy, dental and behavioral health products and services. For periods prior to the Aetna Acquisition Date, the Health Care Benefits segment consisted solely of the Company's SilverScript® Medicare Part D prescription drug plan ("PDP") business. The segment results for the three and nine months ended September 30, 2019 and 2018 were as follows:


Three Months Ended

September 30,


Nine Months Ended

September 30,

In millions, except percentages

2019


2018


Change


2019


2018


Change

Total revenues

$

17,181



$

641


$

16,540


$

52,454



$

2,723


$

49,731

Operating income (loss)

1,036



74


962


3,253



(64)


3,317

Adjusted operating income (loss) (1)

1,423



75


1,348


4,423



(62)


4,485

Medical benefit ratio ("MBR") (a)

83.3

%


NM




83.7

%


NM



Medical membership as of September 30, 2019







22.8








(a)

The Health Care Benefits segment for the three and nine months ended September 30, 2018 consisted solely of the Company's SilverScript PDP business. Accordingly, the MBRs for the three and nine months ended September 30, 2018 are not meaningful ("NM") and are not directly comparable to the MBRs for the three and nine months ended September 30, 2019.

 

  • Total revenues increased $16.5 billion for the three months ended September 30, 2019 compared to the prior year primarily driven by the Aetna Acquisition.
  • Operating income and adjusted operating income increased $962 million and $1.3 billion, respectively, for the three months ended September 30, 2019, compared to the prior year primarily driven by the Aetna Acquisition. The increase in operating income was partially offset by an increase in intangible asset amortization related to the Aetna Acquisition.
  • Medical membership as of September 30, 2019 of 22.8 million remained consistent compared with June 30, 2019, reflecting increases in Medicare and Medicaid products, offset by declines in Commercial products.
  • The Health Care Benefits segment experienced favorable development of prior-periods' health care cost estimates in its Commercial and Government businesses, primarily attributable to second quarter 2019 performance.
  • Prior years' health care costs payable estimates developed favorably by $511 million during the nine months ended September 30, 2019. This development is reported on a basis consistent with the prior years' development reported in the health care costs payable table in the Company's annual audited financial statements and does not directly correspond to an increase in 2019 operating results.

See the supplemental information on page 23 for additional information regarding the performance of the Health Care Benefits segment.

2019 Full Year Guidance

The Company revised its full year 2019 GAAP operating income guidance range to $11.77 billion to $11.95 billion from $11.82 billion to $12.02 billion and raised and narrowed its guidance range for full year 2019 adjusted operating income to $15.22 billion to $15.40 billion from $15.16 billion to $15.36 billion. The Company revised its full year 2019 GAAP diluted EPS from continuing operations guidance range to $4.90 to $4.98 from $4.93 to $5.04, and raised and narrowed its full year 2019 Adjusted EPS guidance range to $6.97 to $7.05 from $6.89 to $7.00.

The adjustments between GAAP operating income and GAAP diluted EPS from continuing operations and adjusted operating income and Adjusted EPS include, as applicable, adding back amortization of intangible assets, integration costs related to the Aetna Acquisition, store rationalization charges, gains/losses on divestitures and losses on early extinguishment of debt.

Teleconference and Webcast

The Company will be holding a conference call today for investors at 8:00 a.m. (Eastern time) to discuss its third quarter results. An audio webcast of the call will be broadcast simultaneously for all interested parties through the Investor Relations section of the CVS Health website at http://investors.cvshealth.com. This webcast will be archived and available on the website for a one-year period following the conference call.

About the Company

CVS Health is the nation's premier health innovation company helping people on their path to better health. Whether in one of its pharmacies or through its health services and plans, CVS Health is pioneering a bold new approach to total health by making quality care more affordable, accessible, simple and seamless. CVS Health is community-based and locally focused, engaging consumers with the care they need when and where they need it. The Company has approximately 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 102 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year and expanding specialty pharmacy services. CVS Health also serves an estimated 38 million people through traditional, voluntary and consumer-directed health insurance products and related services, including rapidly expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan. The Company believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs. Find more information about how CVS Health is shaping the future of health at https://www.cvshealth.com.

Cautionary Statement Concerning Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of CVS Health Corporation. Statements in this press release that are forward-looking include the information under the heading "2019 Full Year Guidance" and the related endnotes and reconciliations and the information in Mr. Merlo's quoted statement. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our Securities and Exchange Commission ("SEC") filings, including those set forth in the Risk Factors section and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Annual Report on Form 10-K and in our most recently filed Quarterly Report on Form 10-Q.

You are cautioned not to place undue reliance on CVS Health's forward looking statements. These forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. CVS Health does not assume any duty to update or revise forward-looking statements, whether as a result of new information, future events or otherwise, as of any future date.

- Tables Follow -

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)



Three Months Ended

September 30,


Nine Months Ended

September 30,

In millions, except per share amounts

2019


2018


2019


2018

Revenues:








Products

$

47,149


$

46,334


$

136,023


$

136,035

Premiums

15,539


627


47,612


2,684

Services

1,859


308


5,447


951

Net investment income

263


221


805


485

Total revenues

64,810


47,490


189,887


140,155

Operating costs:








Cost of products sold

40,437


39,502


116,654


115,883

Benefit costs

12,850


439


39,396


2,399

Goodwill impairment




3,921

Operating expenses

8,595


4,975


24,887


14,755

Total operating costs

61,882


44,916


180,937


136,958

Operating income

2,928


2,574


8,950


3,197

Interest expense

747


674


2,301


1,886

Loss on early extinguishment of debt

79



79


Other expense (income)

(31)


1


(93)


7

Income before income tax provision

2,133


1,899


6,663


1,304

Income tax provision

604


509


1,776


1,478

Income (loss) from continuing operations

1,529


1,390


4,887


(174)

Loss from discontinued operations, net of tax




(1)

Net income (loss)

1,529


1,390


4,887


(175)

Net loss attributable to noncontrolling interests

1




Net income (loss) attributable to CVS Health

$

1,530


$

1,390


$

4,887


$

(175)









Basic earnings (loss) per share:








Income (loss) from continuing operations attributable to CVS Health

$

1.17


$

1.36


$

3.76


$

(0.17)

Loss from discontinued operations attributable to CVS Health

$


$


$


$

Net income (loss) attributable to CVS Health

$

1.17


$

1.36


$

3.76


$

(0.17)

  Weighted average basic shares outstanding

1,302


1,020


1,300


1,018

Diluted earnings (loss) per share:








Income (loss) from continuing operations attributable to CVS Health

$

1.17


$

1.36


$

3.75


$

(0.17)

Loss from discontinued operations attributable to CVS Health

$


$


$


$

Net income (loss) attributable to CVS Health

$

1.17


$

1.36


$

3.75


$

(0.17)

  Weighted average diluted shares outstanding

1,305


1,022


1,303


1,018

Dividends declared per share

$

0.50


$

0.50


$

1.50


$

1.50

 

 

CVS HEALTH CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)


In millions

September 30,
2019


December 31,
2018

Assets:




Cash and cash equivalents

$

5,193


$

4,059

Investments

2,334


2,522

Accounts receivable, net

19,789


17,631

Inventories

16,028


16,450

Other current assets

4,841


4,581

Total current assets

48,185


45,243

Long-term investments

17,342


15,732

Property and equipment, net

11,651


11,349

Operating lease right-of-use assets

20,757


Goodwill

79,548


78,678

Intangible assets, net

33,655


36,524

Separate accounts assets

4,590


3,884

Other assets

4,385


5,046

Total assets

$

220,113


$

196,456





Liabilities:




Accounts payable

$

9,442


$

8,925

Pharmacy claims and discounts payable

13,099


11,365

Health care costs payable

7,014


6,147

Policyholders' funds

2,938


2,939

Accrued expenses

11,615


10,711

Other insurance liabilities

1,790


1,937

Current portion of operating lease liabilities

1,798


Short-term debt

1,070


720

Current portion of long-term debt

3,778


1,265

Total current liabilities

52,544


44,009

Long-term operating lease liabilities

18,826


Long-term debt

64,206


71,444

Deferred income taxes

7,279


7,677

Separate accounts liabilities

4,590


3,884

Other long-term insurance liabilities

7,557


8,119

Other long-term liabilities

2,178


2,780

Total liabilities

157,180


137,913





Shareholders' equity:




Preferred stock


Common stock and capital surplus

45,854


45,440

Treasury stock

(28,207)


(28,228)

Retained earnings

44,017


40,911

Accumulated other comprehensive income

950


102

Total CVS Health shareholders' equity

62,614


58,225

Noncontrolling interests

319


318

Total shareholders' equity

62,933


58,543

Total liabilities and shareholders' equity

$

220,113


$

196,456

 

 

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Nine Months Ended

September 30,

In millions

2019


2018

Cash flows from operating activities:




Cash receipts from customers

$

184,519


$

132,275

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(109,958)


(107,920)

Insurance benefits paid

(38,812)


(2,400)

Cash paid to other suppliers and employees

(21,411)


(12,305)

Interest and investment income received

756


406

Interest paid

(2,675)


(1,759)

Income taxes paid

(2,205)


(1,911)

Net cash provided by operating activities

10,214


6,386





Cash flows from investing activities:




Proceeds from sales and maturities of investments

5,616


43

Purchases of investments

(6,011)


(97)

Purchases of property and equipment

(1,890)


(1,452)

Acquisitions (net of cash acquired)

(361)


(616)

Proceeds from sale of subsidiary


725

Other

16


11

Net cash used in investing activities

(2,630)


(1,386)





Cash flows from financing activities:




Net borrowings (repayments) of short-term debt

350


(1,276)

Proceeds from issuance of long-term debt

3,458


39,376

Repayments of long-term debt

(8,350)


(2,266)

Derivative settlements

(25)


446

Dividends paid

(1,952)


(1,528)

Proceeds from exercise of stock options

183


214

Payments for taxes related to net share settlement of equity awards

(85)


(39)

Other

11


Net cash provided by (used in) financing activities

(6,410)


34,927

Net increase in cash, cash equivalents and restricted cash

1,174


39,927

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

4,295


1,900

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

$

5,469


$

41,827

 

 

CVS HEALTH CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Nine Months Ended

September 30,

In millions

2019


2018

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




Net income (loss)

$

4,887


$

(175)

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




Depreciation and amortization

3,275


1,911

Goodwill impairment


3,921

Stock-based compensation

355


172

Loss on sale of subsidiary

205


86

Loss on early extinguishment of debt

79


Deferred income taxes and other noncash items

(38)


210

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




Accounts receivable, net

(2,312)


(1,725)

Inventories

413


472

Other assets

(374)


(3)

Accounts payable and pharmacy claims and discounts payable

2,330


1,839

Health care costs payable and other insurance liabilities

535


Other liabilities

859


(322)

Net cash provided by operating activities

$

10,214


$

6,386

Non-GAAP Financial Information

The Company uses non-GAAP financial measures to analyze underlying business performance and trends. The Company believes that providing these non-GAAP financial measures enhances the Company's and investors' ability to compare the Company's past financial performance with its current performance. These non-GAAP financial measures are provided as supplemental information to the financial measures presented in this press release that are calculated and presented in accordance with GAAP. Non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP. The Company's definitions of its non-GAAP financial measures may not be comparable to similarly titled measurements reported by other companies.

Non-GAAP financial measures such as adjusted operating income, adjusted earnings per share (EPS), adjusted income from continuing operations attributable to CVS Health, adjusted revenues and adjusted operating expenses exclude from the relevant GAAP metrics, as applicable: amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance.

For the periods covered in this press release, the following items are excluded from the non-GAAP financial measures described above, as applicable, because the Company believes they neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance:

  • The Company's acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the Company's statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company's revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company's insurance products, the services performed for the Company's customers or the sale of the Company's products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company's acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company's and investors' ability to compare the Company's past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company's GAAP financial statements and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised.
  • During the three and nine months ended September 30, 2019 and 2018, acquisition-related transaction and integration costs relate to the Aetna Acquisition. During the nine months ended September 30, 2018, acquisition-related integration costs also relate to the acquisition of Omnicare, Inc. The acquisition-related transaction and integration costs are reflected in the Company's unaudited GAAP condensed consolidated statements of operations in operating expenses primarily within the Corporate/Other segment.
  • During the three and nine months ended September 30, 2019, the store rationalization charges relate to the planned closure of 22 underperforming retail pharmacy stores in the first quarter of 2020. During the nine months ended September 30, 2019, the store rationalization charges also relate to the planned closure of 46 underperforming retail pharmacy stores in the second quarter of 2019. The store rationalization charges primarily relate to operating lease right-of-use asset impairment charges and are reflected in the Company's unaudited GAAP condensed consolidated statements of operations in operating expenses within the Retail/LTC segment.
  • During the three and nine months ended September 30, 2019, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of Onofre, which occurred on July 1, 2019. The loss on divestiture primarily relates to the elimination of the cumulative translation adjustment from accumulated other comprehensive income and is reflected in operating expenses in the Company's unaudited GAAP condensed consolidated statements of operations within the Retail/LTC segment. During the nine months ended September 30, 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company's RxCrossroads subsidiary for $725 million and is reflected in operating expenses in the Company's unaudited GAAP condensed consolidated statements of operations within the Retail/LTC segment.
  • During the three and nine months ended September 30, 2019, the loss on early extinguishment of debt relates to the Company's repayment of $4.0 billion of its outstanding senior notes in August 2019 pursuant to its tender offers for such senior notes.
  • During the nine months ended September 30, 2018, the goodwill impairment charge relates to the LTC reporting unit within the Retail/LTC segment.
  • During the three and nine months ended September 30, 2018, the Company recorded interest expense of $436 million and $1.2 billion, respectively, related to bridge financing costs and interest expense on the $40 billion of its unsecured senior notes issued on March 9, 2018 ("2018 Notes"). The interest expense was reduced by related interest income of $209 million and $453 million, during the three and nine months ended September 30, 2018, respectively, on the proceeds of the 2018 Notes. All amounts are for the periods prior to the close of the Aetna Acquisition and were recorded within the Corporate/Other segment.
  • The corresponding tax benefit or expense related to the items excluded from adjusted income from continuing operations attributable to CVS Health and Adjusted EPS above. The nature of each non-GAAP adjustment is evaluated to determine whether a discrete adjustment should be made to the adjusted income tax provision.

See endnotes (1) through (4) for definitions of non-GAAP financial measures. Reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP financial measure are presented on pages 13 through 17 and 25 through 26.

Reconciliations of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures


Adjusted Operating Income

(Unaudited)


The following are reconciliations of operating income to adjusted operating income:



Three Months Ended September 30, 2019

In millions

Pharmacy

Services


Retail/

LTC


Health Care

Benefits


Corporate/

Other


Intersegment

Eliminations


Consolidated

Totals

Operating income (loss) (GAAP measure)

$

1,340


$

1,095


$

1,036


$

(364)


$

(179)


$

2,928

Non-GAAP adjustments:












Amortization of intangible assets

99


120


387


1



607

Acquisition-related integration costs




111



111

Store rationalization charge


96





96

Loss on divestiture of subsidiary


205





205

Adjusted operating income (loss) (1)

$

1,439


$

1,516


$

1,423


$

(252)


$

(179)


$

3,947




Three Months Ended September 30, 2018

In millions

Pharmacy

Services


Retail/

LTC


Health Care

Benefits


Corporate/

Other


Intersegment

Eliminations


Consolidated

Totals

Operating income (loss) (GAAP measure)

$

1,275


$

1,491


$

74


$

(70)


$

(196)


$

2,574

Non-GAAP adjustments:












Amortization of intangible assets

87


127


1




215

Acquisition-related transaction and integration costs


4



66



70

Interest income on financing for the Aetna Acquisition




(209)



(209)

Adjusted operating income (loss) (1)

$

1,362


$

1,622


$

75


$

(213)


$

(196)


$

2,650

 


Nine Months Ended September 30, 2019

In millions

Pharmacy

Services


Retail/

LTC


Health Care

Benefits


Corporate/

Other


Intersegment

Eliminations


Consolidated

Totals

Operating income (loss) (GAAP measure)

$

3,387


$

3,884


$

3,253


$

(1,053)


$

(521)


$

8,950

Non-GAAP adjustments:












Amortization of intangible assets

295


354


1,170


3



1,822

Acquisition-related integration costs




365



365

Store rationalization charges


231





231

Loss on divestiture of subsidiary


205





205

Adjusted operating income (loss) (1)

$

3,682


$

4,674


$

4,423


$

(685)


$

(521)


$

11,573


Nine Months Ended September 30, 2018

In millions

Pharmacy

Services


Retail/

LTC


Health Care

Benefits


Corporate/

Other


Intersegment

Eliminations


Consolidated

Totals

Operating income (loss) (GAAP measure)

$

3,268


$

890


$

(64)


$

(339)


$

(558)


$

3,197

Non-GAAP adjustments:












Amortization of intangible assets

262


375


2




639

Acquisition-related transaction and integration costs


7



145



152

Loss on divestiture of subsidiary


86





86

Goodwill impairment


3,921





3,921

Interest income on financing for the Aetna Acquisition




(453)



(453)

Adjusted operating income (loss) (1)

$

3,530


$

5,279


$

(62)


$

(647)


$

(558)


$

7,542

 

 

Adjusted Earnings Per Share

(Unaudited)


The following are reconciliations of income (loss) from continuing operations attributable to CVS Health to adjusted income from continuing operations attributable to CVS Health and calculations of GAAP diluted EPS from continuing operations and Adjusted EPS:



Three Months Ended
September 30, 2019


Three Months Ended
September 30, 2018

In millions, except per share amounts

Total
Company


Per
Common
Share


Total
Company


Per
Common
Share

Income from continuing operations (GAAP measure)

$

1,529




$

1,390



Net loss attributable to noncontrolling interests (GAAP measure)

1






Income allocable to participating securities (GAAP measure)




(1)



Income from continuing operations attributable to CVS Health (GAAP measure)

1,530


$

1.17


1,389


$

1.36

Non-GAAP adjustments:








Amortization of intangible assets

607


0.46


215


0.21

Acquisition-related transaction and integration costs

111


0.09


70


0.07

Store rationalization charge

96


0.07



Loss on divestiture of subsidiary

205


0.16



Loss on early extinguishment of debt

79


0.06



Net interest expense on financing for the Aetna Acquisition



227


0.22

Income tax benefit

(220)


(0.17)


(132)


(0.13)

Income allocable to participating securities, net of tax (a)

(1)



(1)


Adjusted income from continuing operations attributable to CVS Health (2)

$

2,407


$

1.84


$

1,768


$

1.73









Weighted average diluted shares outstanding



1,305




1,022

______________________

(a) 

Represents the corresponding impact to income allocable to participating securities, net of tax, related to the items above excluded from income from continuing operations attributable to CVS Health in determining adjusted income from continuing operations attributable to CVS Health and calculating Adjusted EPS above.

 

 


Nine Months Ended

September 30, 2019


Nine Months Ended

September 30, 2018

In millions, except per share amounts

Total
Company


Per
Common
Share


Total
Company


Per
Common
Share

Income (loss) from continuing operations (GAAP measure)

$

4,887





$

(174)




Net loss attributable to noncontrolling interests (GAAP measure)








Income allocable to participating securities (GAAP measure)

(3)





(3)




Income (loss) from continuing operations attributable to CVS Health (GAAP measure)

4,884



$

3.75



(177)



$

(0.17)


Non-GAAP adjustments:








Amortization of intangible assets

1,822



1.40



639



0.63


Acquisition-related transaction and integration costs

365



0.28



152



0.15


Store rationalization charges

231



0.17






Loss on divestiture of subsidiary

205



0.16



86



0.08


Loss on early extinguishment of debt

79



0.06






Goodwill impairment





3,921



3.84


Net interest expense on financing for the Aetna Acquisition





697



0.68


Income tax benefit

(611)



(0.47)



(320)



(0.31)


Income allocable to participating securities, net of tax (a)

(2)





(7)



(0.01)


Adjusted income from continuing operations attributable to CVS Health (2)

$

6,973



$

5.35



$

4,991



$

4.89










Weighted average diluted shares outstanding (GAAP) (2)



1,303





1,018


Adjusted weighted average diluted shares outstanding (non-GAAP) (2)



1,303





1,020


________________________________

(a) 

Represents the corresponding impact to income allocable to participating securities, net of tax, related to the items above excluded from income (loss) from continuing operations attributable to CVS Health in determining adjusted income from continuing operations attributable to CVS Health and calculating Adjusted EPS above.

 

 

Adjusted Revenues and Adjusted Operating Expenses

(Unaudited)


The following is a reconciliation of total revenues to adjusted revenues:



Three Months Ended

September 30,


Nine Months Ended

September 30,

In millions

2019


2018


2019


2018

Total revenues (GAAP measure)

$

64,810


$

47,490


$

189,887


$

140,155

Non-GAAP adjustment:








Interest income on financing for the Aetna Acquisition


(209)



(453)

Adjusted revenues (3)

$

64,810


$

47,281


$

189,887


$

139,702


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



Three Months Ended
September 30,


Nine Months Ended
September 30,

In millions

2019


2018


2019


2018

Operating expenses (GAAP measure)

$

8,595


$

4,975


$

24,887


$

14,755

Non-GAAP adjustments:








Amortization of intangible assets

(607)


(215)


(1,822)null