10-QPeriod: Q2 FY2019

CVS HEALTH Corp Quarterly Report for Q2 Ended Jun 30, 2019

Filed August 7, 2019For Securities:CVS

Summary

CVS Health Corporation's (CVS) Q2 2019 filing reveals significant revenue growth, primarily driven by the integration of the Aetna acquisition which closed in late 2018. Total revenues for the quarter increased by 35.2% year-over-year, reaching $63.4 billion, with the Health Care Benefits segment showing the most dramatic expansion due to Aetna's inclusion. Despite this top-line growth, operating expenses also surged by 65.2%, largely attributable to acquisition-related costs, including intangible asset amortization. The company reported a net income of $1.94 billion for the quarter, a substantial turnaround from a net loss of $2.56 billion in the same period last year. This improvement is largely due to the absence of a significant goodwill impairment charge ($3.9 billion) that impacted the prior year's results. The Pharmacy Services and Retail/LTC segments demonstrated modest revenue growth, driven by increased prescription volumes, though both faced ongoing pressures from price compression and reimbursement challenges.

Financial Highlights

56 data points
Beta

Revenue

$63.43B

38.6% Gross Margin

Net Income

$1.94B

3.1% Net Margin

EPS (Diluted)

$1.49

Total Assets

$218.90B

Cash & Equivalents

$6.06B

Free Cash Flow

$4.76B

Financial Statements
Beta
Revenue$63.43B
Cost of Revenue$38.97B
Gross Profit$24.46B
Operating Expenses$60.10B
Operating Income$3.33B
Interest Expense$772.00M
Net Income$1.94B
EPS (Basic)$1.49
EPS (Diluted)$1.49
Shares Outstanding (Basic)1.30B
Shares Outstanding (Diluted)1.30B

Key Highlights

  • 1Total revenues increased by 35.2% to $63.4 billion in Q2 2019 compared to Q2 2018, primarily due to the Aetna acquisition.
  • 2Net income turned positive at $1.94 billion, a significant improvement from a net loss of $2.56 billion in Q2 2018, largely due to the absence of a prior year goodwill impairment charge.
  • 3The Health Care Benefits segment experienced substantial revenue growth following the Aetna acquisition, with premiums and services revenue showing significant year-over-year increases.
  • 4Pharmacy Services segment revenue grew by 4.2% year-over-year, driven by increased claims volume and improved purchasing economics, despite continued price compression.
  • 5Retail/LTC segment revenue increased by 3.7% year-over-year, supported by higher prescription volumes and front store sales, though ongoing reimbursement pressure remains a challenge.
  • 6Operating expenses rose by 65.2% due to the Aetna acquisition, including intangible asset amortization and integration costs.
  • 7The company maintained its quarterly dividend of $0.50 per share and has $13.9 billion remaining authorization under its share repurchase program.

Frequently Asked Questions

The primary driver of the substantial revenue increase was the acquisition of Aetna, which closed in November 2018. The financial results of Aetna were consolidated for the full quarter, significantly boosting total revenues, particularly within the Health Care Benefits segment.

The Aetna acquisition contributed to a significant improvement in net income. While Aetna added to revenues, its inclusion also brought increased operating expenses, including amortization of intangible assets and integration costs. However, the company's reported net income benefited significantly from the absence of a large goodwill impairment charge that negatively impacted the prior year's results.

Both the Pharmacy Services and Retail/LTC segments continue to face challenges such as ongoing pharmacy reimbursement pressure and price compression. In the Pharmacy Services segment, this is exacerbated by competitive PBM industry dynamics. In the Retail/LTC segment, reimbursement pressure and the complexities of the long-term care business are significant concerns.

CVS Health views 2019 as a transition year focused on integrating Aetna and executing its growth strategy. While confident in achieving Aetna synergy targets, the company anticipates ongoing pressures on its Retail/LTC and Pharmacy Services segments due to reimbursement challenges, pricing compression, and other industry-specific factors. The company is implementing strategic actions to address these challenges and improve performance.