01—Abstract
Summary
Summary of the 10-K filed February 28, 2019. Cited figures are marked; the original filing is the authoritative source.
CVS Health's 2018 10-K, filed February 28, 2019, is dominated by the November 28, 2018 acquisition of Aetna for roughly $70 billiona in equity value (about $78 billion including assumed debt), financed largely with approximately $45 billion of new debt.
The deal transforms the company into a four-segment organization (Pharmacy Services, Retail/LTC, Health Care Benefits, Corporate/Other) and adds about 38 million health plan members. Because Aetna was consolidated for only about one month, 2018 results understate the go-forward scale, and the reported figures are heavily distorted by one-time charges. Reported 2018 financials were weak.
Total revenues rose 5.3% to $194.6 billionb, but operating income fell 57.8% to $4.0 billion, and the company posted a net loss attributable to CVS Health of $594 million (EPS of -$0.57). The decline was driven by $6.1 billion of goodwill impairments in the LTC (long-term care) reporting unit, $485 million of Corporate/Other acquisition transaction and integration costs, and continued price compression in PBM and retail pharmacy. The Retail/LTC segment's operating income collapsed to $620 million from $6.6 billion, while Pharmacy Services was roughly flat at $4.7 billion.
Looking forward, management called 2019 a "transition year" focused on integrating Aetna, said it was on track to exceed its 2020 synergy target, and warned that pharmacy reimbursement pressure, a declining benefit from new generic launches, and LTC challenges would weigh on Pharmacy Services and Retail/LTC operating income. Balance-sheet leverage rose sharply: long-term debt went from $22.2 billion to $71.4 billionc, and Moody's cut the long-term rating to Baa2 with a negative outlook while S&P moved to BBB.
The dividend was held at $0.50d per quarter and share repurchases were paused in 2018. Key risks flagged include ACA and Medicare Advantage policy changes, star-rating dependence, RADV audit exposure, and integration execution.
02—Key points
Key Highlights
- Aetna acquisition closed November 28, 2018: about $70 billion equity value, roughly $78 billion including assumed debt; cash consideration of $145 per Aetna share funded in part by approximately $45 billion of new debt.
- Net loss attributable to CVS Health of $594 million (EPS -$0.57) versus net income of $6.6 billion in 2017, driven by $6.1 billion of LTC goodwill impairments and a sharp rise in operating expenses.
- Operating income fell 57.8% to $4.0 billion; Retail/LTC operating income dropped to $620 million from $6.6 billion, while Pharmacy Services held roughly flat at $4.7 billion.
- Total revenues grew 5.3% to $194.6 billion, with Aetna contributing only about $5.6 billion from the post-close period; Pharmacy Services processed approximately 1.9 billion prescriptions.
- Long-term debt rose to $71.4 billion from $22.2 billion; Moody's cut the long-term rating to Baa2 (negative outlook) and S&P rated the debt BBB, keeping it investment grade.
- Management guides 2019 as a transition year with PBM and Retail/LTC margin pressure, while expecting to exceed its 2020 Aetna synergy target; the quarterly dividend was held at $0.50 and no buybacks were made in 2018.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2018, CVS Health Corp lost $0.00.
- Revenue$194.58B100.0%
- Cost of revenue−$156.45B80.4%
- Gross profit$38.13B19.6%
- Operating costs−$34.11B17.5%
- Operating income$4.02B2.1%
- Interest, other & tax−$4.62B2.4%
- Net income−$594.0M0.3%
Where FY2018 revenue went
$194.58B- Cost of revenue: $156.45B, 80% of revenue
- Operating costs: $34.11B, 18% of revenue
- Operating income: $4.02B, 2.1% of revenue
Kept 2.1% as operating incomeOperating income $4.02B · 2.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 28, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $194.58B$184.79B | +5.3% |
| Cost of Revenue | $156.45B$156.22B | +0.1% |
| Gross Profit | $38.13B$28.55B | +33.6% |
| Operating Expenses | $190.56B$18.81B | +913.1% |
| Operating Income | $4.02B$9.54B | −57.8% |
| Interest Expense | $2.62B$1.06B | +146.6% |
| Net Income | -$594.00M$6.62B | −109.0% |
| EPS (Basic) | $-0.57$6.47 | −108.8% |
| EPS (Diluted) | $-0.57$6.44 | −108.9% |
| Shares Outstanding (Basic) | 1.04B1.02B | +2.4% |
| Shares Outstanding (Diluted) | 1.04B1.02B | +2.0% |
05—Questions
Frequently Asked Questions
Why did CVS report a net loss in 2018 when revenues grew?
The loss was driven by non-cash and one-time items rather than core operating deterioration alone. CVS recorded $6.1 billion of goodwill impairments, mostly in its LTC (long-term care) unit, which was hit by skilled nursing facility bankruptcies and lower occupancy. It also incurred roughly $485 million of Aetna transaction and integration costs and an effective tax rate of 142.4%, because most of the goodwill impairment was not tax-deductible.
How much debt did CVS take on for the Aetna deal, and how is its credit profile affected?
CVS issued about $45 billion of new debt, including $40 billion of notes in March 2018 and term loans, and assumed roughly $8.1 billion of Aetna debt. Total long-term debt reached $71.4 billion at year-end. Moody's lowered the rating to Baa2 with a negative outlook and S&P rated the debt BBB, so the company remains investment grade but has materially less financial flexibility, and interest expense rose to $2.6 billion from $1.1 billion.
What should investors expect from CVS in 2019?
Management described 2019 as a transition year. It expects continued reimbursement pressure in Pharmacy Services and Retail/LTC, fewer new multi-source generic launches, lower brand-name price inflation, and continued LTC challenges, partly offset by new PBM contracting models and an enterprise cost-reduction program. It also said it is on track to exceed its 2020 Aetna synergy target. Investors should watch Medicare Advantage star ratings, the proposed RADV audit methodology change, and the realization of integration savings.
Is the dividend at risk, and are buybacks resuming?
The quarterly dividend was held at $0.50 per share for 2018 and management expects to maintain it through 2019, paying about $2.0 billion annually. No shares were repurchased in 2018, and the $13.9 billion remaining under the 2016 authorization was not used, as capital was prioritized for debt reduction and the integration. Insurance subsidiaries can pay about $584 million in dividends to the parent in 2019 without prior regulatory approval, which is a relevant constraint on upstream cash.
06—Continue