WE ARE
A pharmacy innovation company
OUR STRATEGY
Reinventing pharmacy
OUR PURPOSE
Helping people on their
path to better health
OUR VALUES
Innovation
Collaboration
Caring
Integrity
Accountability
C
C
C
V
V
V
S
S
S
H
H
H
e
e
e
a
a
a
l
l
l
t
t
t
h
h
h
2
2
2
0
0
0
1
1
1
5
7
6
A
A
A
n
n
n
n
n
n
u
u
u
a
a
a
l
l
l
R
R
R
e
e
e
p
p
p
o
o
o
r
r
r
t
t
t
The CVS Health 2017 Annual Report achieved the following
results by printing a portion of this project on paper contain-
ing 10 percent post-consumer recycled content. FSC® is not
responsible for any calculations from choosing this paper.
Trees
Saved
59
fully grown
Water
Saved
27,542
gallons
Energy
Saved
Solid Waste
Not Produced
Greenhouse Gases
Not Produced
Hazardous Air
Pollutants
Not Produced
2,000,000
MM BTUs
1,843
pounds
5,078
pounds
4
pounds
2017 Annual Report
CVS Health, One CVS Drive, Woonsocket, RI 02895 | 401.765.1500 | cvshealth.com
At the heart of health.
Shareholder Information
Officers
Larry J. Merlo
President and Chief Executive Officer
David M. Denton
Executive Vice President and
Chief Financial Officer
Jonathan C. Roberts
Executive Vice President and
Chief Operating Officer
Lisa G. Bisaccia
Executive Vice President and
Chief Human Resources Officer
Eva C. Boratto
Executive Vice President – Controller
and Chief Accounting Officer
Troyen A. Brennan, M.D.
Executive Vice President and
Chief Medical Officer
Directors
C. Daniel Haron
Executive Vice President and
President – Omnicare
J. David Joyner
Executive Vice President, Sales and
Account Services – CVS Caremark
Thomas M. Moriarty
Executive Vice President, Chief Policy and
External Affairs Officer and General Counsel
Derica W. Rice
Executive Vice President and
President – CVS Caremark
Carol A. DeNale
Senior Vice President and Treasurer
David A. Falkowski
Senior Vice President and Chief
Compliance Officer
John P. Kennedy
Senior Vice President and Chief Tax Officer
Michael P. McGuire
Senior Vice President – Investor Relations
Colleen M. McIntosh
Senior Vice President, Corporate Secretary and
Assistant General Counsel – Corporate Services
Thomas S. Moffatt
Vice President, Assistant Secretary and Assistant
General Counsel – Corporate Services
OFFICERS’ CERTIFICATIONS
The Company has filed the required certifications under
Section 302 of the Sarbanes-Oxley Act of 2002 regarding
the quality of our public disclosures as Exhibits 31.1 and
31.2 to our annual report on Form 10-K for the fiscal year
ended December 31, 2017. After our 2017 annual meeting
of stockholders, the Company filed with the New York Stock
Exchange the CEO certification regarding its compliance
with the NYSE corporate governance listing standards as
required by NYSE Rule 303A.12(a).
Richard M. Bracken (1) (2) (5)
Former Chairman and Chief Executive Officer
HCA Holdings, Inc.
Anne M. Finucane (1) (3)
Vice Chairman
Bank of America Corporation
William C. Weldon (1) (3)
Former Chairman and Chief Executive Officer
Johnson & Johnson
C. David Brown II (1) (3) (5)
Chairman of the Firm
Broad and Cassel
Larry J. Merlo (5)
President and Chief Executive Officer
CVS Health Corporation
Alecia A. DeCoudreaux (2) (4)
Former President, Mills College
and Former Executive, Eli Lilly & Company
Jean-Pierre Millon (2) (4)
Former President and Chief Executive Officer
PCS Health Systems, Inc.
Nancy-Ann M. DeParle (2) (4)
Partner
Consonance Capital Partners, LLC
David W. Dorman (1) (3) (5)
Chairman of the Board
CVS Health Corporation
Mary L. Schapiro (4)
Vice Chair of the Advisory Board
Promontory Financial Group
Richard J. Swift (4) (5)
Former Chairman, President and
Chief Executive Officer
Foster Wheeler Ltd.
Tony L. White (2) (3)
Former Chairman, President and
Chief Executive Officer
Applied Biosystems, Inc.
(1) Member of the Nominating and
Corporate Governance Committee
(2) Member of the Patient Safety and
Clinical Quality Committee
(3) Member of the Management Planning
and Development Committee
(4) Member of the Audit Committee
(5) Member of the Executive Committee
Shareholder Information
Corporate Headquarters
CVS Health Corporation
One CVS Drive, Woonsocket, RI 02895
(401) 765-1500
Annual Shareholders’ Meeting
June 4, 2018
CVS Health Corporate Headquarters
Stock Market Listing
The New York Stock Exchange
Symbol: CVS
designed and produced by see see eye
Transfer Agent and Registrar
Questions regarding stock holdings, certificate
replacement/transfer, dividends and address
changes should be directed to:
Equiniti Trust Company
P.O. Box 64874
St. Paul, MN 55164-0874
Toll-free: (877) CVS-PLAN (287-7526)
International: +1 (651) 450-4064
Email: stocktransfer@eq-us.com
Website: www.shareowneronline.com
Direct Stock Purchase/Dividend
Reinvestment Program
Shareowner Services Plus PlanSM provides a
convenient and economical way for you to
purchase your first shares or additional shares
of CVS Health common stock. The program is
sponsored and administered by Equiniti Trust
Company. For more information, including an
enrollment form, please contact Equiniti Trust
Company at (877) 287-7526.
Financial and Other Company
Information
The Company’s Annual Report on Form 10-K
will be sent without charge to any shareholder
upon request by contacting:
Michael P. McGuire
Senior Vice President – Investor Relations
CVS Health Corporation
One CVS Drive, MC 1008
Woonsocket, RI 02895
(800) 201-0938
In addition, financial reports and recent
filings with the Securities and Exchange
Commission, including our Form 10-K,
as well as other Company information,
are available via the Internet at
investors.cvshealth.com.
What does it mean to be at the heart of health?
For CVS Health, it’s about addressing the unique challenges of today’s health care
environment and developing solutions that will lead to better health care delivery in the
years to come. Over the next few pages, you’ll learn about some of the many steps we’re
taking to improve outcomes while also providing more value for clients and patients.
We’re accomplishing this through a broad set of innovations across the spectrum of health
care that leverage our unique suite of assets. Through them, we’re able to engage patients
and help them live healthier lives in ways that no other health care company can.
2017 Annual Report
1
We bring optimal
care closer to
people who need it.
Our streamlined authorization
process for specialty customers
and new delivery options are
two ways in which we are
improving access for patients.
Our strategic initiatives with Epic, the
most popular electronic health records
(EHR) platform, are helping us meet the
many challenges of care coordination in
today’s fragmented health care system. For
example, Epic has helped us streamline
the often-challenging prior authorization
process so that physicians can get their
patients started on specialty therapies more
rapidly. Given Epic’s compatibility with other
EHR systems, we can work with physicians
using different platforms as well.
Across the enterprise, we’re making it even
easier for patients to get the care they need.
In addition to Maintenance Choice®, which
gives customers the option of getting their
90-day prescriptions at one of our retail
locations at the same low price as mail,
our new Maintenance Choice All Access
includes on-demand prescription delivery. In
2018, CVS Pharmacy® is launching nation-
wide next-day delivery, and we’re offering
same-day delivery for Manhattan customers.
We expect to add same-day delivery in
additional cities as the year progresses.
2
CVS Health
26 million
lives enrolled in
Maintenance Choice
30%
more likely to
achieve optimal
adherence if enrolled
in Maintenance
Choice
6 cities
to have same-day
delivery in 2018
66%
fewer touches are
required for prior
authorization process
due to streamlining
improvements
~38%
conversion rate to the preferred
medication when a prescriber is made
aware of an alternative within an EHR
Based on predictive models, adherence...
increases
13%
by optimizing
timing of refill
reminders
increases
17%
among digitally
receptive
patients
decreases
5%
due to
inclement
weather
Research shows that plan members often
feel they do not have adequate knowledge
about the use of formularies or the drugs
covered by their plan. Through real-time
benefits, we’re putting member-specific
information into the hands of health care
professionals at the point of prescribing.
As a result, prescribers can know the
cost of a selected drug based on the
patient’s plan design. We also suggest
clinically appropriate alternatives, identify
restrictions, and confirm whether a selected
pharmacy is in network. Our integrated
technology enables the pharmacist to
see the same list of clinically appropriate
formulary alternatives.
CVS Health is also deploying a set of
machine learning techniques to determine
why a given individual stops taking his or
her medications. We can microsegment
our patient population, derive new insights
into their behavior, and deliver appropriate
interventions across our vast suite of
enterprise assets.
Innovation is
central to
promoting health.
At the doctor’s office and at the
pharmacy, we’re offering new
solutions to drive adherence
and provide plan members with
transparent access to information
at critical decision points.
2017 Annual Report
3
Targeted interventions through Pharmacy Advisor
can deliver greater adherence up to:
10%
for
hypertension
medication
9%
for
anti-
diabetics
12%
for
cholesterol
therapy
HealthTag recipients were
~34%
more likely to get a flu
vaccine due to targeted
HealthTag messaging,
compared to a control group
Our flagship Pharmacy Advisor® program
has long provided plan members with
one-on-one counseling at any CVS
Pharmacy location or through one of
our call centers. By applying predictive
analytics to detailed member pharmacy
data, we can also determine at what point
in treatment a member may become
non-adherent. Through our HealthTag®
technology, we’re also making it easier for
clients and strategic partners to include
customized messages on prescription
bags such as the need for an exam.
Engagement takes many other forms as
well. For example, about half of all patients
on multiple medications report being
confused about how and when to take
them. That’s why every CVS Pharmacy
now offers customers a ScriptPathTM
Prescription Schedule on request. Using
easy-to-follow icons, this personalized
guide maps out exactly which prescriptions
to take and when.
Our unique suite
of assets drives
unmatched patient
engagement.
We’re serving customers and
plan members on their own
terms and addressing unique
conditions with customized
interventions.
4
CVS Health
Our cost-effective
model enhances
value for payors and
plan members alike.
We’re helping clients
and patients manage
costs in the treatment of
chronic conditions while
new formulary strategies
tie reimbursements to
effectiveness.
Chronic conditions account for 86 percent
of health care spending in the United
States. Our Transform CareTM programs help
members manage these conditions effec-
tively by drawing on the full range of CVS
Health assets and identifying personalized
improvement opportunities. Transform
Diabetes CareTM has delivered nearly $3,000
in medical cost savings per enrolled diabetes
patient since its launch just over a year ago.
It also limits payors to single-digit price
increases annually for anti-diabetic drugs.
Among other innovations, our value-based
contracting approaches maximize payor
value by aligning a drug’s reimbursement
to the actual health outcome it delivers. A
drug’s value is determined by such factors
as survival rates, quality of life, and the
ability of patients to complete the course of
therapy. CVS Health’s approach lessens the
overall cost impact for payors and enables
more favorable formulary placement for the
most effective treatment options. Utilizing
this strategy can help deliver the most cost-
effective pricing per drug, per condition, and
lower prices for all drugs within a category.
2017 Annual Report
5
More than
$13 billion
in aggregate client savings
achieved from formulary
strategies since 2012
Up to
8%
in pharmacy spend
savings through
formulary strategies
Up to
$2,800
PMPY* in potential savings
for each 1% improvement
in A1C levels through
Transform Diabetes Care
* per member per year
Helping people on
their path to better
health takes many
forms.
Through Health in Action,
one of the pillars of our
Prescription for a Better World
Corporate Social Responsibility
platform, we support a broad
range of initiatives throughout
CVS Health communities.
CVS Health and the CVS Health Foundation
donated more than $100 million in 2017
through a combination of grants, in-kind
product contributions, volunteer hours, and
other community investments. We funded
disaster relief efforts, smoking cessation
programs, and a wide range of organiza-
tions focused on understanding illness and
improving access to quality health care.
As a leader in fighting the opioid abuse
epidemic, our commitment takes many
forms. Among them, we’ve broadened our
relationship with the National Association
of Community Health Centers through
a $2 million commitment — on top of
previous investments — to increase access
to medication-assisted treatment and
other recovery services. We also expanded
our Medication Disposal for Safer
Communities Program to a total of 1,550
kiosks, including 750 additional disposal
units we are rolling out in CVS Pharmacy
locations across the country.
6
CVS Health
$117 million
worth of free medical services
provided through Project Health
since 2006
More than
300,000
students have been educated
by CVS pharmacists about the
dangers of abusing prescription
drugs through our Pharmacists
Teach program
7,150
stores have been
retrofitted with LED
lighting, realizing a
cumulative savings of
$30 million
$425 million
annual investment in
long-term and sustainable
wage increases and
benefits resulting from
tax reform
17,000
youths hired in full-time and
part-time summer positions
4,700
Registered Apprenticeships in 18 states for roles
such as store manager and pharmacy technician
Our journey toward offering consumers
more sustainable products continued
in 2017 with our commitment to stop
selling —by the end of 2019 —nearly 600
store-brand beauty and personal care
products that contain parabens, phthalates,
and the most prevalent formaldehyde
donors. Additionally, CVS Pharmacy
became the first national retail pharmacy
chain to remove artificial trans fats from all
of our exclusive store-brand food products.
And, as part of our environmental focus, we
joined more than 250 companies that are
setting their emissions-reduction targets in
line with climate science.
We are strongly committed to promoting a
diverse workforce and inclusive culture and
were proud to earn a place for the first time
on DiversityInc’s 2017 Top 50 Companies
for Diversity list. For improving quality of life
in the communities where we do business,
CVS Health was also named to the presti-
gious Points of Light Civic 50 list.
We have a
responsibility to
be sustainable and
to meet colleague
expectations.
Our Planet in Balance and
Leader in Growth pillars
encompass efforts at reducing
our environmental impact
and creating an engaging and
inclusive workplace.
2017 Annual Report
7
Financial highlights
in millions, except per share figures
2017
2016
% change
Net revenues
Operating profit
Net income
Diluted EPS from continuing operations
Free cash flow*
Stock price at year-end
$ 184,765
$ 177,526
4.1%
$
$
$
$
$
9,517
$ 10,366
(8.2%)
6,623
6.45
6,354
72.50
$
$
$
$
5,319
24.5%
4.91
31.5%
8,147
(22.0%)
78.91
(8.1%)
Market capitalization at year-end
$ 73,456
$ 84,153
(12.7%)
* Free cash flow is defined as net cash provided by operating activities less net additions to properties and equipment (i.e., additions to property and equipment
plus proceeds from sale-leaseback transactions).
Net revenue
in billions of dollars
Diluted EPS from
continuing operations
in dollars
Annual cash dividends
in dollars per common share
126.8
139.4
153.3
177.5
184.8
3.75
3.96
4.62
4.91
6.45
0.90
1.10
1.40
1.70
2.00
13
14
15
16
17
13
14
15
16
17
13
14
15
16
17
8
CVS Health
Dear fellow shareholders:
Health care costs in the United States are rising at a remarkable pace, driven
in large part by an aging population and the increased prevalence of chronic
disease. To address today’s challenges and play a larger role in the evolution
of health care, CVS Health has assembled a unique suite of assets that allows
us to deliver superior outcomes at a lower cost. Beyond their formidable
standalone capabilities, we’ve integrated these assets to fill unmet needs
and create opportunities to redefine health care for all our stakeholders.
Our planned acquisition of Aetna, one of the nation’s leading diversified health care
benefits companies, represents another leg of this journey. Through our unmatched
patient touchpoints, CVS Health already owns the “front door” of our customers’
health care experience. Our combined companies will help to remake this
experience, integrating more closely the work of doctors, pharmacists, other
health care professionals, and health benefits companies. The deal is still going
through regulatory approvals, and we currently anticipate it closing during the
second half of 2018.
Revenue continued to rise in 2017, with progress made on plan for
sustainable earnings growth
Before going into more detail on our accomplishments and challenges, I’ll first
provide a brief overview of the past year’s financial performance. Net revenue
for the year increased by 4.1 percent to a record $184.8 billion, with adjusted
earnings per share up slightly at $5.90. I’m happy to report that we have also
made meaningful gains in the four-point plan we laid out in 2016 to generate
more robust levels of earnings growth in the years ahead. Let me highlight
some key steps in the progress we have made.
First, CVS Pharmacy® has partnered more broadly with pharmacy benefits
managers (PBMs) and health plans. Our network arrangements with Cigna,
OptumRx, and Express Scripts, as well as expanded Medicare Part D
preferred network arrangements, should drive meaningful growth in CVS
Pharmacy prescription volumes.
On the innovation front, we continued to introduce PBM products — such
as Transform Diabetes Care™ — that lower client costs while improving
care for members. We also unveiled a new performance-based pharmacy
network that is anchored by CVS Pharmacy, Walgreens, and up to 10,000
independent pharmacies. The network is designed not only to deliver unit
cost savings, but also to improve clinical outcomes that will help lower
overall health care costs. And through real-time benefits, we are putting
member-specific formulary information at the prescriber’s fingertips. This allows
Larry J. Merlo
President and Chief Executive Officer
doctors to select clinically appropriate alternatives that may
also cost members less.
Third, we finished the first year of our enterprise streamlining
initiative and are on track to generate cumulative savings of
$3 billion by 2021. Among our accomplishments, we have
simplified the dispensing process by sharing workload across
our mail, retail, and long-term care pharmacy platforms. We are
also implementing processes to simplify claims adjudication,
enrollment, benefit verification, and related client services.
Finally, we used our cash flow to return $6.4 billion to shareholders
through share repurchases and dividends in 2017. Due to the
pending Aetna acquisition, we suspended our share repurchase
program during the fourth quarter of 2017 and plan to maintain
our current annual dividend of $2.00 per share in 2018.
Differentiated PBM offerings drive customer satisfaction and
new business wins
Our PBM, CVS Caremark®, delivered solid growth in 2017, with
increases in both revenue and operating profit. Since 2014,
we have achieved a 13.9 percent compound annual growth
rate (CAGR) for PBM revenue with a 10.6 percent CAGR for
operating profit. Turning to 2018, we estimate that PBM net
revenues will climb to approximately $134 billion while operating
profit for the segment will approach $5 billion.
Innovative offerings led to another outstanding selling season,
with gross new business wins totaling $6.2 billion for 2018.
That figure represents nearly half of all the business that
switched PBMs in the latest selling season, with government
and union clients accounting for the largest share of new
business. Despite the fact that fewer health plans moved to a
new PBM, this segment still added nearly $2 billion in revenue.
Along with these gains, our PBM recorded a retention rate
surpassing 96 percent. That is due in no small part to a
continued rise in client satisfaction among the 94 million lives
we serve. Moreover, our ability to retain clients has resulted in
significant gains in enterprise dispensing. Over time we have
developed new plan designs that save our clients money while
simultaneously moving share into our channels. For example,
the new plan members we enrolled over the past three selling
seasons will contribute an additional 40 million prescriptions to
the enterprise in 2018.
With brand inflation, an aging population, and the rising
utilization of specialty drugs, clients depend on us more than
ever to slow the rate of drug spending growth — or “trend.”
In 2017, we succeeded in reducing trend for commercial
clients from 3.2 percent in 2016 to 1.9 percent, the lowest
level in five years. We accomplished this through a variety
of increasingly sophisticated cost-management strategies,
such as our advanced approach to formularies and new or
enhanced pharmacy networks.
Among other innovations, we are enhancing our flagship
Maintenance Choice® product by making it available to a
10
CVS Health
broader range of clients, including fully insured health plans. By
giving their members the option of getting 90-day prescriptions
at our stores or by mail, we expect to save them money and
improve adherence rates. Additionally, we’ve enhanced member
benefits with the launch of on-demand home delivery, as well
as the rollout of a digital tool that makes it easier to transfer a
prescription into our network.
Medicare and Medicaid remain important growth drivers,
both for CVS Health and our payor clients. Our SilverScript
Insurance Company subsidiary, the nation’s largest standalone
Medicare Part D Prescription Drug Plan, continued to perform
well in the marketplace. We have built deep expertise in
Medicare quality and delivery through our support of 6.1 million
members. For the third consecutive year, SilverScript earned
four stars (out of a maximum of five) on the government’s
annual quality measurement system.
A D D I N G S H A R E H O L D E R V A L U E
Turning to 2018, we estimate that PBM
net revenues will climb to approximately
$134 billion while operating profit for
the segment will approach $5 billion.
When you include our health plan clients, we support more
than 13 million Medicare members. Our differentiated services
offer clients a competitive advantage to help their businesses
grow. Along with operational and consultative services, we
make formulary and plan design recommendations, and also
help prepare their annual bids to the Centers for Medicare and
Medicaid Services.
The industry’s largest specialty pharmacy leads the way
with multiple innovations
At CVS Specialty®, revenue from prescriptions we dispense and
manage rose 12 percent to $57 billion in 2017. Since 2013,
dispensing revenue has increased at a 27 percent CAGR to
$35 billion. We remain the largest specialty pharmacy by a
considerable margin, resulting in greater scale and stronger
purchasing economics.
PBM clients value the breadth and depth of our specialty
management innovations, which include Accordant nurse
case management services, Coram infusion services, and
our NovoLogix medical benefit management system. A key
differentiator, NovoLogix has helped us win 70 percent of the
standalone specialty contracts that have changed hands over
the past three years. It currently has 65 million lives under
management — spread across 31 health plans — delivering
an estimated savings of $2.1 billion to our clients.
Despite moderating brand drug inflation, the rising significance
of specialty generics and biosimilars, and other dynamics that
are expected to slow specialty growth, specialty will remain
the pharmacy industry’s fastest-growing segment. Specialty’s
clinical, administrative, and logistical complexities create
opportunities for us to differentiate on price, product, and ser-
vices. Looking at 2018, we expect to continue outpacing the
marketplace by adding another $4 billion in specialty revenue.
Innovation will play a key role in our specialty growth, and we
have focused on applying it across three areas: driving optimal
adherence, streamlining the prescribing process, and managing
high-cost disease states. For example, our predictive analytics
pilot is helping us understand why any given individual is
non-adherent, allowing us to adjust the timing of our interven-
tions and the methodologies we use to close gaps in care.
Our Specialty Connect® solution, which allows for pick-up or
drop-off of specialty prescriptions at our retail locations, was
among our first and most successful efforts at simplifying the
specialty patient experience. The ability to integrate with elec-
tronic health record systems is now helping us streamline the
often-challenging prior authorization process so that physicians
get their patients started on specialty therapies more rapidly.
CVS Pharmacy remains focused on making pharmacy and
everyday health care better for consumers
Flat same store prescription volumes, along with reimbursement
pressure and generic introductions, led to a 2.6 percent decline
in same store sales in 2017. On the plus side, prescriptions
grew in our Target pharmacies thanks to the strength of
our patient care programs and Maintenance Choice. CVS
Pharmacy locations fill 1.1 billion prescriptions annually, and
our share of U.S. retail prescriptions exceeds 23 percent.
CVS Caremark members have certainly helped us capture
market share, but we have also strengthened our relationships
with other PBMs and payors. For example, OptumRx has
made us the exclusive provider of 90-day in-store prescriptions
for one of its networks, and we are also a preferred pharmacy
in the Express Scripts diabetes network.
In 2018, we expect to see same store prescription volumes rise
by at least 6 percent, driven primarily by these broader part-
nerships with PBMs and health plans, as well as our expanded
participation as a preferred pharmacy in a greater number of
Medicare Part D networks. We anticipate same store sales
growth in the range of 2 percent to 3.5 percent.
More than
94
million
PBM
members
Nearly
6.1
million
SilverScript
members
More than
13
million
total Medicare
members
More than
9,800
retail locations
23.6%
market share
Client trend
The rate of drug spending growth for
CVS Health commercial pharmacy
benefit management (PBM) clients
11.8%
5.0%
3.2%
1.9%
14
15
16
17
2.5 billion
adjusted prescriptions
dispensed or managed
annually
$57 billion
in specialty revenue
in 2017
2017 Annual Report
11
We remain focused on making pharmacy and everyday health
care better for consumers, and we have the physical and
digital assets that customers demand. Our 9,800 retail
locations make ours the largest U.S. pharmacy chain, with
nearly 70 percent of the population living within three miles of a
store. In 2017, our 30,000 retail pharmacists provided more
than 140 million face-to-face consultations with customers
to discuss dosages, timing, and side effects. We have also
expanded delivery options with nationwide next-day delivery
and same-day delivery in select cities.
Because approximately 50 percent of people do not continue
prescriptions as prescribed, we have built the industry’s
leading patient care platform. This includes new script pick-up
counseling, adherence outreach calls, gaps in care counseling,
prescription care counseling, and, where appropriate, helping
customers move from 30- to 90-day prescriptions.
We’re adding valuable services at retail and investing in
the front-store shopping experience
Beyond pharmacy, we are adding new services to our stores
with the goal of enhancing our position as the front door to con-
sumer health. We already operate more than 1,100 MinuteClinic®
locations in 33 states and are expanding its offerings to include
monitoring and treatment of diabetes, hypertension, high
cholesterol, and thyroid disorders. We will also begin rolling out
audiology and optical centers in select locations in 2018 follow-
ing successful pilots. Both offer significantly greater productivity
per square foot than comparable areas of our average stores.
In the front of the store, we are driving growth by making
investments that improve the shopping experience. For
example, by the end of 2018 we will have reset nearly
2,000 stores to our popular health and beauty format. Stores
that we have already converted are showing an average of
2.5 percent gain in sales as well as improved profitability from
their emphasis on these two high-margin categories. Among
our other resets and refreshes, we will convert an additional
350 locations to the CVS Pharmacy y más® format to better
serve the fast-growing Hispanic market.
We are able to identify optimal reset candidates in part through
the many insights we have gained from ExtraCare® card users.
Launched back in 2001, ExtraCare today has 62 million actively
engaged customers. It is supported by a broad range of tech-
nologies that help us target and engage high-value shoppers
with the right offers — both in the store and digitally — and adjust
to changes in consumer behavior. In 2017, cardholders earned
$3.6 billion in ExtraCare rewards and savings.
threats facing our country, and we owe it to our patients and
communities to help provide solutions.
CVS Health has been working with policymakers across the
country to increase access to naloxone, the medication that
rapidly reverses opioid overdose. In early 2018, we also
introduced an enhanced opioid utilization management
program that limits the supply of opioids dispensed to seven
days for certain acute prescriptions for patients who are
new to therapy. It also limits the daily dosage of opioids
dispensed, based on the strength of the opioid, and requires
the use of immediate-release formulations of opioids before
extended-release opioids are dispensed. Initial results of this
program show that the number of patients new to opioid
therapy with an acute condition who received more than a
seven-day supply decreased by 70 percent.
30,000
retail pharmacists
delivered more than
140 million
face-to-face
consultations
in 2017
$6.4
billion
returned to
shareholders in
2017 through
dividends and share
repurchases
I also want to acknowledge here the outstanding work of
our colleagues who helped ensure that customers in Florida,
Texas, and Puerto Rico received vital medications both before
and after the hurricanes that devastated their communities
in 2017. CVS Health colleagues played a critical role in
supporting so many of our outreach initiatives. We have
proudly supported rebuilding efforts through a $4 million
in-store fundraising campaign, along with the donation of more
than $7 million worth of critical products and supplies. For
a comprehensive review of our efforts, I encourage you to visit
CVSHealth.com to download the newly published CVS Health
2017 Corporate Social Responsibility Report.
In closing, I want to thank our board of directors, our
shareholders, and the more than 240,000 colleagues who
support our vision for the future of health care delivery. If you
haven’t already done so, I encourage you to read the pages
that preceded this letter to learn more about the unique
capabilities that allow CVS Health to improve care, lower
costs, and transform the patient experience.
CVS Health has made addressing the opioid epidemic
a cornerstone of our social responsibility initiatives
Sincerely,
You can read about some of our social responsibility and
sustainability initiatives on pages 6 and 7. I do want to touch
on just a couple here, starting with our response to the opioid
epidemic. This has become one of the greatest public health
12
CVS Health
Larry J. Merlo
President and Chief Executive Officer
February 14, 2018
2017
Financial Report
14 Management’s Discussion and Analysis of Financial
Condition and Results of Operations
39 Management’s Report on Internal Control Over
Financial Reporting
40 Report of Ernst & Young LLP, Independent
Registered Public Accounting Firm
41 Consolidated Statements of Income
42 Consolidated Statements of Comprehensive Income
43 Consolidated Balance Sheets
44 Consolidated Statements of Cash Flows
45 Consolidated Statements of Shareholders’ Equity
46 Notes to Consolidated Financial Statements
84 Five-Year Financial Summary
85 Report of Ernst & Young LLP, Independent
Registered Public Accounting Firm
86 Stock Performance Graph
13
2017 Annual Report
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and
Cautionary Statement Concerning Forward-Looking Statements that are included in this Annual Report.
Overview of Our Business
CVS Health Corporation, together with its subsidiaries (collectively, “CVS Health,” the “Company,” “we,” “our” or “us”), is a
pharmacy innovation company helping people on their path to better health. At the forefront of a changing health care landscape,
the Company has an unmatched suite of capabilities and the expertise needed to drive innovations that will help shape the future
of health care.
We are currently the only integrated pharmacy health care company with the ability to impact consumers, payors, and providers
with innovative, channel-agnostic solutions. We have a deep understanding of their diverse needs through our unique integrated
model, and we are bringing them innovative solutions that help increase access to quality care, deliver better health outcomes
and lower overall health care costs.
Through more than 9,800 retail locations, more than 1,100 walk-in health care clinics, a leading pharmacy benefits manager with
more than 94 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year,
expanding specialty pharmacy services and a leading stand-alone Medicare Part D prescription drug plan, we enable people,
businesses, and communities to manage health in more affordable, effective ways. We are delivering break-through products
and services, from advising patients on their medications at our CVS Pharmacy® locations, to introducing unique programs to
help control costs for our clients at CVS Caremark®, to innovating how care is delivered to our patients with complex conditions
through CVS Specialty®, to improving pharmacy care for the senior community through Omnicare®, or by expanding access to
high-quality, low-cost care at CVS MinuteClinic®.
We have three reportable segments: Pharmacy Services, Retail/LTC and Corporate.
Overview of Our Pharmacy Services Segment
Our Pharmacy Services business generates revenue from a full range of pharmacy benefit management (“PBM”) solutions,
including plan design offerings and administration, formulary management, Medicare Part D services, mail order pharmacy,
specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems,
clinical services, disease management services and medical spend management.
Our 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, other sponsors of health benefit plans, and
individuals throughout the United States. A portion of covered lives primarily within the Managed Medicaid, health plan and
employer markets have access to our services through public and private exchanges.
As a pharmacy benefits manager, we manage the dispensing of prescription drugs through our mail order pharmacies, specialty
pharmacies, national network of long-term care pharmacies and more than 68,000 retail pharmacies, consisting of approximately
41,000 chain pharmacies (which includes our CVS Pharmacy® pharmacies) and 27,000 independent pharmacies, to eligible mem-
bers in the benefit plans maintained by our clients and utilize our information systems to perform, among other things, safety
checks, drug interaction screenings and brand-to-generic substitutions.
Our specialty pharmacies support individuals who require complex and expensive drug therapies. Our specialty pharmacy
business includes mail order and retail specialty pharmacies that operate under the CVS Caremark®, Navarro® Health Services
and Advanced Care Scripts (“ACS Pharmacy”) names. Substantially all of our mail service specialty pharmacies have been
accredited by The Joint Commission, which is an independent, not-for-profit organization that accredits and certifies health care
organizations and programs in the United States. We also offer specialty infusion services and enteral nutrition services through
Coram LLC and its subsidiaries (collectively, “Coram”). With Specialty Connect®, which integrates our specialty pharmacy mail
and retail capabilities, we provide members with disease-state specific counseling from our experienced specialty pharmacists
and the choice to bring their specialty prescriptions to any CVS Pharmacy location. Whether submitted through one of our mail
order pharmacy or at a CVS Pharmacy, all prescriptions are filled through the Company’s specialty mail order pharmacies, so all
revenue from this specialty prescription services program is recorded within the Pharmacy Services Segment. Members then can
choose to pick up their medication at their local CVS Pharmacy or have it sent to their home through the mail.
14
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations We also provide health management programs, which include integrated disease management for 18 conditions, through our
AccordantCareTM rare disease management offering. The majority of these integrated programs are accredited by the National
Committee for Quality Assurance.
In addition, through our SilverScript Insurance Company (“SilverScript”) subsidiary, we are a national provider of drug benefits to
eligible beneficiaries under the federal government’s Medicare Part D program. As of December 31, 2017, we provided Medicare
Part D plan benefits to approximately 5.5 million beneficiaries through SilverScript, including our individual and employer group
waiver plans.
The Pharmacy Services Segment operates under the CVS Caremark® Pharmacy Services, Caremark®, CVS Caremark®, CVS
Specialty®, AccordantCareTM, SilverScript®, Wellpartner®, Coram®, NovoLogix®, Navarro® Health Services and ACS Pharmacy
names. As of December 31, 2017, the Pharmacy Services Segment operated 23 retail specialty pharmacy stores, 18 specialty
mail order pharmacies, four mail order dispensing pharmacies, and 83 branches for infusion and enteral services, including
approximately 73 ambulatory infusion suites and three centers of excellence, located in 42 states, Puerto Rico and the District
of Columbia.
Overview of Our Retail/LTC Segment
Our Retail/LTC Segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter
drugs, beauty products and cosmetics, personal care products, convenience foods, photo finishing, seasonal merchandise and
greeting cards. With the acquisition of Omnicare’s long-term care (“LTC”) operations, the Retail/LTC Segment now also includes
the distribution of prescription drugs, related pharmacy consulting and other ancillary services to chronic care facilities and other
care settings. Omnicare operations also included commercialization services which were provided under the name RxCrossroads®
(“RxC”), until the sale of RxC was completed on January 2, 2018. See Note 3 “Goodwill and Other Intangibles” to our consoli-
dated financial statements for more information. Our Retail/LTC Segment derives the majority of its revenues through the sale of
prescription drugs, which are dispensed by our more than 32,000 pharmacists. The role of our retail pharmacists is expanding
from primarily dispensing prescriptions to also providing services, including flu vaccinations as well as face-to-face patient
counseling with respect to adherence to drug therapies, closing gaps in care, and more cost-effective drug therapies. Our integrated
pharmacy services model enables us to enhance access to care while helping to lower overall health care costs and improve
health outcomes.
Our Retail/LTC Segment also provides health care services through our 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. We believe our clinics provide
high-quality services that are affordable and convenient.
Our proprietary loyalty card program, ExtraCare®, has about 62 million active cardholders, making it one of the largest and most
successful retail loyalty card programs in the country.
As of December 31, 2017, our Retail/LTC Segment included 9,803 retail stores (of which 8,060 were our stores that operated
a pharmacy and 1,695 were our pharmacies located within Target stores) located in 49 states, the District of Columbia, Puerto
Rico and Brazil operating primarily under the CVS Pharmacy®, CVS®, CVS Pharmacy y más®, Longs Drugs®, Navarro Discount
Pharmacy® and Drogaria OnofreTM names, 37 onsite pharmacies primarily operating under the CarePlus CVS PharmacyTM,
CarePlus® and CVS Pharmacy® names, and 1,134 retail health care clinics operating under the MinuteClinic® name (of which
1,129 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 145 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.
Overview of Our Corporate Segment
The Corporate Segment provides management and administrative services to support the Company. The Corporate Segment
consists of certain aspects of our executive management, corporate relations, legal, compliance, human resources, information
technology and finance departments.
15
2017 Annual Report Proposed Acquisition of Aetna
On December 3, 2017, we entered into a definitive merger agreement to acquire all of the outstanding shares of Aetna Inc.
(“Aetna”) for a combination of cash and stock (“Aetna Acquisition”). Under the terms of the merger agreement, Aetna sharehold-
ers will receive $145.00 per share in cash and 0.8378 CVS Health shares for each Aetna share. The transaction values Aetna at
approximately $207 per share or approximately $69 billion based on the Company’s 5-day volume weighted average price ending
December 1, 2017, of $74.21 per share. Including the assumption of Aetna’s debt, the total value of the transaction is approxi-
mately $77 billion. The final purchase price will be determined based on the Company’s stock price on the date of closing of the
transaction. We expect to finance the cash portion of the purchase price through a combination of cash on hand and by issuing
approximately $45.0 billion of new debt, including senior notes and term loans (see “Liquidity and Capital Resources” in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”). We made customary representations,
warranties and covenants in the merger agreement, including, among others, a covenant, subject to certain exceptions, to
conduct our business in the ordinary course between the execution of the merger agreement and the closing of the transaction.
The proposed acquisition is currently projected to close in the second half of 2018 and remains subject to approval by CVS
Health and Aetna shareholders and customary closing conditions, including the expiration of the waiting period under the federal
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and approvals of state departments of insurance and U.S. and interna-
tional regulators.
If the transaction is not completed, the Company could be liable to Aetna for a termination fee of $2.1 billion in connection with
the merger agreement, depending on the reasons leading to such termination.
Results of Operations
Summary of our Consolidated Financial Results
in millions, except per share amounts
2017
2016
2015
Year Ended December 31,
Net revenues
Cost of revenues
Gross profit
Operating expenses
Operating profit
Interest expense, net
Loss on early extinguishment of debt
Other expense
Income before income tax provision
Income tax provision
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income
Net income attributable to noncontrolling interest
$ 184,765
156,220
28,545
19,028
9,517
1,041
—
208
8,268
1,637
6,631
(8)
6,623
(1)
$
177,526
$
153,290
148,669
126,762
28,857
18,491
10,366
1,058
643
28
8,637
3,317
5,320
(1)
5,319
(2)
26,528
17,053
9,475
838
—
21
8,616
3,386
5,230
9
5,239
(2)
Net income attributable to CVS Health
$
6,622
$
5,317
$
5,237
16
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Net revenues increased $7.2 billion in 2017 compared to 2016, and increased $24.2 billion in 2016 compared to 2015. As you
review our performance in this area, we believe you should consider the following important information:
• During 2017, net revenues in our Pharmacy Services Segment increased 8.9% and net revenues in our Retail/LTC Segment
decreased 2.1% compared to the prior year. The Retail/LTC Segment decrease was primarily due to a decline in same store
sales of 2.6% as a result of the previously-announced marketplace changes that restrict CVS Pharmacy from participating in
certain networks.
• During 2016, net revenues in our Pharmacy Services Segment increased by 19.5% and net revenues in our Retail/LTC Segment
increased 12.6% compared to the prior year. The Retail/LTC Segment benefited from the 2015 acquisitions of Omnicare and
the pharmacies and clinics of Target.
• In 2017 and 2016, the Pharmacy Services Segment continued to grow from net new business and specialty. The increase in
our generic dispensing rates in both of our operating segments continued to have a negative effect on net revenue in 2017 as
compared to 2016, as well as in 2016 as compared to 2015.
Please see the Segment Analysis later in this document for additional information about our net revenues.
Gross profit decreased $312 million, or 1.1%, in 2017, to $28.5 billion, as compared to $28.9 billion in 2016. Gross profit
increased $2.3 billion, or 8.8%, in 2016, to $28.9 billion, as compared to $26.5 billion in 2015. Gross profit as a percentage of
net revenues declined to 15.4%, as compared to 16.3% in 2016 and 17.3% in 2015.
• During 2017, gross profit in our Pharmacy Services Segment and Retail/LTC Segment increased by 2.4% and decreased by
1.8%, respectively, compared to the prior year. For the year ended December 31, 2017, gross profit as a percentage of net
revenues in our Pharmacy Services Segment and Retail/LTC Segment was 4.6% and 29.4%, respectively.
• During 2016, gross profit in our Pharmacy Services Segment and Retail/LTC Segment increased by 12.9% and 7.9%, respec-
tively, compared to the prior year. For the year ended December 31, 2016, gross profit as a percentage of net revenues in our
Pharmacy Services Segment and Retail/LTC Segment was 4.9% and 29.3%, respectively.
• The increased weighting toward the Pharmacy Services Segment, which has a lower gross margin than the Retail/LTC
Segment, resulted in a decline in consolidated gross profit as a percent of net revenues in 2017 as compared to 2016. In
addition, gross profit for 2017 and 2016 has been negatively impacted by price compression in the Pharmacy Services
Segment and reimbursement pressure in the Retail/LTC Segment.
• Our gross profit continued to benefit from the increased utilization of generic drugs, which normally yield a higher gross profit
rate than brand name drugs, in both the Pharmacy Services and Retail/LTC segments for 2017 and 2016, partially offsetting
the negative impacts described above.
Please see the Segment Analysis later in this document for additional information about our gross profit.
Operating expenses increased $537 million, or 2.9%, in the year ended December 31, 2017, as compared to the prior year.
Operating expenses as a percent of net revenues declined to 10.3% in the year ended December 31, 2017, compared to
10.4% in the prior year. The increase in operating expense dollars in the year ended December 31, 2017, was primarily due to an
increase in charges of $181 million associated with the closure of 71 retail stores in connection with our enterprise streamlining
initiative, goodwill impairment charges of $181 million related to the RxCrossroads reporting unit within the Retail/LTC Segment,
$57 million of hurricane related expenses which were predominately in the Retail/LTC Segment, and new store openings. The
increase in operating expenses also reflects the lack of a favorable impact for the reversal of an accrual of $85 million, in the Pharmacy
Services Segment, in connection with a legal settlement in the year ended December 31, 2016. These matters which led to the
increase in operating expenses in 2017 were partially offset by a decrease in acquisition-related transaction and integration costs
of $226 million due to the bulk of the Omnicare related integration costs being incurred in 2016. The improvement in operating
expenses as a percentage of net revenues in 2017 is primarily due to expense leverage from net revenue growth.
Operating expenses increased $1.4 billion, or 8.4%, in the year ended December 31, 2016, as compared to the prior year. Operating
expenses as a percent of net revenues declined to 10.4% in the year ended December 31, 2016, compared to 11.1% in the prior
year. The increase in operating expense dollars in the year ended December 31, 2016, was primarily due to the acquisition of
the Target pharmacy and clinic businesses in December 2015, the Omnicare acquisition in August 2015 and incremental store
operating costs associated with a higher store count, partially offset by lower legal settlement costs, including the reversal of an
accrual of $85 million, in the Pharmacy Services Segment, in the year ended December 31, 2016. The improvement in operating
expenses as a percentage of net revenues in 2016 was primarily due to expense leverage from net revenue growth.
Please see the Segment Analysis later in this document for additional information about operating expenses.
17
2017 Annual Report Interest expense, net for the years ended December 31 consisted of the following:
in millions
Interest expense
Interest income
Interest expense, net
2017
$
1,062
(21)
$
1,041
2016
1,078
(20)
1,058
$
$
$
$
2015
859
(21)
838
Net interest expense decreased $17 million during the year ended December 31, 2017, primarily due to the Company’s debt
issuance and debt tender offers that occurred in 2016 which resulted in overall more favorable interest rates on the Company’s
long-term debt. See Note 5 “Borrowings and Credit Agreements” to the consolidated financial statements for additional informa-
tion. During 2016, net interest expense increased $220 million, primarily due to the $15 billion debt issuance in July 2015, the
proceeds of which were used to fund the acquisitions of Omnicare and the pharmacies and clinics of Target, and repay the
majority of the debt assumed in the Omnicare acquisition.
Loss on early extinguishment of debt During the year ended December 31, 2016, the Company purchased approximately
$4.2 billion aggregate principal amount of certain of its senior notes pursuant to its tender offer for such senior notes and option
to redeem the outstanding senior notes (see Note 5 “Borrowings and Credit Agreements” to the consolidated financial state-
ments). The Company paid a premium of $583 million in excess of the debt principal, wrote off $54 million of unamortized
deferred financing costs, and incurred $6 million in fees, for a total loss on the early extinguishment of debt of $643 million.
Income tax provision On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “TCJA”). Among
numerous changes to existing tax laws, the TCJA permanently reduces the federal corporate income tax rate from 35% to 21%
effective January 1, 2018. The effects of changes in tax rates on deferred tax balances are required to be taken into consideration
in the period in which the changes are enacted, regardless of when they are effective. As the result of the reduction of the corporate
income tax rate under the TCJA, the Company estimated the revaluation of its net deferred tax liabilities and recorded a provi-
sional noncash income tax benefit of approximately $1.5 billion for year ended December 31, 2017. The Company has not
completed all of its processes to determine the TCJA’s final impact. The final impact may differ from this provisional amount due
to, among other things, changes in interpretations and assumptions the Company has made thus far and the issuance of addi-
tional regulatory or other guidance. The accounting is expected to be completed by the time the 2017 federal corporate income
tax return is filed in 2018.
Our effective income tax rate was 19.8%, 38.4% and 39.3% in 2017, 2016 and 2015, respectively. The effective income tax rate
was lower in 2017 compared to 2016 primarily due to the provisional impact of the TCJA, including the revaluation of net deferred
tax liabilities. The effective income tax rate was lower in 2016 compared to 2015 primarily due to the resolution in 2016 of certain
income tax matters in tax years through 2012, as well as other permanent items.
Income (loss) from 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 Linens ‘n Things,
which filed for bankruptcy in 2008, and Bob’s Stores, which filed for bankruptcy in 2016. The Company’s loss from discontinued
operations includes lease-related costs required to satisfy its Linens ‘n Things and Bob’s Stores lease guarantees. We incurred a
loss from discontinued operations, net of tax, of $8 million and $1 million in 2017 and 2016, respectively. The Company’s income
from discontinued operations in 2015 of $9 million, net of tax, was related to the release of certain store lease guarantees due to
the settlement of a dispute with a landlord.
See Note 1 “Significant Accounting Policies Discontinued Operations” to the consolidated financial statements for additional
information about discontinued operations and Note 12 “Commitments and Contingencies” for additional information about our
lease guarantees.
18
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Segment Analysis
We evaluate the performance of our Pharmacy Services and Retail/LTC segments based on net revenues, gross profit and
operating profit before the effect of nonrecurring charges and gains and certain intersegment activities. The Company evaluates
the performance of its Corporate Segment based on operating expenses before the effect of nonrecurring charges and gains, and
certain intersegment activities. The following is a reconciliation of the Company’s business segments to the consolidated financial
statements:
in millions
2017:
Net revenues
Gross profit (3)
Operating profit (loss) (4) (5)
2016:
Net revenues
Gross profit (3)
Operating profit (loss) (4) (5) (6) (7)
2015:
Net revenues
Gross profit
Operating profit (loss) (4) (5) (6) (7)
Pharmacy
Services
Segment (1) (2)
Retail/LTC
Segment (2)
Corporate
Segment
Intersegment
Eliminations (2)
Consolidated
Totals
$ 130,596
6,040
4,755
$ 79,398
23,317
6,469
$
—
—
(966)
$
(25,229)
(812)
(741)
$ 184,765
28,545
9,517
119,963
5,901
4,676
100,363
5,227
3,992
81,100
23,738
7,302
72,007
21,992
7,146
—
—
(891)
—
—
(1,035)
(23,537)
(782)
(721)
(19,080)
(691)
(628)
177,526
28,857
10,366
153,290
26,528
9,475
(1) Net revenues of the Pharmacy Services Segment include approximately $10.8 billion, $10.5 billion and $8.9 billion of Retail/LTC Co-Payments for 2017, 2016 and
2015, respectively. See Note 1 “Significant Accounting Policies – Revenue Recognition” to the consolidated financial statements for additional information about
Retail/LTC Co-Payments.
(2) Intersegment eliminations relate to intersegment revenue-generating activities that occur between the Pharmacy Services Segment and the Retail/LTC Segment.
These occur in the following ways: when members of Pharmacy Services Segment clients (“members”) fill prescriptions at our retail pharmacies to purchase
covered products, when members enrolled in programs such as Maintenance Choice® elect to pick up maintenance prescriptions at one of our retail pharmacies
instead of receiving them through the mail, or when members have prescriptions filled at our long-term care pharmacies. When these occur, both the Pharmacy
Services and Retail/LTC segments record the revenues, gross profit and operating profit on a standalone basis.
(3) The Retail/LTC Segment gross profit for the years ended December 31, 2017 and 2016 includes $2 million and $46 million, respectively, of acquisition-related
integration costs. The integration costs in 2017 are related to the acquisition of Omnicare and the integration costs in 2016 are related to the acquisitions of
Omnicare and the pharmacies and clinics of Target.
(4) The Retail/LTC Segment operating profit for 2017, 2016 and 2015 includes $34 million, $281 million and $64 million, respectively, of acquisition-related integration
costs. The integration costs in 2017 are related to the acquisition of Omnicare. The integration costs in 2016 and 2015 are related to the acquisitions of Omnicare
and the pharmacies and clinics of Target. Operating profit for the year ended December 31, 2017, also includes $215 million of charges associated with store
rationalization and $181 million of goodwill impairment charges related to the RxCrossroads reporting unit. For the year ended December 31, 2016, operating profit
includes a $34 million asset impairment charge in connection with planned store closures in 2017 related to our enterprise streamlining initiative.
(5) The Corporate Segment operating loss for the year ended December 31, 2017, includes a reduction of $3 million in integration costs for a change in estimate related
to the acquisition of Omnicare, $34 million in acquisition-related transaction costs related to the proposed Aetna acquisition, and $9 million of transaction costs
related to the divestiture of RxCrossroads. The Corporate Segment operating loss for the year ended December 31, 2016, includes integration costs of $10 million
related to the acquisitions of Omnicare and the pharmacies and clinics of Target. For the year ended December 31, 2015, the Corporate Segment operating loss
includes $156 million of acquisition-related transaction and integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target and a
$90 million charge related to a legacy lawsuit challenging the 1999 legal settlement by MedPartners of various securities class actions and a related derivative claim.
(6) The Pharmacy Services Segment operating profit for the year ended December 31, 2016, includes the reversal of an accrual of $88 million in connection with a
legal settlement.
(7) Amounts revised to reflect the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which increased consolidated operating profit by $28 million and $21 million for the years ended December 31, 2016, and 2015, respectively.
19
2017 Annual Report
Pharmacy Services Segment
The following table summarizes our Pharmacy Services Segment’s performance for the respective periods:
in millions
Net revenues
Gross profit
Gross profit % of net revenues
Operating expenses (1) (2)
Operating expenses % of net revenues
Operating profit (1)
Operating profit % of net revenues
Net revenues:
Mail choice (3)
Pharmacy network (4)
Other
Pharmacy claims processed (90 Day = 3 prescriptions) (5) (6):
Total
Mail choice (3)
Pharmacy network (4)
Generic dispensing rate (5) (6):
Total
Mail choice (3)
Pharmacy network (4)
Mail choice penetration rate (5) (6)
Year Ended December 31,
2017
$ 130,596
$
6,040
4.6 %
$
1,285
1.0 %
$
4,755
3.6 %
$ 45,709
$ 84,555
$
332
1,781.9
265.2
1,516.7
87.0 %
83.1 %
87.7 %
14.9 %
$
$
$
$
$
$
$
2016
119,963
5,901
4.9 %
1,225
1.0 %
4,676
3.9 %
42,783
76,848
332
1,639.2
251.5
1,387.7
85.9 %
81.4 %
86.7 %
15.3 %
$
$
$
$
$
$
$
2015
100,363
5,227
5.2 %
1,235
1.2 %
3,992
4.0 %
37,828
62,240
295
1,325.8
241.1
1,084.7
83.9 %
79.4 %
84.9 %
18.2 %
(1) Amounts revised to reflect the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which decreased operating expenses and increased operating profit by $4 million and $3 million for the year ended December 31, 2016, and 2015, respectively.
(2) The Pharmacy Services Segment operating expenses for the year ended December 31, 2016, includes the reversal of an accrual of $88 million in connection with
a legal settlement.
(3) 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.
(4) Pharmacy network net revenues, claims processed, and generic dispensing rates do not include Maintenance Choice activity, which is included within the mail
choice category. 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.
(5) Includes the adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions
include approximately three times the amount of product days supplied compared to a normal prescription.
(6) The pharmacy claims processed, the generic dispensing rate and the mail choice penetration rate for the year ended December 31, 2016, has been revised to
reflect 90-day prescriptions to the equivalent of three 30-day prescriptions.
Net revenues in our Pharmacy Services Segment increased $10.6 billion, or 8.9%, to $130.6 billion for the year ended December 31,
2017, as compared to the prior year. The increase is primarily due to growth in pharmacy network and specialty pharmacy volume
as well as brand inflation, partially offset by continued price compression and increased generic dispensing.
Net revenues increased $19.6 billion, or 19.5%, to $120.0 billion for the year ended December 31, 2016, as compared to the prior
year. The increase is primarily due to increased pharmacy network claims, growth in specialty pharmacy, growth in Medicare Part D,
the addition of ACS Pharmacy through the acquisition of Omnicare, and inflation, partially offset by increased generic dispensing
and price compression.
20
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations
As you review our Pharmacy Services Segment’s revenue performance, we believe you should also consider the following
important information about the business:
• Our mail choice claims processed increased 5.5% to 265.2 million claims, on a 30-day equivalent basis, in the year ended
December 31, 2017, compared to 251.5 million claims in the prior year. During 2016, our mail choice claims processed
increased 4.3% to 251.5 million claims on a 30-day equivalent basis. The increases in mail choice claims were driven by growth
in specialty pharmacy claims, an increase in net new business, and continued adoption of our Maintenance Choice offerings.
• During 2017 and 2016, our average revenue per mail choice claim, on a 30-day equivalent basis, increased by 1.7% and
8.3%, compared to 2016 and 2015, respectively. The increase in both years was primarily due to growth in specialty phar-
macy and inflation.
• Our pharmacy network claims processed increased 9.3% to 1,516.7 million claims in the year ended December 31, 2017,
compared to 1,387.7 million claims in the prior year on a 30-day equivalent basis. During 2016, our pharmacy network claims
processed, on a 30-day equivalent basis, increased 27.9% to 1,387.7 million compared to 1,084.7 million pharmacy network
claims processed in 2015. These increases were primarily due to volume from net new business.
• During 2017 and 2016, our average revenue per pharmacy network claim processed remained flat on a 30-day equivalent basis.
• Our mail choice generic dispensing rate was 83.1%, 81.4% and 79.4% in the years ended December 31, 2017, 2016 and 2015,
respectively. Our pharmacy network generic dispensing rate was 87.7%, 86.7%, and 84.9% in the years ended December 31,
2017, 2016 and 2015, respectively. These continued increases in mail choice and pharmacy network generic dispensing rates
were primarily due to the impact of new generic drug introductions, and our continuous efforts to encourage plan members to
use generic drugs when they are available and clinically appropriate. We believe our generic dispensing rates will continue to
increase in future periods, albeit at a slower pace. This increase will be affected by, among other things, the number of new
brand and generic drug introductions and our success at encouraging plan members to utilize generic drugs when they are
available and clinically appropriate.
Gross profit in our Pharmacy Services Segment includes net revenues less cost of revenues. Cost of revenues includes (i) the
cost of pharmaceuticals dispensed, either directly through our mail service and specialty retail pharmacies or indirectly through
our pharmacy network, (ii) shipping and handling costs and (iii) the operating costs of our mail service dispensing pharmacies,
customer service operations and related information technology support.
Gross profit increased $139 million, or 2.4%, to $6.0 billion in the year ended December 31, 2017, as compared to the prior year.
Gross profit as a percentage of net revenues decreased to 4.6% for the year ended December 31, 2017, compared to 4.9% in
the prior year. The increase in gross profit dollars in the year ended December 31, 2017, was primarily due to growth in specialty
pharmacy, higher generic dispensing and favorable purchasing economics, partially offset by price compression. The decrease
in gross profit as a percentage of net revenues was primarily due to changes in the mix of our business and continued price
compression, partially offset by favorable generic dispensing and purchasing economics.
Gross profit increased $674 million, or 12.9%, to $5.9 billion in the year ended December 31, 2016, as compared to the prior year.
Gross profit as a percentage of net revenues decreased to 4.9% for the year ended December 31, 2016, compared to 5.2% in
the prior year. The increase in gross profit dollars in the year ended December 31, 2016, was primarily due to growth in specialty
pharmacy, growth in Medicare Part D lives, higher generic dispensing and favorable purchasing economics, partially offset by
price compression. The decrease in gross profit as a percentage of net revenues was primarily due to changes in the mix of our
business and continued price compression, partially offset by favorable generic dispensing and purchasing economics.
As you review our Pharmacy Services Segment’s performance in this area, we believe you should consider the following import-
ant information about the business:
• Our efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates and/or discounts we
received from manufacturers, wholesalers and retail pharmacies continue to have an impact on our gross profit dollars and
gross profit as a percentage of net revenues. In particular, competitive pressures in the PBM industry have caused us and other
PBMs to continue to share with clients a larger portion of rebates and/or discounts received from pharmaceutical manufactur-
ers. In addition, market dynamics and regulatory changes have limited our ability to offer plan sponsors pricing that includes
retail network “differential” or “spread,” and we expect these trends to continue. The “differential” or “spread” is any difference
between the drug price charged to plan sponsors, including Medicare Part D plan sponsors, by a PBM and the price paid for
the drug by the PBM to the dispensing provider.
21
2017 Annual Report Operating expenses in our Pharmacy Services Segment, which include selling, general and administrative expenses, deprecia-
tion and amortization related to selling, general and administrative activities and administrative payroll, employee benefits and
occupancy costs, were flat at 1.0% of net revenues in 2017 and 2016, compared to 1.2% in 2015.
Operating expenses increased $60 million or 4.9% in the year ended December 31, 2017, compared to the prior year. Operating
expenses decreased $10 million or 0.8% in the year ended December 31, 2016, compared to the prior year. These changes in
operating expense dollars are primarily due to an $88 million reversal of an accrual in connection with a legal settlement in 2016,
partially offset by an increase in costs associated with the growth of our business.
Retail/LTC Segment
The following table summarizes our Retail/LTC Segment’s performance for the respective periods:
in millions
Net revenues
Gross profit (1)
Gross profit % of net revenues
Operating expenses (2) (3)
Operating expenses % of net revenues
Operating profit (3)
Operating profit % of net revenues
Prescriptions filled (90 Day = 3 prescriptions) (4)
Net revenue increase (decrease):
Total
Pharmacy
Front Store
Total prescription volume (90 Day = 3 prescriptions) (4)
Same store sales increase (decrease) (5):
Total
Pharmacy
Front Store (6)
Prescription volume (90 Day = 3 prescriptions) (4)
Generic dispensing rates
Pharmacy % of net revenues
Year Ended December 31,
2017
2016
$ 79,398
$ 23,317
$
$
81,100
23,738
29.4 %
29.3 %
$ 16,848
$
16,436
21.2 %
20.3 %
$
6,469
$
7,302
8.1 %
9.0 %
$
$
$
$
2015
72,007
21,992
30.5 %
14,846
20.6 %
7,146
9.9 %
1,230.5
1,223.5
1,031.6
(2.1) %
(2.2) %
(1.9) %
0.6 %
(2.6) %
(2.6) %
(2.6) %
0.4 %
87.3 %
75.0 %
12.6 %
15.9 %
0.3 %
18.6 %
1.9 %
3.2 %
(1.5) %
3.6 %
85.7 %
75.0 %
6.2 %
9.5 %
(2.5) %
10.2 %
1.7 %
4.5 %
(5.0) %
4.8 %
84.5 %
72.9 %
(1) Gross profit for the years ended December 31, 2017, and 2016 includes $2 million and $46 million, respectively, of acquisition-related integration costs. In 2017, the
integration costs related to the acquisition of Omnicare. In 2016, the integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target.
(2) Operating expenses for the years ended December 31, 2017, 2016 and 2015 include $32 million, $235 million and $64 million, respectively, of acquisition-related
integration costs. In 2017, the integration costs related to the acquisition of Omnicare. In 2016 and 2015, the integration costs related to the acquisitions of
Omnicare and the pharmacies and clinics of Target. For the year ended December 31, 2017, operating expenses include $215 million of charges associated with
store closures and $181 million of goodwill impairment charges related to the segment’s RxCrossroads reporting unit. Operating expenses for the year ended
December 31, 2016, also include a $34 million asset impairment charge in connection with planned store closures in 2017 related to our enterprise streamlining
initiative.
(3) Amounts revised to reflect the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which decreased operating expenses and increased operating profit by $21 million and $16 million for the years ended December 31, 2016, and 2015, respectively.
(4) Includes the adjustment to convert 90-day, non-specialty prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these
prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.
(5) Same store sales and prescriptions exclude revenues from MinuteClinic, and revenue and prescriptions from stores in Brazil, from LTC operations and from
commercialization services.
(6) Front store same store sales would have been approximately 520 basis points higher for the year ended December 31, 2015, if tobacco and the estimated
associated basket sales were excluded from the year ended December 31, 2014.
22
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Net revenues decreased approximately $1.7 billion, or 2.1%, to $79.4 billion for the year ended December 31, 2017, as com-
pared to the prior year. The decrease was primarily due to a decline in same store sales as a result of the previously-announced
marketplace changes that restrict CVS Pharmacy from participating in certain networks.
Net revenues increased approximately $9.1 billion, or 12.6%, to $81.1 billion for the year ended December 31, 2016, as com-
pared to the prior year. This increase was primarily driven by the acquisitions of the pharmacies and clinics of Target and new
stores, which accounted for approximately 640 basis points of our total net revenue percentage increase during the year, the
acquisition of Omnicare’s LTC operations and a same store sales increase of 1.9%. As you review our Retail/LTC Segment’s
performance in this area, we believe you should consider the following important information about the business:
• Front store same store sales declined 2.6% in the year ended December 31, 2017, as compared to the prior year, and were
negatively impacted approximately 30 basis points due to the absence of leap day in the current year. The decrease is primarily
driven by softer customer traffic and efforts to rationalize promotional strategies, partially offset by an increase in basket size.
• Pharmacy same store sales declined 2.6% in the year ended December 31, 2017, as compared to the prior year. Pharmacy
same store sales were negatively impacted by approximately 390 basis points due to recent generic introductions. Same store
prescription volumes increased 0.4%, including the approximately 420 basis point negative impact from previously-discussed
marketplace changes that restrict CVS Pharmacy from participating in certain networks.
• Pharmacy revenues continue to be negatively impacted by the conversion of brand name drugs to equivalent generic drugs,
which typically have a lower selling price. The generic dispensing rate grew to 87.3% for the year ended December 31, 2017,
compared to 85.7% in the prior year. In addition, our pharmacy revenue growth has also been negatively affected by the mix
of drugs sold, continued reimbursement pressure and the lack of significant new brand name drug introductions.
• Pharmacy revenue growth may be impacted by industry changes in the LTC business, such as continuing lower occupancy
rates at skilled nursing facilities.
• Pharmacy revenue continued to benefit from our ability to attract and retain managed care customers, the increased use of
pharmaceuticals by an aging population and as the first line of defense for health care.
Gross profit in our Retail/LTC Segment includes net revenues less the cost of merchandise sold during the reporting period and
the related purchasing costs, warehousing costs, delivery costs and actual and estimated inventory losses.
Gross profit decreased $421 million, or 1.8%, to approximately $23.3 billion in the year ended December 31, 2017, as compared
to the prior year. Gross profit as a percentage of net revenues increased slightly to 29.4% in year ended December 31, 2017, from
29.3% in 2016. Gross profit increased $1.7 billion, or 7.9%, to approximately $23.7 billion in the year ended December 31, 2016,
as compared to the prior year. Gross profit as a percentage of net revenues decreased to 29.3% in year ended December 31,
2016, from 30.5% in 2015.
The decrease in gross profit dollars in both Retail Pharmacy and LTC in the year ended December 31, 2017, was primarily driven
by the continued reimbursement pressure as well as a loss of prescriptions in Retail Pharmacy due to previously discussed network
restrictions. In the year ended December 31, 2017, gross profit as a percentage of net revenues was relatively flat, driven by
increased front store margins which offset the continued reimbursement pressure on pharmacy. Front store margins increased
due to changes in the mix of products sold and efforts to rationalize promotional strategies.
As you review our Retail/LTC Segment’s performance in this area, we believe you should consider the following important
information about the business:
• Front store revenues as a percentage of total Retail/LTC Segment net revenues for both of the years ended December 31,
2017, and 2016 was 23.6% and for the year ended December 31, 2015, was 26.5%. On average, our gross profit on front
store revenues is higher than our gross profit on pharmacy revenues. The mix effect from a higher proportion of pharmacy
sales had a negative effect on our overall gross profit as a percentage of net revenues for the years ended December 31, 2016,
and 2015. This negative effect was partially offset by an increase in generic drugs dispensed and an improved front store gross
margin rate, which includes efforts to rationalize promotional strategies.
• During 2017 and 2016, our front store gross profit as a percentage of net revenues increased compared to the prior year. In
both years, the increase reflects a change in the mix of products sold, including store brand products, as a result of our efforts
to rationalize promotional strategies.
• Our pharmacy gross profit rates have been adversely affected by the efforts of managed care organizations, PBMs and
governmental and other third-party payors to reduce their prescription drug costs, including the use of restrictive networks,
as well as changes in the mix of our business within the pharmacy portion of the Retail/LTC Segment. In the event the reim-
bursement pressure accelerates, we may not be able to grow our revenues and gross profit dollars could be adversely
23
2017 Annual Report impacted. The increased use of generic drugs has positively impacted our gross profit but has resulted in third-party payors
augmenting their efforts to reduce reimbursement payments to retail pharmacies for prescriptions. This trend, which we expect
to continue, reduces the benefit we realize from brand to generic product conversions.
Operating expenses in our Retail/LTC Segment include store payroll, store employee benefits, store occupancy costs, selling
expenses, advertising expenses, depreciation and amortization expense and certain administrative expenses.
Operating expenses increased $412 million, or 2.5% to $16.8 billion, or 21.2% as a percentage of net revenues, in the year ended
December 31, 2017, as compared to $16.4 billion, or 20.3% as a percentage of net revenues, in the prior year. Operating expenses
increased $1.6 billion, or 10.7%, to $16.4 billion, or 20.3% as a percentage of net revenues, in the year ended December 31,
2016, as compared to $14.9 billion, or 20.6% as a percentage of net revenues, in the prior year.
The increase in operating expense dollars for the year ended December 31, 2017, was primarily due to $181 million increase in
charges associated with the closure of 71 retail stores in connection with our enterprise streamlining initiative, $181 million of goodwill
impairment charges related to the RxCrossroads reporting unit, which was subsequently sold on January 2, 2018, $55 million
in hurricane-related costs, and new store openings. Operating expenses as a percentage of net revenues for the year ended
December 31, 2017, increased due to a decline in expense leverage with the loss of business from restricted network changes.
The increase in operating expense dollars for the year ended December 31, 2016, was primarily due to the 2015 acquisitions of
LTC and the pharmacies and clinics within Target stores, including acquisition-related integration costs of $235 million, as well as
incremental store operating costs associated with operating more stores. Operating expenses for the year ended December 31,
2016, includes a gain from a legal settlement with certain credit card companies of $32 million and an asset impairment charge
of $34 million in connection with planned store closures in 2017 related to our enterprise streamlining initiative. Additionally, in
April 2016, the Retail/LTC Segment made a charitable contribution of $32 million to the CVS Foundation to fund future charitable
giving. The CVS Foundation is a non-profit entity that focuses on health, education and community involvement programs. The
charitable contribution was recorded as an operating expense in the year ended December 31, 2016.
Corporate Segment
Operating expenses increased $75 million, or 8.4%, to $966 million in the year ended December 31, 2017, as compared to
the prior year. Operating expenses decreased $144 million, or 13.9%, to $891 million in the year ended December 31, 2016.
Operating expenses within the Corporate Segment include executive management, corporate relations, legal, compliance, human
resources, information technology and finance related costs. The increase in operating expenses for the year ended December 31,
2017, was partially driven by ongoing investments in strategic initiatives and increased employee benefit costs. Operating
expenses for the year ended December 31, 2017, include $34 million in transaction costs associated with the proposed acquisi-
tion of Aetna, and $9 million of transaction costs associated with the divestiture of RxCrossroads. The decrease in operating
expenses for the year ended December 31, 2016, was primarily due to acquisition-related transaction and integration costs
associated with the acquisition of Omnicare that occurred in August 2015 and the acquisition of the pharmacies and clinics
of Target that occurred in December 2015.
Liquidity and Capital Resources
We maintain a level of liquidity sufficient to allow us to meet our cash needs in the short term. Over the long term, we manage
our cash and capital structure to maximize shareholder return, maintain our financial position and maintain flexibility for future
strategic initiatives. We continuously assess our working capital needs, debt and leverage levels, capital expenditure require-
ments, dividend payouts, potential share repurchases and future investments or acquisitions. We believe our operating cash
flows, commercial paper program, credit facilities, sale-leaseback program, as well as any potential future borrowings, will be
sufficient to fund these future payments and long-term initiatives.
The change in cash and cash equivalents is as follows:
in millions
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Year Ended December 31,
2017
2016
2015
$
8,007
$
10,141
$
8,539
(2,932)
(6,751)
1
(2,470)
(6,761)
2
912
(13,420)
4,879
(20)
(22)
$
Net increase (decrease) in cash and cash equivalents
$
(1,675)
$
24
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Net cash provided by operating activities decreased by $2.1 billion in 2017 and increased by $1.6 billion in 2016. These changes
are primarily related to the timing of payments for our Medicare Part D operations.
Net cash used in investing activities increased by $462 million in 2017 and decreased $11.0 billion in 2016. The increase in
2017 is largely driven by an increase in acquisition activity as compared to 2016. The decrease in 2016 was primarily due to the
$9.6 billion paid for the acquisition of Omnicare and the $1.9 billion paid for the acquisition of the pharmacies and clinics of Target
in 2015, compared to the $539 million paid for acquisitions in 2016.
In 2017, gross capital expenditures totaled approximately $1.9 billion, a decrease of approximately $306 million compared to
the prior year. The decrease in 2017 capital expenditures is due to the Target integration being completed in 2016. During 2017,
approximately 25% of our total capital expenditures were for new store construction, 30% were for store, fulfillment and support
facilities expansion and improvements and 45% were for technology and other corporate initiatives. Gross capital expenditures
totaled approximately $2.2 billion and $2.4 billion during 2016 and 2015, respectively. During 2016, approximately 31% of our
total capital expenditures were for new store construction, 20% were for store, fulfillment and support facilities expansion and
improvements and 49% were for technology and other corporate initiatives.
Proceeds from sale-leaseback transactions totaled $265 million in 2017. This compares to $230 million in 2016 and $411 million
in 2015. Under the sale-leaseback transactions, the properties are generally sold at net book value, which generally approximates
fair value, and the resulting leases generally qualify and are accounted for as operating leases. The specific timing and amount of
future sale-leaseback transactions will vary depending on future market conditions and other factors.
Below is a summary of our store development activity for the respective years:
Total stores (beginning of year)
New and acquired stores (1)
Closed stores (1)
Total stores (end of year)
Relocated stores
2017 (2)
2016 (2)
2015 (2)
9,750
179
(83)
9,846
30
9,665
132
(47)
9,750
50
7,866
1,833
(34)
9,665
58
(1) Relocated stores are not included in new or closed store totals.
(2) Includes retail drugstores, certain onsite pharmacy stores, specialty pharmacy stores and pharmacies within Target stores.
Net cash used in financing activities was $6.8 billion in both 2017 and 2016 as net borrowings and net payments to shareholders
were relatively flat in both years. Net cash provided by financing activities was $4.9 billion in 2015 versus net cash used in
financing activities of $6.8 billion in 2016. The difference of $11.6 billion was primarily due to higher net borrowings in 2015,
including the $14.8 billion in net proceeds received from the July 2015 debt issuance that was used to fund the acquisition of
Omnicare and the acquisition of the pharmacies and clinics of Target.
Share repurchase programs The following share repurchase programs were authorized by the Company’s Board of Directors:
in billions
Authorization Date
November 2, 2016 (“2016 Repurchase Program”)
December 15, 2014 (“2014 Repurchase Program”)
December 17, 2013 (“2013 Repurchase Program”)
Authorized
$
15.0
10.0
6.0
Remaining as of
December 31, 2017
$
13.9
—
—
The share Repurchase Programs, each of which was effective immediately, permit the Company to effect repurchases from time
to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase
(“ASR”) transactions, and/or other derivative transactions. The 2016 Repurchase Program can be modified or terminated by the
Board of Directors at any time.
25
2017 Annual Report
Pursuant to the authorization under the 2014 Repurchase Program, in August 2016, the Company entered into two fixed-dollar
ASRs with Barclays Bank PLC (“Barclays”) for a total of $3.6 billion. Upon payment of the $3.6 billion purchase price in January
2017, the Company received a number of shares of its common stock equal to 80% of the $3.6 billion notional amount of the
ASRs or approximately 36.1 million shares, which were placed into treasury stock in January 2017. The ASRs were accounted for
as an initial treasury stock transaction for $2.9 billion and a forward contract for $0.7 billion. In April 2017, the Company received
9.9 million shares of common stock, representing the remaining 20% of the $3.6 billion notional amount of the ASRs, thereby
concluding the ASRs. The remaining 9.9 million shares of common stock delivered to the Company by Barclays were placed into
treasury stock and the forward contract was reclassified from capital surplus to treasury stock in April 2017.
Pursuant to the authorization under the 2014 Repurchase Program, in December 2015, the Company entered into a $725 million
fixed-dollar ASR with Barclays. Upon payment of the $725 million purchase price in December 2015, the Company received a
number of shares of its common stock equal to 80% of the $725 million notional amount of the ASR or approximately 6.2 million
shares. The initial 6.2 million shares of common stock delivered to the Company by Barclays were placed into treasury stock in
December 2015. The ASR was accounted for as an initial treasury stock transaction of $580 million and a forward contract of
$145 million. The forward contract was classified as an equity instrument and was recorded within capital surplus on the consoli-
dated balance sheet. In January 2016, the Company received 1.4 million shares of common stock, representing the remaining
20% of the $725 million notional amount of the ASR, thereby concluding the ASR. The remaining 1.4 million shares of common
stock delivered to the Company by Barclays were placed into treasury stock in January 2016 and the forward contract was
reclassified from capital surplus to treasury stock.
Pursuant to the authorization under the 2013 Repurchase Programs, in January 2015, the Company entered into a $2.0 billion
fixed-dollar ASR agreement with J.P. Morgan Chase Bank (“JP Morgan”). Upon payment of the $2.0 billion purchase price in
January 2015, the Company received a number of shares of its common stock equal to 80% of the $2.0 billion notional amount
of the ASR agreement or approximately 16.8 million shares, which were placed into treasury stock in January 2015. In May 2015,
the Company received approximately 3.1 million shares of common stock, representing the remaining 20% of the $2.0 billion
notional amount of the ASR, thereby concluding the ASR. The remaining 3.1 million shares of common stock delivered to the
Company by JP Morgan were placed into treasury stock in May 2015. The ASR was accounted for as an initial treasury stock
transaction of $1.6 billion and a forward contract of $0.4 billion. The forward contract was classified as an equity instrument and
was initially recorded within capital surplus on the consolidated balance sheet and was reclassified to treasury stock upon the
settlement of the ASR in May 2015.
In the ASR transactions described above, the initial repurchase of the shares and delivery of the remainder of the shares to
conclude the ASR resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common
shares outstanding for basic and diluted earnings per share.
During the year ended December 31, 2017, the Company repurchased an aggregate of 55.4 million shares of common stock for
approximately $4.4 billion under the 2014 and 2016 Repurchase Programs. As of December 31, 2017, there remained an aggre-
gate of approximately $13.9 billion available for future repurchases under the 2016 Repurchase Program and the 2014 Repurchase
Program was complete. During the fourth quarter of 2017, the Company suspended share repurchase activity as a result of the
Aetna Acquisition.
During the year ended December 31, 2016, the Company repurchased an aggregate of 47.5 million shares of common stock
for approximately $4.5 billion under the 2014 Repurchase Program. As of December 31, 2016, there remained an aggregate of
approximately $18.2 billion available for future repurchases under the 2016 and 2014 Repurchase Programs.
During the year ended December 31, 2015, the Company repurchased an aggregate of 48.0 million shares of common stock for
approximately $5.0 billion under the 2013 and 2014 Repurchase Programs. As of December 31, 2015, there remained an aggre-
gate of approximately $7.7 billion available for future repurchases under the 2014 Repurchase Program and the 2013 Repurchase
Program was complete.
Short-term borrowings The Company had approximately $1.3 billion of commercial paper outstanding at a weighted average
interest rate of 2.0% as of December 31, 2017. The Company had approximately $1.9 billion of commercial paper outstanding
at a weighted average interest rate of 1.22% as of December 31, 2016. In connection with its commercial paper program, the
Company maintains a $1.0 billion, 364-day unsecured back-up credit facility, which expires on May 17, 2018; a $1.25 billion,
five-year unsecured back-up credit facility, which expires on July 24, 2019; a $1.25 billion, five-year unsecured back-up credit
facility, which expires on July 1, 2020; and a $1.0 billion, five-year unsecured back-up credit facility, which expires on May 18,
2022. The credit facilities allow for borrowings at various rates that are dependent, in part, on the Company’s public debt ratings
26
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations and require the Company to pay a weighted average quarterly facility fee of approximately 0.02%, regardless of usage. As of
December 31, 2016, there were no borrowings outstanding under the back-up credit facilities. During 2018, the Company intends
to refinance the 364-day unsecured back-up credit facility, which expires on May 17, 2018.
On December 3, 2017, in connection with the proposed acquisition of Aetna, the Company entered into a $49.0 billion unsecured
bridge loan facility. The Company paid approximately $221 million in fees upon entering into the agreement. The fees were
capitalized in other current assets and will be amortized as interest expense over the period the bridge facility is outstanding. The
bridge loan facility was reduced to $44.0 billion on December 15, 2017, upon the Company entering into a $5.0 billion term loan
agreement. The Company recorded $56 million of amortization of the bridge loan facility fees during the year ended December
31, 2017, which was recorded in interest expense. On December 15, 2017, in connection with the proposed acquisition of Aetna,
the Company entered into a $5.0 billion unsecured term loan agreement. The term loan facility under the term loan agreement
consists of a $3.0 billion three-year tranche and a $2.0 billion five-year tranche. The term loan facility allows for borrowings at
various rates that are dependent, in part, on the Company’s debt ratings and require the Company to pay a weighted average
quarterly commitment fee, regardless of usage.
On January 3, 2017, the Company entered into a $2.5 billion revolving credit facility. The credit facility allows for borrowings at
various rates that are dependent, in part, on the Company’s debt ratings and require the Company to pay a weighted average
quarterly facility fee of approximately 0.03%, regardless of usage. The Company terminated the credit facility in May 2017.
On May 20, 2015, in connection with the acquisition of Omnicare, the Company entered into a $13 billion unsecured bridge loan
facility. The Company paid approximately $52 million in fees in connection with the facility. The fees were capitalized and amor-
tized as interest expense over the period the bridge facility was outstanding. The bridge loan facility expired on July 20, 2015,
upon the Company’s issuance of unsecured senior notes with an aggregate principal of $15 billion as discussed below. The
bridge loan facility fees became fully amortized in July 2015.
Long-term borrowings On May 16, 2016, the Company issued $1.75 billion aggregate principal amount of 2.125% unsecured
senior notes due June 1, 2021, and $1.75 billion aggregate principal amount of 2.875% unsecured senior notes due June 1, 2026
(collectively, the “2016 Notes”) for total proceeds of approximately $3.5 billion, net of discounts and underwriting fees. The 2016
Notes pay interest semi-annually and may be redeemed, in whole at any time, or in part from time to time, at the Company’s
option at a defined redemption price plus accrued and unpaid interest to the redemption date. The net proceeds of the 2016
Notes were used for general corporate purposes and to repay certain corporate debt.
On May 16, 2016, the Company announced tender offers for (1) any and all of its 5.75% Senior Notes due 2017, its 6.60% Senior
Notes due 2019 and its 4.75% Senior Notes due 2020 (collectively, the “Any and All Notes”) and (2) up to $1.5 billion aggregate
principal amount of its 6.25% Senior Notes due 2027, its 6.125% Senior Notes due 2039, its 5.75% Senior Notes due 2041, the
5.00% Senior Notes due 2024 issued by its wholly-owned subsidiary, Omnicare, Inc. (“Omnicare”), the 4.75% Senior Notes due
2022 issued by Omnicare, its 4.875% Senior Notes due 2035 and its 3.875% Senior Notes due 2025 (collectively, the “Maximum
Tender Offer Notes” and together with the Any and All Notes, the “Notes”). On May 31, 2016, the Company increased the
aggregate principal amount of the tender offers for the Maximum Tender Offer Notes to $2.25 billion. The Company purchased
approximately $835 million aggregate principal amount of the Any and All Notes and $2.25 billion aggregate principal amount of
the Maximum Tender Offer Notes pursuant to the tender offers, which expired on June 13, 2016. The Company paid a premium
of $486 million in excess of the debt principal in connection with the purchase of the Notes, wrote off $50 million of unamortized
deferred financing costs and incurred $6 million in fees, for a total loss on the early extinguishment of debt of $542 million, which
was recorded in income from continuing operations in the consolidated statement of income for the year ended December 31, 2016.
On June 27, 2016, the Company notified the holders of the remaining Any and All Notes that the Company was exercising its
option to redeem the outstanding Any and All Notes pursuant to the terms of the Any and All Notes and the Indenture dated as
of August 15, 2006, between the Company and The Bank of New York Mellon Trust Company, N.A. Approximately $1.1 billion
aggregate principal amount of Any and All Notes was redeemed on July 27, 2016. The Company paid a premium of $97 million
in excess of the debt principal and wrote off $4 million of unamortized deferred financing costs, for a total loss on early extin-
guishment of debt of $101 million during the year ended December 31, 2016.
The Company recorded a total loss on the early extinguishment of debt of $643 million, which was recorded in the income from
continuing operations in the consolidated statement of income for the year ended December 31, 2016.
27
2017 Annual Report On July 20, 2015, the Company issued an aggregate of $2.25 billion of 1.9% unsecured senior notes due 2018 (“2018 Notes”),
an aggregate of $2.75 billion of 2.8% unsecured senior notes due 2020 (“2020 Notes”), an aggregate of $1.5 billion of 3.5%
unsecured senior notes due 2022 (“2022 Notes”), an aggregate of $3 billion of 3.875% unsecured senior notes due 2025 (“2025
Notes”), an aggregate of $2 billion of 4.875% unsecured senior notes due 2035 (“2035 Notes”), and an aggregate of $3.5 billion of
5.125% unsecured senior notes due 2045 (“2045 Notes” and, together with the 2018 Notes, 2020 Notes, 2022 Notes, 2025 Notes
and 2035 Notes, the “Notes”) for total proceeds of approximately $14.8 billion, net of discounts and underwriting fees. The Notes
pay interest semi-annually and contain redemption terms which allow or require the Company to redeem the Notes at a defined
redemption price plus accrued and unpaid interest at the redemption date. The net proceeds of the Notes were used to fund the
Omnicare acquisition and the acquisition of the pharmacies and clinics of Target. The remaining proceeds were used for general
corporate purposes.
Upon the closing of the Omnicare acquisition in August 2015, the Company assumed the long-term debt of Omnicare that had
a fair value of approximately $3.1 billion, $2.0 billion of which was previously convertible into Omnicare shares that holders were
able to redeem subsequent to the acquisition. During the period from August 18, 2015, to December 31, 2015, all but $5 million
of the $2.0 billion of previously convertible debt was redeemed and repaid and approximately $0.4 billion in Omnicare term debt
assumed was repaid for total repayments of Omnicare debt of approximately $2.4 billion in 2015.
The remaining principal of the Omnicare debt assumed was comprised of senior unsecured notes with an aggregate principal
amount of $700 million ($400 million of 4.75% senior notes due 2022 and $300 million of 5% senior notes due 2024). In
September 2015, the Company commenced exchange offers for the 4.75% senior notes due 2022 and the 5% senior notes
due 2024 to exchange all validly tendered and accepted notes issued by Omnicare for notes to be issued by the Company.
This offer expired on October 20, 2015, and the aggregate principal amounts of $388 million of the 4.75% senior notes due 2022
and $296 million of the 5% senior notes due 2024 were validly tendered and exchanged for notes issued by the Company. The
Company recorded this exchange transaction as a modification of the original debt instruments. Consequently, no gain or loss
on extinguishment was recognized in the Company’s consolidated income statement as a result of this exchange transaction
and the issuance costs of the new debt were expensed as incurred.
Our back-up credit facilities and unsecured senior notes (see Note 5 “Borrowings and Credit Agreements” to the consolidated
financial statements) contain customary restrictive financial and operating covenants. The covenants do not materially affect the
Company’s financial or operating flexibility. As of December 31, 2017, the Company is in compliance with all debt covenants.
As of December 31, 2017, we had outstanding derivative financial instruments (see Note 1 “Significant Accounting Policies” to
the consolidated financial statements). We had no outstanding derivative financial instruments as of December 31, 2016.
Debt Ratings As of December 31, 2017, our long-term debt was rated “Baa1” by Moody’s and “BBB+” by Standard & Poor’s,
and our commercial paper program was rated “P 2” by Moody’s and “A 2” by Standard & Poor’s. In December 2017, subsequent
to the announcement of the proposed acquisition of Aetna, Moody’s changed the outlook on our long-term debt to “Under
Review” from “Stable.” Similarly, S&P placed our long-term debt outlook on “Watch Negative” from “Stable”. The outlook for
the commercial paper program was unchanged. In assessing our credit strength, we believe that both Moody’s and Standard &
Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, our
historical acquisition activity and other financial information. Although we currently believe our long-term debt ratings will remain
investment grade, we cannot guarantee the future actions of Moody’s and/or Standard & Poor’s. Our debt ratings have a direct
impact on our future borrowing costs, access to capital markets and new store operating lease costs.
Quarterly Cash Dividend In December 2016, our Board of Directors authorized an 18% increase in our quarterly common
stock cash dividend to $0.50 per share effective in 2017. This increase equated to an annual dividend rate of $2.00 per share.
The Company expects to maintain its quarterly dividend of $0.50 per share throughout 2018. In December 2015, our Board of
Directors authorized a 21% increase in our quarterly common stock cash dividend to $0.425 per share. This increase equated to
an annual dividend rate of $1.70 per share. In December 2014, our Board of Directors authorized a 27% increase to our quarterly
common stock cash dividend to $0.35 per share. This increase equated to an annual dividend rate of $1.40 per share.
28
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations Off-Balance Sheet Arrangements
In connection with executing operating leases, we provide a guarantee of the lease payments. We also finance a portion of our
new store development through sale-leaseback transactions, which involve selling stores to unrelated parties and then leasing
the stores back under leases that generally qualify and are accounted for as operating leases. We do not have any retained or
contingent interests in the stores, and we do not provide any guarantees, other than a guarantee of the lease payments, in
connection with the transactions. In accordance with generally accepted accounting principles, our operating leases are not
reflected on our consolidated balance sheets.
Between 1995 and 1997, we sold or spun off a number of subsidiaries, including Bob’s Stores, Linens ‘n Things, and Marshalls.
In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the store’s lease obligations.
When the subsidiaries were disposed of, the Company’s guarantees remained in place, although each initial purchaser agreed
to indemnify the Company for any lease obligations the Company was required to satisfy. If any of the purchasers or any of the
former subsidiaries were to become insolvent and failed to make the required payments under a store lease, the Company could
be required to satisfy these obligations.
As of December 31, 2017, we guaranteed approximately 85 such store leases (excluding the lease guarantees related to Linens ‘n
Things), with the maximum remaining lease term extending through 2029. Management believes the ultimate disposition of any of
the remaining lease guarantees will not have a material adverse effect on the Company’s consolidated financial condition or future
cash flows. Please see “Income (loss) from discontinued operations” previously in this document for further information regarding
our guarantee of certain Linens ’n Things store lease obligations.
Below is a summary of our significant contractual obligations as of December 31, 2017:
in millions
Operating leases
Lease obligations from discontinued operations
Capital lease obligations
Contractual lease obligations with Target (1)
Long-term debt
Interest payments on long-term debt (2)
Other long-term liabilities in the consolidated
balance sheet
$
$
Total
27,151
11
1,342
1,924
25,224
10,469
468
Payments Due by Period
2018
2,493
3
74
—
3,523
893
52
$
2019
to 2020
2021
to 2022
Thereafter
$
4,562
5
148
—
3,600
1,614
346
4,006
3
146
—
5,449
1,343
33
$
16,090
—
974
1,924
12,652
6,619
37
$
66,589
$
7,038
$
10,275
$
10,980
$
38,296
(1) The Company leases pharmacy and clinic space from Target Corporation (“Target”). See Note 7 “Leases” to the consolidated financial statements for additional
information regarding the lease arrangements with Target. Amounts related to the operating and capital leases with Target are reflected within the operating leases
and capital lease obligations above. Amounts due in excess of the remaining estimated economic lives of the buildings are reflected herein assuming equivalent
stores continue to operate through the term of the arrangements.
(2) Interest payments on long-term debt are calculated on outstanding balances and interest rates in effect on December 31, 2017.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with generally accepted accounting principles, which require
management to make certain estimates and apply judgment. We base our estimates and judgments on historical experience,
current trends and other factors that management believes to be important at the time the consolidated financial statements
are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our consolidated
financial statements. While we believe the historical experience, current trends and other factors considered support the preparation
of our consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ
from our estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 “Significant Accounting Policies” to our consolidated financial
statements. We believe the following accounting policies include a higher degree of judgment and/or complexity and, thus, are
considered to be critical accounting policies. We have discussed the development and selection of our critical accounting policies
with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to them.
29
2017 Annual Report
Revenue Recognition
Pharmacy Services Segment
Our Pharmacy Services Segment sells prescription drugs directly through our mail service dispensing pharmacies and indirectly
through our retail pharmacy network. We recognize revenues in our Pharmacy Services Segment from prescription drugs sold by
our mail service dispensing pharmacies and under retail pharmacy network contracts where we are the principal using the gross
method at the contract prices negotiated with our clients. Net revenue from our Pharmacy Services Segment includes: (i) the
portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii) the price
paid to us (“Mail Co-Payments”) or a third party pharmacy in our retail pharmacy network (“Retail Co-Payments”) by individuals
included in our clients’ benefit plans, and (iii) administrative fees for retail pharmacy network contracts where we are not the
principal. Sales taxes are not included in revenue.
We recognize revenue in the Pharmacy Services Segment when: (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is
reasonably assured. The following revenue recognition policies have been established for the Pharmacy Services Segment.
• Revenues generated from prescription drugs sold by mail service dispensing pharmacies are recognized when the prescription
is delivered. At the time of delivery, the Pharmacy Services Segment has performed substantially all of its 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 Pharmacy Services Segment’s retail phar-
macy network and associated administrative fees are recognized at the Pharmacy Services Segment’s point-of-sale, which is
when the claim is adjudicated by the Pharmacy Services Segment’s online claims processing system.
We determine whether we are the principal or agent for our retail pharmacy network transactions on a contract-by-contract basis.
In the majority of our contracts, we have determined we are the principal due to us: (i) being the primary obligor in the arrange-
ment, (ii) having latitude in establishing the price, changing the product or performing part of the service, (iii) having discretion in
supplier selection, (iv) having involvement in the determination of product or service specifications, and (v) having credit risk. Our
obligations under our client contracts for which revenues are reported using the gross method are separate and distinct from our
obligations to the third party pharmacies included in our retail pharmacy network contracts. Pursuant to these contracts, we are
contractually required to pay the third party pharmacies in our retail pharmacy network for products sold, regardless of whether
we are paid by our clients. Our responsibilities under these client contracts typically include validating eligibility and coverage
levels, communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible
adverse drug interactions for the pharmacist to address with the physician prior to dispensing, suggesting clinically appropriate
generic alternatives where appropriate and approving the prescription for dispensing. Although we do not have credit risk with
respect to Retail Co-Payments or inventory risk related to retail network claims, we believe that all of the other indicators of gross
revenue reporting are present. For contracts under which we act as an agent, we record revenues using the net method.
We deduct from our revenues the manufacturers’ rebates that are earned by our clients based on their members’ utilization
of brand-name formulary drugs. We estimate these rebates at period-end based on actual and estimated claims data and our
estimates of the manufacturers’ rebates earned by our clients. We base our estimates 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. We adjust our rebates payable
to clients to the actual amounts paid when these rebates are paid or as significant events occur. We record any cumulative
effect of these adjustments against revenues as identified, and adjust our estimates prospectively to consider recurring matters.
Adjustments generally result from contract changes with our clients or manufacturers, differences between the estimated and
actual product mix subject to rebates or whether the product was included in the applicable formulary. We also deduct from our
revenues pricing guarantees and guarantees regarding the level of service we will provide to the client or member as well as other
payments made to our clients. Because the inputs to most of these estimates are not subject to a high degree of subjectivity or
volatility, the effect of adjustments between estimated and actual amounts has not been material to our results of operations
or financial position.
We participate in the federal government’s Medicare Part D program as a PDP through our SilverScript subsidiary. Our net
revenues include insurance premiums earned by the PDP, which are determined based on the PDP’s annual bid and related
contractual arrangements with CMS. The insurance premiums include a beneficiary premium, which is the responsibility of
the PDP member, but which is subsidized by CMS in the case of low-income members, and a direct premium paid by CMS.
Premiums collected in advance are initially deferred as accrued expenses and are then recognized ratably as revenue over
the period in which members are entitled to receive benefits.
30
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations In addition to these premiums, our 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 we are paid an estimated prospective Member Co-Payment subsidy, each month.
The prospective Member Co-Payment subsidy amounts received from CMS are also included in our net revenues. These
amounts represent 7.2%, 5.9% and 6.3% of consolidated net revenues in 2017, 2016 and 2015, respectively. If the prospective
Member Co-Payment subsidies received differ from the amounts based on actual prescription claims, the difference is recorded
in either accounts receivable or accrued expenses. We account for fully insured CMS obligations and Member Co-Payments
(including the amounts subsidized by CMS) using the gross method, consistent with our revenue recognition policies for Mail
Co-Payments and Retail Co-Payments. We have recorded estimates of various assets and liabilities arising from our participation
in the Medicare Part D program based on information in our claims management and enrollment systems. Significant estimates
arising from our participation in the Medicare Part D program include: (i) estimates of low-income cost subsidy, reinsurance
amounts and coverage gap discount amounts ultimately payable to or receivable from CMS based on a detailed claims reconcili-
ation, (ii) an estimate of amounts payable to CMS under a risk-sharing feature of the Medicare Part D program design, referred to
as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for
our estimate of claims that have been incurred but have not yet been reported. Actual amounts of Medicare Part D-related assets
and liabilities could differ significantly from amounts recorded. Historically, the effect of these adjustments has not been material
to our results of operations or financial position.
Retail/LTC Segment
Retail Pharmacy We recognize revenue from the sale of front store merchandise at the time the merchandise is purchased by
the retail customer and recognize revenue from the sale of prescription drugs when the prescription is picked up by the customer.
Customer returns are not material. Sales taxes are not included in revenue.
Long-term Care We recognize revenue when products are delivered or services are rendered or provided to our customers,
prices are fixed and determinable, and collection is reasonably assured. A significant portion of our revenues from sales of
pharmaceutical and medical products are reimbursed by the federal Medicare Part D program and, to a lesser extent, state
Medicaid programs. Payments for services rendered to patients covered by these programs are generally less than billed
charges. We monitor our revenues and receivables from these reimbursement sources, as well as other third party insurance
payors, and record an estimated contractual allowance for sales and receivable balances at the revenue recognition date, to
properly account for anticipated differences between billed and reimbursed amounts. Accordingly, the total net revenues and
receivables reported in our consolidated financial statements are recorded at the amount expected to be ultimately received from
these payors. Since billing functions for a portion of our revenue systems are largely computerized, enabling on-line adjudication
at the time of sale to record net revenues, our exposure in connection with estimating contractual allowance adjustments is
limited primarily to unbilled and initially rejected Medicare, Medicaid and third party claims (typically approved for reimbursement
once additional information is provided to the payor). For the remaining portion of our revenue systems, the contractual allowance
is estimated for all billed, unbilled and initially rejected Medicare, Medicaid and third party claims. We evaluate several criteria in
developing the estimated contractual allowances on a monthly basis, including historical trends based on actual claims paid,
current contract and reimbursement terms, and changes in customer base and payor/product mix. Contractual allowance estimates
are adjusted to actual amounts as cash is received and claims are settled, and the aggregate impact of these resulting adjustments
was not significant to our results of operations. Further, we do not expect the impact of changes in estimates related to unsettled
contractual allowance amounts from Medicare, Medicaid and third party payors as of December 31, 2017, to be significant to our
future consolidated results of operations, financial position and cash flows.
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 our normal billing procedures and subject to our normal accounts receivable collections procedures.
Health Care Clinics For services provided by our health care clinics, revenue recognition occurs for completed services provided
to patients, with adjustments made for third party payor contractual obligations and patient direct bill historical collection rates.
Loyalty Program Our customer loyalty program, ExtraCare®, is comprised of two components, ExtraSavingsTM and ExtraBucks®
Rewards. ExtraSavings coupons redeemed by customers are recorded as a reduction of revenue when redeemed. ExtraBucks
Rewards are accrued as a charge to cost of revenues when earned, net of estimated breakage. We determine breakage based
on our historical redemption patterns.
31
2017 Annual Report Allowances for Doubtful Accounts
Accounts receivable primarily includes amounts due from third party providers (e.g., pharmacy benefit managers, insurance
companies, governmental agencies and long-term care facilities), clients, members and private pay customers, as well as
vendors and manufacturers. We provide a reserve for accounts receivable considered to be at increased risk of becoming
uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value.
We establish this allowance for doubtful accounts and consider such factors as historical collection experience, (i.e., payment
history and credit losses) and creditworthiness, specifically identified credit risks, aging of accounts receivable by payor category,
current and expected economic conditions and other relevant factors. We regularly review our allowance for doubtful accounts for
appropriateness. Judgment is used to assess the collectability of account balances and the economic ability of a customer to pay.
Our allowance for doubtful accounts as of December 31, 2017, was $307 million, compared with $286 million as of December 31,
2016. Our allowance for doubtful accounts represented 2.3% of gross receivables (net of contractual allowance adjustments) as
of both December 31, 2017, and 2016. Unforeseen future developments could lead to changes in our provision for doubtful accounts
levels and future allowance for doubtful accounts percentages. For example, a one percentage point increase in the allowance for
doubtful accounts as a percentage of gross receivables as of December 31, 2017, would result in an increase to the provision of
doubtful accounts of approximately $135 million.
Given our experience, we believe that our aggregate reserves for potential losses are adequate, but if any of our larger customers
were to unexpectedly default on their obligations, our overall allowances for doubtful accounts may prove to be inadequate. In
particular, if economic conditions worsen, the payor mix shifts significantly or reimbursement rates are adversely affected, we
may adjust our allowance for doubtful accounts accordingly, and our accounts receivable collections, cash flows, financial
position and results of operations could be adversely affected.
Vendor Allowances and Purchase Discounts
Pharmacy Services Segment
Our Pharmacy Services Segment receives purchase discounts on products purchased. Contractual arrangements with vendors,
including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy Services Segment to receive
purchase discounts from established list prices in one, or a combination, of the following forms: (i) a direct discount at the time
of purchase, (ii) a discount for the prompt payment of invoices or (iii) when products are purchased indirectly from a manufacturer
(e.g., through a wholesaler or retail pharmacy), a discount (or rebate) paid subsequent to dispensing. These rebates are recog-
nized when prescriptions are dispensed and are generally calculated and billed to manufacturers within 30 days of the end of
each completed quarter. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the
amounts billed and collected has not been material to the results of operations. We account for the effect of any such differences
as a change in accounting estimate in the period the reconciliation is completed. The Pharmacy Services Segment also receives
additional discounts under its wholesaler contracts if it exceeds contractually defined purchase volumes. In addition, the Pharmacy
Services Segment receives fees from pharmaceutical manufacturers for administrative services. Purchase discounts and adminis-
trative service fees are recorded as a reduction of “Cost of revenues.”
Retail/LTC Segment
Vendor allowances received by the Retail/LTC Segment reduce the carrying cost of inventory and are recognized in cost of
revenues when the related inventory is sold, unless they are specifically identified as a reimbursement of incremental costs for
promotional programs and/or other services provided. Amounts that are directly linked to advertising commitments are recog-
nized as a reduction of advertising expense (included in operating expenses) when the related advertising commitment is satisfied.
Any such allowances received in excess of the actual cost incurred also reduce the carrying cost of inventory. The total value of
any upfront payments received from vendors that are linked to purchase commitments is initially deferred. The deferred amounts
are then amortized to reduce cost of revenues over the life of the contract based upon purchase volume. The total value of any
upfront payments received from vendors that are not linked to purchase commitments is also initially deferred. The deferred
amounts are then amortized to reduce cost of revenues on a straight-line basis over the life of the related contract.
We have not made any material changes in the way we account for vendor allowances and purchase discounts during the past
three years.
32
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations Inventory
Inventories are valued at the lower of cost or market using the weighted average cost method.
We reduce the value of our ending inventory for estimated inventory losses that have occurred during the interim period between
physical inventory counts. Physical inventory counts are taken on a regular basis in each store and a continuous cycle count
process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to
ensure that the amounts reflected in the accompanying consolidated financial statements are properly stated. The accounting for
inventory contains uncertainty since we must use judgment to estimate the inventory losses that have occurred during the interim
period between physical inventory counts. When estimating these losses, we consider a number of factors, which include, but
are not limited to, historical physical inventory results on a location-by-location basis and current physical inventory loss trends.
Our total reserve for estimated inventory losses covered by this critical accounting policy was $297 million as of December 31,
2017. Although we believe we have sufficient current and historical information available to us to record reasonable estimates
for estimated inventory losses, it is possible that actual results could differ. In order to help you assess the aggregate risk, if any,
associated with the uncertainties discussed above, a ten percent (10%) pre-tax change in our estimated inventory losses, which
we believe is a reasonably likely change, would increase or decrease our total reserve for estimated inventory losses by about
$30 million as of December 31, 2017.
Although we believe that the estimates discussed above are reasonable and the related calculations conform to generally
accepted accounting principles, actual results could differ from our estimates, and such differences could be material.
Goodwill and Intangible Assets
Identifiable intangible assets consist primarily of trademarks, client contracts and relationships, favorable leases and covenants
not to compete. These intangible assets arise primarily from the determination of their respective fair market values at the date
of acquisition.
Amounts assigned to identifiable intangible assets, and their related useful lives, are derived from established valuation tech-
niques and management estimates. Goodwill represents the excess of amounts paid for acquisitions over the fair value of the
net identifiable assets acquired.
We evaluate the recoverability of certain long-lived assets, including intangible assets with finite lives, but excluding goodwill
and intangible assets with indefinite lives which are tested for impairment using separate tests, whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. We group and evaluate these long-lived assets
for impairment at the lowest level at which individual cash flows can be identified. When evaluating these long-lived assets for
potential impairment, we first compare the carrying amount of the asset group to the asset group’s estimated future cash flows
(undiscounted and without interest charges). If the estimated future cash flows are less than the carrying amount of the asset
group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset
group to the asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss
is recorded for the portion of the asset group’s carrying value that exceeds the asset group’s estimated future cash flows
(discounted and with interest charges). Our long-lived asset impairment loss calculation contains uncertainty since we must use
judgment to estimate each asset group’s future sales, profitability and cash flows. When preparing these estimates, we consider
historical results and current operating trends and our consolidated sales, profitability and cash flow results and forecasts.
These estimates can be affected by a number of factors, including, but not limited to, general economic and regulatory condi-
tions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the
continued efforts of competitors to gain market share and consumer spending patterns.
Goodwill and indefinitely-lived intangible assets are subject to annual impairment reviews, or more frequent reviews if events or
circumstances indicate that the carrying value may not be recoverable.
Indefinitely-lived intangible assets are tested by comparing the estimated fair value of the asset to its carrying value. If the
carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized and the asset is written down to
its estimated fair value.
Our indefinitely-lived intangible asset impairment loss calculation contains uncertainty since we must use judgment to estimate
the fair value based on the assumption that in lieu of ownership of an intangible asset, the Company would be willing to pay a
royalty in order to utilize the benefits of the asset. Value is estimated by discounting the hypothetical royalty payments to their
present value over the estimated economic life of the asset. These estimates can be affected by a number of factors, including,
but not limited to, general economic conditions, availability of market information as well as the profitability of the Company.
33
2017 Annual Report Goodwill is tested for impairment on a reporting unit basis. The impairment test is calculated by comparing the reporting unit’s
fair value with its net book value (or carrying amount), including goodwill. The fair value of our reporting units is estimated using
a combination of a discounted cash flow method and a market multiple method. If the fair value of the reporting unit exceeds its
carrying amount, the reporting unit’s goodwill is considered to be impaired and an impairment is recognized in an amount equal
to the excess.
The determination of the fair value of our reporting units requires the Company to make significant assumptions and estimates.
These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies;
control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount
rates, terminal growth rates; and forecasts of revenue, operating profit, depreciation and amortization, capital expenditures and
future working capital requirements. When determining these assumptions and preparing these estimates, we consider each
reporting unit’s historical results and current operating trends and our consolidated revenues, profitability and cash flow results,
forecasts and industry trends. Our estimates can be affected by a number of factors including, but not limited to, general eco-
nomic and regulatory conditions, our market capitalization, efforts of customers and payers to reduce costs including their
prescription drug costs and/or increase member co-payments, the continued efforts of competitors to gain market share and
consumer spending patterns.
The carrying value of goodwill and other intangible assets covered by this critical accounting policy was $38.5 billion and
$13.5 billion as of December 31, 2017, respectively. We recorded $181 million in goodwill impairments in 2017 related to our
RxCrossroads reporting unit, see Note 3 “Goodwill and Other Intangibles” to our consolidated financial statements. We did not
record any impairment losses related to goodwill or other intangible assets during 2016 or 2015. During the third quarter of 2017,
we performed our required annual impairment tests of goodwill and indefinitely-lived trademarks. The goodwill impairment tests
resulted in the fair values of our Pharmacy Services and Retail Pharmacy reporting units exceeding their carrying values by
significant margins. The fair values of our LTC and RxC reporting units exceeded their carrying values by approximately 1% and
6%, respectively. The balance of goodwill for our LTC and RxCrossroads reporting units at December 31, 2017 was approxi-
mately $6.5 billion and $0.4 billion, respectively. On January 2, 2018, we sold our RxCrossroads reporting unit to McKesson
Corporation for $725 million.
Although we believe we have sufficient current and historical information available to us to test for impairment, it is possible that
actual results could differ from the estimates used in our impairment tests.
As previously discussed, the results of our annual goodwill impairment test resulted in the fair value of our LTC reporting unit
exceeding its carrying value by approximately 1%. Our multi-year cash flow projections for our LTC reporting unit have declined
from the prior year due to customer reimbursement pressures, industry trends such as lower occupancy rates in skilled nursing
facilities, and client retention rates. Our projected discounted cash flow model assumes future script growth from our senior living
initiative and the impact of acquisitions. Such projections also include expected cost savings from labor productivity and other
initiatives. Our market multiple method is heavily dependent on earnings multiples of market participants in the pharmacy industry,
including certain competitors and suppliers. If we do not achieve our forecasts, given the small excess of fair value over the
related carrying value, as well as current market conditions in the healthcare industry, it is reasonably possible that the opera-
tional performance of the LTC reporting unit could be below our current expectations in the near term and the LTC reporting unit
could be deemed to be impaired by a material amount.
We have not made any material changes in the methodologies utilized to test the carrying values of goodwill and intangible
assets for impairment during the past three years.
Closed Store Lease Liability
We account for closed store lease termination costs when a leased store is closed. When a leased store is closed, we record a
liability for the estimated present value of the remaining obligation under the noncancelable lease, which includes future real estate
taxes, common area maintenance and other charges, if applicable. The liability is reduced by estimated future sublease income.
The initial calculation and subsequent evaluations of our closed store lease liability contain uncertainty since we must use
judgment to estimate the timing and duration of future vacancy periods, the amount and timing of future lump sum settlement
payments and the amount and timing of potential future sublease income. When estimating these potential termination costs and
their related timing, we consider a number of factors, which include, but are not limited to, historical settlement experience, the
owner of the property, the location and condition of the property, the terms of the underlying lease, the specific marketplace
demand and general economic conditions.
34
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations Our total closed store lease liability covered by this critical accounting policy was $344 million as of December 31, 2017. This
amount is net of $156 million of estimated sublease income that is subject to the uncertainties discussed above. Although we
believe we have sufficient current and historical information available to us to record reasonable estimates for sublease income,
it is possible that actual results could differ.
In order to help you assess the risk, if any, associated with the uncertainties discussed above, a ten percent (10%) pre-tax
change in our estimated sublease income, which we believe is a reasonably likely change, would increase or decrease our total
closed store lease liability by about $16 million as of December 31, 2017.
We have not made any material changes in the reserve methodology used to record closed store lease reserves during the past
three years.
Self-Insurance Liabilities
We are self-insured for certain losses related to general liability, workers’ compensation and auto liability, although we maintain
stop loss coverage with third party insurers to limit our total liability exposure. We are also self-insured for certain losses related
to health and medical liabilities.
The estimate of our self-insurance liability contains uncertainty since we must use judgment to estimate the ultimate cost that will
be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.
When estimating our self-insurance liability, we consider a number of factors, which include, but are not limited to, historical claim
experience, demographic factors, severity factors and other standard insurance industry actuarial assumptions. On a quarterly
basis, we review our self-insurance liability to determine if it is adequate as it relates to our general liability, workers’ compensa-
tion and auto liability. Similar reviews are conducted semi-annually to determine if our self-insurance liability is adequate for our
health and medical liability.
Our total self-insurance liability covered by this critical accounting policy was $696 million as of December 31, 2017. Although we
believe we have sufficient current and historical information available to us to record reasonable estimates for our self-insurance
liability, it is possible that actual results could differ. In order to help you assess the risk, if any, associated with the uncertainties
discussed above, a ten percent (10%) pre-tax change in our estimate for our self-insurance liability, which we believe is a reasonably
likely change, would increase or decrease our self-insurance liability by about $70 million as of December 31, 2017.
We have not made any material changes in the accounting methodology used to establish our self-insurance liability during the
past three years.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are established for any
temporary differences between financial and tax reporting bases and are adjusted as needed to reflect changes in the enacted
tax rates expected to be in effect when the temporary differences reverse. Such adjustments are recorded in the period in which
changes in tax laws are enacted, regardless of when they are effective. Deferred tax assets are reduced, if necessary, by a
valuation allowance to the extent future realization of those losses, deductions or other tax benefits is sufficiently uncertain.
Significant judgment is required in determining the provision for income taxes and the related taxes payable and deferred tax
assets and liabilities since, in the ordinary course of business, there are transactions and calculations where the ultimate tax
outcome is uncertain. Additionally, our tax returns are subject to audit by various domestic and foreign tax authorities that could
result in material adjustments based on differing interpretations of the tax laws. Although we believe that our estimates are
reasonable and are based on the best available information at the time we prepare the provision, actual results could differ from
these estimates resulting in a final tax outcome that may be materially different from that which is reflected in our consolidated
financial statements.
The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than
50% likelihood of being realized upon settlement. Interest and/or penalties related to uncertain tax positions are recognized in
income tax expense. Significant judgment is required in determining our uncertain tax positions. We have established accruals for
uncertain tax positions using our best judgment and adjust these accruals, as warranted, due to changing facts and circumstances.
35
2017 Annual Report New Accounting Pronouncements
See Note 1 “Significant Accounting Policies” to the consolidated financial statements for a description of New Accounting
Pronouncements applicable to the Company.
Cautionary Statement Concerning Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements
made by or on behalf of the Company. In addition, the Company and its representatives may, from time to time, make written
or verbal forward-looking statements, including statements contained in the Company’s filings with the U.S. Securities and
Exchange Commission (“SEC”) and in its reports to stockholders, press releases, webcasts, conference calls, meetings and other
communications. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “project,” “anticipate,” “will,”
“should” and similar expressions identify statements that constitute forward-looking statements. All statements addressing
operating performance of CVS Health Corporation or any subsidiary, events or developments that the Company expects or
anticipates will occur in the future, including statements relating to corporate strategy; revenue growth; earnings or earnings per
common share growth; adjusted earnings or adjusted earnings per common share growth; free cash flow; debt ratings; inventory
levels; inventory turn and loss rates; store development; relocations and new market entries; retail pharmacy business, sales
trends and operations; PBM business, sales trends and operations; specialty pharmacy business, sales trends and operations;
LTC pharmacy business, sales trends and operations; the Company’s ability to attract or retain customers and clients; Medicare
Part D competitive bidding, enrollment and operations; new product development; and the impact of industry and regulatory
developments, as well as statements expressing optimism or pessimism about future operating results or events, are for-
ward-looking statements within the meaning of the Reform Act.
The 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. The Company undertakes no
obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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 SEC filings, including those set
forth in the Risk Factors section within the 2017 Annual Report on Form 10-K, and including, but not limited to:
• Risks relating to the health of the economy in general and in the markets we serve, which could impact consumer purchasing
power, preferences and/or spending patterns, drug utilization trends, the financial health of our PBM and LTC clients, retail and
specialty pharmacy payors or other payors doing business with the Company and our ability to secure necessary financing,
suitable store locations and sale-leaseback transactions on acceptable terms.
• Efforts to reduce reimbursement levels and alter health care financing practices, including pressure to reduce reimbursement
levels for generic drugs.
• The possibility of PBM and LTC client loss and/or the failure to win new PBM and LTC business, including as a result of failure
to win renewal of expiring contracts, contract termination rights that may permit clients to terminate a contract prior to expira-
tion and early or periodic renegotiation of pricing by clients prior to expiration of a contract.
• The possibility of loss of Medicare Part D business and/or failure to obtain new Medicare Part D business, whether as a result
of the annual Medicare Part D competitive bidding process or otherwise.
• Risks related to the frequency and rate of the introduction of generic drugs and brand-name prescription products.
• Risks of declining gross margins attributable to increased competitive pressures, increased client demand for lower prices,
enhanced service offerings and/or higher service levels and market dynamics and, with respect to the PBM industry, regulatory
changes that impact our ability to offer plan sponsors pricing that includes the use of retail “differential” or “spread” or the use
of maximum allowable cost pricing.
• Regulatory changes, business changes and compliance requirements and restrictions that may be imposed by Centers for
Medicare & Medicaid Services (“CMS”), Office of Inspector General or other government agencies relating to the Company’s
participation in Medicare, Medicaid and other federal and state government-funded programs, including sanctions and
remedial actions that may be imposed by CMS on our Medicare Part D business.
36
CVS HealthManagement’s Discussion and Analysis of Financial Condition and Results of Operations • Risks and uncertainties related to the timing and scope of reimbursement from Medicare, Medicaid and other govern-
ment-funded programs, including the possible impact of sequestration, the impact of other federal budget, debt and deficit
negotiations and legislation that could delay or reduce reimbursement from such programs and the impact of any closure,
suspension or other changes affecting federal or state government funding or operations.
• Possible changes in industry pricing benchmarks used to establish pricing in many of our PBM and LTC client contracts,
pharmaceutical purchasing arrangements, retail network contracts, specialty payor agreements and other third party payor
contracts.
• Efforts to increase reimbursement rates in PBM pharmacy networks and to inhibit the ability of PBMs to audit network pharma-
cies for fraud, waste and abuse.
• Risks related to increasing oversight of PBM activities by state departments of insurance and boards of pharmacy.
• A highly competitive business environment, including the uncertain impact of increased consolidation in the PBM industry, the
possibility of combinations, joint ventures or other collaboration between PBMs and retailers, uncertainty concerning the ability
of our retail pharmacy business to secure and maintain contractual relationships with PBMs and other payors on acceptable
terms, uncertainty concerning the ability of our PBM business to secure and maintain competitive access, pricing and other
contract terms from retail network pharmacies in an environment where some PBM clients are willing to consider adopting
narrow or more restricted retail pharmacy networks, the possibility of our retail stores or specialty pharmacies being excluded
from narrow or restricted networks, the potential of disruptive innovation from existing and new competitors and risks related
to developing and maintaining a relevant experience for our customers.
• The Company’s ability to timely identify or effectively respond to changing consumer preferences and spending patterns,
an inability to expand the products being purchased by our customers, or the failure or inability to obtain or offer particular
categories of products.
• Risks relating to our ability to secure timely and sufficient access to the products we sell from our domestic and/or international
suppliers, including limited distribution drugs.
• Reform of the U.S. health care system, including ongoing implementation of the Patient Protection and Affordable Care Act and
the Health Care and Education Reconciliation Act (collectively, “ACA”) and the possible repeal and replacement of all or parts
of ACA, continuing legislative efforts, regulatory changes and judicial interpretations impacting our health care system and the
possibility of shifting political and legislative priorities related to reform of the health care system in the future.
• Risks related to changes in legislation, regulation and government policy (including through the use of Executive Orders) that
could significantly impact our business and the health care and retail industries, including, but not limited to, the possibility of
major developments in tax policy or trade relations, such as the imposition of unilateral tariffs on imported products, changes
with respect to the approval process for biosimilars, or changes or developments with respect to the regulation of drug pricing,
including federal and state drug pricing programs.
• Risks relating to any failure to properly maintain our information technology systems, our information security systems and our
infrastructure to support our business and to protect the privacy and security of sensitive customer and business information.
• Risks related to compliance with a broad and complex regulatory framework, including compliance with new and existing
federal, state and local laws and regulations relating to health care, network pharmacy reimbursement and auditing, accounting
standards, corporate securities, tax, environmental and other laws and regulations affecting our business.
• Risks related to litigation, government investigations and other legal proceedings as they relate to our business, the pharmacy
services, retail pharmacy, LTC pharmacy, specialty pharmacy or retail clinic industries, or to the health care industry generally.
• The risk that any condition related to the closing of any proposed acquisition, including the Aetna Acquisition, may not be
satisfied on a timely basis or at all, including the inability to obtain required regulatory approvals of any proposed acquisition,
including the Aetna Acquisition, or on the terms desired or anticipated; the risk that such approvals may result in the imposition
of conditions that could adversely affect the resulting combined company or the expected benefits of any proposed transac-
tion, including the Aetna Acquisition; and the risk that the proposed transactions, including the Aetna Acquisition fail to close
for any other reason, which could negatively impact our stock price and our future business and financial results.
• The possibility that the anticipated synergies and other benefits from any acquisition by us, including the Aetna Acquisition, will
not be realized, or will not be realized within the expected time periods.
37
2017 Annual Report Management’s Discussion and Analysis
of Financial Condition and Results of Operations
• Other risks related to the Aetna Acquisition, including the possibility of failing to retain existing management including key
executives of Aetna, the potential for disruption of our business relationships due to uncertainty associated with the Aetna
Acquisition, the increased difficulty for us to pursue alternatives to the Aetna Acquisition, and the possibility that the Aetna
Acquisition may not be accretive to our earnings per share.
• The risks and uncertainties related to our ability to integrate the operations, products, services and employees of any entities
acquired by us, including the Aetna Acquisition, and the effect of the potential disruption of management’s attention from
ongoing business operations due to any pending acquisitions, including the Aetna Acquisition.
• The accessibility or availability of adequate financing on a timely basis and on reasonable terms and the risks of increased
indebtedness incurred to fund the Aetna Acquisition.
• Risks related to the outcome of any legal proceedings related to or involving any entity that is a part of, any proposed acquisi-
tion contemplated by us, including the risk that we may be subject to securities class action and derivative lawsuits in
connection with the Aetna Acquisition.
• The possibility of lower-than-expected valuations at the Company’s reporting units could result in goodwill impairment charges
at those reporting units.
• Other risks and uncertainties detailed from time to time in our filings with the SEC.
The foregoing list is not exhaustive. There can be no assurance that the Company has correctly identified and appropriately
assessed all factors affecting its business. Additional risks and uncertainties not presently known to the Company or that it currently
believes to be immaterial also may adversely impact the Company. Should any risks and uncertainties develop into actual events,
these developments could have a material adverse effect on the Company’s business, financial condition and results of operations.
For these reasons, you are cautioned not to place undue reliance on the Company’s forward-looking statements.
38
CVS Health Management’s Report on Internal Control
Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our Company’s internal
control over financial reporting includes those policies and procedures that pertain to the Company’s ability to record, process,
summarize and report a system of internal accounting controls and procedures to provide reasonable assurance, at an appropri-
ate cost/benefit relationship, that the unauthorized acquisition, use or disposition of assets are prevented or timely detected and
that transactions are authorized, recorded and reported properly to permit the preparation of financial statements in accordance
with generally accepted accounting principles (GAAP) and receipts and expenditures are duly authorized. In order to ensure the
Company’s internal control over financial reporting is effective, management regularly assesses such controls and did so most
recently for its financial reporting as of December 31, 2017.
We conducted an assessment of the effectiveness of our internal controls over financial reporting based on the criteria set forth
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 Framework). This evaluation included review of the documentation, evaluation of the design effectiveness and testing of the
operating effectiveness of controls. Our system of internal control over financial reporting is enhanced by periodic reviews by our
internal auditors, written policies and procedures and a written Code of Conduct adopted by our Company’s Board of Directors,
applicable to all employees of our Company. In addition, we have an internal Disclosure Committee, comprised of management
from each functional area within the Company, which performs a separate review of our disclosure controls and procedures.
There are inherent limitations in the effectiveness of any system of internal controls over financial reporting.
Based on our assessment, we conclude our Company’s internal control over financial reporting is effective and provides reason-
able assurance that assets are safeguarded and that the financial records are reliable for preparing financial statements as of
December 31, 2017.
Ernst & Young LLP, independent registered public accounting firm, is appointed by the Board of Directors and ratified by our
Company’s shareholders. They were engaged to render an opinion regarding the fair presentation of our consolidated financial
statements as well as conducting an audit of internal control over financial reporting. Their accompanying reports are based upon
audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).
February 14, 2018
39
2017 Annual Report Report of Ernst & Young LLP,
Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of CVS Health Corporation
Opinion on Internal Control over Financial Reporting
We have audited CVS Health Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, CVS Health Corporation (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2017, and 2016, the related consolidated state-
ments of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes and our report dated February 14, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assess-
ment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be inde-
pendent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Boston, Massachusetts
February 14, 2018
40
CVS Health Consolidated Statements of Income
in millions, except per share amounts
2017
2016
2015
Year Ended December 31,
Net revenues
Cost of revenues
Gross profit
Operating expenses
Operating profit
Interest expense, net
Loss on early extinguishment of debt
Other expense
Income before income tax provision
Income tax provision
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income
Net income attributable to noncontrolling interest
$ 184,765
156,220
28,545
19,028
9,517
1,041
—
208
8,268
1,637
6,631
(8)
6,623
(1)
$
177,526
$
153,290
148,669
126,762
28,857
18,491
10,366
1,058
643
28
8,637
3,317
5,320
(1)
5,319
(2)
26,528
17,053
9,475
838
—
21
8,616
3,386
5,230
9
5,239
(2)
Net income attributable to CVS Health
$
6,622
$
5,317
$
5,237
Basic earnings per share:
Income from continuing
operations attributable to CVS Health
Income (loss) from discontinued operations
attributable to CVS Health
Net income attributable to CVS Health
Weighted average shares outstanding
Diluted earnings per share:
Income from continuing
operations attributable to CVS Health
Income (loss) from discontinued operations
attributable to CVS Health
Net income attributable to CVS Health
Weighted average shares outstanding
Dividends declared per share
See accompanying notes to consolidated financial statements.
$
$
$
$
$
$
$
6.48
(0.01)
6.47
1,020
6.45
(0.01)
6.44
1,024
2.00
$
$
$
$
$
$
$
4.93
—
4.93
1,073
4.91
—
4.90
1,079
1.70
$
$
$
$
$
$
$
4.65
0.01
4.66
1,118
4.62
0.01
4.63
1,126
1.40
41
2017 Annual Report
Consolidated Statements of Comprehensive Income
in millions
Net income
Other comprehensive income:
Foreign currency translation adjustments, net of tax
Net cash flow hedges, net of tax
Pension and other postretirement benefits, net of tax
Total other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to noncontrolling interest
Year Ended December 31,
2017
2016
2015
$
6,623
$
5,319
$
5,239
(2)
(10)
152
140
6,763
(1)
38
2
13
53
5,372
(2)
(100)
2
(43)
(141)
5,098
(2)
Comprehensive income attributable to CVS Health
$
6,762
$
5,370
$
5,096
See accompanying notes to consolidated financial statements.
42
CVS Health
Consolidated Balance Sheets
in millions, except per share amounts
Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities:
Accounts payable
Claims and discounts payable
Accrued expenses
Short-term debt
Current portion of long-term debt
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
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; 1,712 shares issued and
1,014 shares outstanding at December 31, 2017, and 1,705 shares issued and
1,061 shares outstanding at December 31, 2016
Treasury stock, at cost: 697 shares at December 31, 2017, and 643 shares at December 31, 2016
Shares held in trust: 1 share at December 31, 2017 and December 31, 2016
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total CVS Health shareholders’ equity
Noncontrolling interest
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
December 31,
2017
2016
$
1,696
$
3,371
111
13,181
15,296
945
31,229
10,292
38,451
13,630
1,529
87
12,164
14,760
660
31,042
10,175
38,249
13,511
1,485
$ 95,131
$
94,462
$
8,863
$
10,355
6,609
1,276
3,545
30,648
22,181
2,996
1,611
—
17
(37,765)
(31)
32,079
43,556
(165)
37,691
4
37,695
7,946
9,451
6,937
1,874
42
26,250
25,615
4,214
1,549
—
17
(33,452)
(31)
31,618
38,983
(305)
36,830
4
36,834
$ 95,131
$
94,462
43
2017 Annual Report
Year Ended December 31,
2017
2016
2015
$ 176,594
(149,279)
(15,348)
21
(1,072)
(2,909)
8,007
$
172,310
(142,511)
(15,478)
20
(1,140)
(3,060)
10,141
$
148,954
(122,498)
(14,035)
21
(629)
(3,274)
8,539
Consolidated Statements of Cash Flows
in millions
Cash flows from operating activities:
Cash receipts from customers
Cash paid for inventory and prescriptions dispensed by retail network pharmacies
Cash paid to other suppliers and employees
Interest received
Interest paid
Income taxes paid
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale-leaseback transactions
Proceeds from sale of property and equipment and other assets
Acquisitions (net of cash acquired) and other investments
Purchase of available-for-sale investments
Maturities of available-for-sale investments
Net cash used in investing activities
Cash flows from financing activities:
Increase (decrease) in short-term debt
Proceeds from issuance of long-term debt
Repayments of long-term debt
Purchase of noncontrolling interest in subsidiary
Payment of contingent consideration
Dividends paid
Proceeds from exercise of stock options
Payments for taxes related to net share settlement of equity awards
Repurchase of common stock
Other
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Reconciliation of net income to net cash provided by operating activities:
Net income
Adjustments required to reconcile net income to net cash
provided by operating activities:
(1,918)
265
33
(1,287)
(86)
61
(2,932)
(598)
—
—
—
—
(2,049)
329
(71)
(4,361)
(1)
(6,751)
1
(1,675)
3,371
$
1,696
$
6,623
$
$
Depreciation and amortization
Goodwill impairments
Losses on settlements of defined benefit pension plans
Stock-based compensation
Loss on early extinguishment of debt
Deferred income taxes
Other noncash items
Change in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net
Inventories
Other current assets
Other assets
Accounts payable and claims and discounts payable
Accrued expenses
Other long-term liabilities
2,479
181
187
234
—
(1,334)
53
(941)
(514)
(341)
3
1,710
(371)
38
(2,224)
230
37
(539)
(65)
91
(2,470)
1,874
3,455
(5,943)
(39)
(26)
(1,840)
296
(72)
(4,461)
(5)
(6,761)
2
912
2,459
3,371
5,319
2,475
—
—
222
643
18
135
(243)
(742)
35
(43)
2,189
131
2
(2,367)
411
35
(11,475)
(267)
243
(13,420)
(685)
14,805
(2,902)
—
(58)
(1,576)
362
(63)
(5,001)
(3)
4,879
(20)
(22)
2,481
2,459
5,239
2,092
—
—
230
—
(252)
(14)
(1,594)
(1,141)
355
2
2,834
892
(104)
$
$
Net cash provided by operating activities
$
8,007
$
10,141
$
8,539
See accompanying notes to consolidated financial statements.
44
CVS Health
Consolidated Statements of Shareholders’ Equity
in millions
2017
2016
2015
2017
2016
2015
Shares
Year Ended December 31,
Dollars
Year Ended December 31,
Common stock:
Beginning of year
Stock options exercised and issuance of
stock awards
End of year
Treasury stock:
Beginning of year
Purchase of treasury shares
Employee stock purchase plan issuances
End of year
Shares held in trust:
Balance at beginning and end of year
Capital surplus:
Beginning of year
Stock option activity, stock awards and other
Excess tax benefit on stock options
and stock awards
2015 accelerated share repurchase
settled in 2016
End of year
Retained earnings:
Beginning of year
Changes in inventory accounting principles
Net income attributable to CVS Health
Common stock dividends
End of year
Accumulated other comprehensive income (loss):
Beginning of year
Foreign currency translation adjustments,
net of tax
Net cash flow hedges, net of tax
Pension and other postretirement benefits,
net of tax
End of year
Total CVS Health shareholders’ equity
Noncontrolling interest:
Beginning of year
Business combinations
Capital contributions
Net income attributable to noncontrolling
interest (1)
Distributions
End of year
Total shareholders’ equity
1,705
1,699
1,691
$
17
$
17
$
7
1,712
6
1,705
8
1,699
$
—
17
$
—
17
$
17
—
17
(643)
(55)
1
(697)
(597)
(47)
1
(643)
(550)
(48)
1
(597)
$ (33,452)
(4,361)
48
$ (28,886)
(4,606)
40
$ (24,078)
(4,856)
48
$ (37,765)
$ (33,452)
$ (28,886)
(1)
(1)
(1)
$
(31)
$
(31)
$
(31)
$ 31,618
461
$ 30,948
449
$ 30,418
533
—
—
76
145
142
(145)
$ 32,079
$ 31,618
$ 30,948
$ 38,983
—
6,622
(2,049)
$ 35,506
—
5,317
(1,840)
$ 31,849
(4)
5,237
(1,576)
$ 43,556
$ 38,983
$ 35,506
$
(305)
$
(358)
$
(217)
(2)
(10)
152
(165)
38
2
13
(305)
(100)
2
(43)
(358)
$ 37,691
$ 36,830
$ 37,196
$
$
4
—
1
1
(2)
4
$
7
—
1
1
(5)
4
5
1
2
1
(2)
7
$ 37,695
$ 36,834
$ 37,203
(1) Excludes $1 million attributable to redeemable noncontrolling interest in 2016 and 2015 (See Note 1 “Significant Accounting Policies”).
See accompanying notes to consolidated financial statements.
45
2017 Annual Report
Notes
to Consolidated Financial Statements
1 | Significant Accounting Policies
Description of business CVS Health Corporation and its subsidiaries (the “Company”) is the largest integrated pharmacy
health care provider in the United States based upon revenues and prescriptions filled. The Company currently has three report-
able business segments, Pharmacy Services, Retail/LTC and Corporate, which are described below.
Pharmacy Services Segment (the “PSS”) The PSS provides a full range of pharmacy benefit management services including
plan design offerings and administration, formulary management, Medicare Part D services, mail order, specialty pharmacy and
infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease
management services and medical spend management. The Company’s clients are primarily employers, insurance companies,
unions, government employee groups, health plans, Medicare Part D, Managed Medicaid plans, plans offered on the public and
private exchanges, and other sponsors of health benefit plans and individuals throughout the United States.
As a pharmacy benefits manager, the PSS manages the dispensing of pharmaceuticals through the Company’s mail order
pharmacies and national network of more than 68,000 retail pharmacies, consisting of approximately 41,000 chain pharmacies
and 27,000 independent pharmacies, to eligible members in the benefits plans maintained by the Company’s clients and utilizes
its information systems to perform, among other things, safety checks, drug interaction screenings and brand to generic
substitutions.
The PSS’ specialty pharmacies support individuals that require complex and expensive drug therapies. The specialty pharmacy
business includes mail order and retail specialty pharmacies that operate under the CVS Caremark®, CarePlus CVS PharmacyTM,
Navarro® Health Services and Advanced Care Scripts (“ACS Pharmacy”) names. The Company enhanced its provides specialty
infusion services and enteral nutrition services through Coram LLC and its subsidiaries (collectively, “Coram”). In August 2015,
the Company further expanded its specialty offerings with the acquisition of ACS Pharmacy which was part of the Omnicare, Inc.
(“Omnicare”) acquisition. See Note 2 “Acquisitions.”
The PSS also provides health management programs, which include integrated disease management for 18 conditions, through
the Company’s AccordantCare rare disease management offering.
In addition, through the Company’s SilverScript Insurance Company (“SilverScript”) subsidiary, the PSS is a national provider of
drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.
The PSS generates net revenues primarily by contracting with clients to provide prescription drugs to plan members. Prescription
drugs are dispensed by the mail order pharmacies, specialty pharmacies and national network of retail pharmacies. Net revenues
are also generated by providing additional services to clients, including administrative services such as claims processing and
formulary management, as well as health care related services such as disease management.
The PSS operates under the CVS Caremark® Pharmacy Services, Caremark®, CVS Caremark®, CVS Specialty®, AccordantCare,
SilverScript®, Wellpartner®, Coram®, CVS Specialty®, NovoLogix®, Navarro® Health Services and ACS Pharmacy names. As of
December 31, 2017, the PSS operates 23 retail specialty pharmacy stores, 18 specialty mail order pharmacies, four mail order
dispensing pharmacies, and 83 branches for infusion and enteral services, including approximately 73 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, photo finishing services,
seasonal merchandise, and greeting cards, 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.
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.
In 2015, the Company made two larger acquisitions which expanded the Retail/LTC Segment’s services. With the acquisition
of Omnicare, the RLS began providing long-term care (“LTC”) operations, which is comprised of providing the distribution of
pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings, as well
as commercialization services which are provided under the name RxCrossroads® (“RxC”). With the December 2015 acquisition of
the pharmacies and clinics of Target Corporation (“Target”), the Company added 1,672 pharmacies and approximately 79 clinics.
46
CVS HealthNotes to Consolidated Financial Statements As of December 31, 2017, our Retail/LTC Segment included 9,803 retail stores (of which 8,060 were our stores that operated
a pharmacy and 1,695 were our pharmacies located within Target stores) located in 49 states, the District of Columbia, Puerto
Rico and Brazil operating primarily under the CVS Pharmacy®, CVS®, CVS Pharmacy y más®, Longs Drugs®, Navarro Discount
Pharmacy® and Drogaria OnofreTM names, 37 onsite pharmacies primarily operating under the CarePlus CVS PharmacyTM,
CarePlus® and CVS Pharmacy® names, and 1,134 retail health care clinics operating under the MinuteClinic® name (of which
1,129 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 145 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.
Principles of consolidation The 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 deter-
mines 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.
Assets and liabilities of VIEs for which the Company is the primary beneficiary were not significant to the Company’s consolidated
financial statements. VIE creditors do not have recourse against the general credit of the Company.
Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts in the
consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Fair value hierarchy 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.
Cash and cash equivalents Cash and cash equivalents consist of cash and temporary investments with maturities of three
months or less when purchased. The Company invests in short-term money market funds, commercial paper and time deposits,
as well as other debt securities that are classified as cash equivalents within the accompanying 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.
Restricted cash As of December 31, 2017 and 2016, the Company had $190 million and $149 million, respectively, of restricted
cash held in a trust in its insurance captive to satisfy collateral requirements associated with the assignment of certain insurance
policies. Such amounts are included in other assets in the consolidated balance sheets. Additionally, as of December 31, 2017,
the Company had $14 million of restricted cash held in escrow accounts in connection with certain recent acquisitions. Such
amounts are included in other current assets in the consolidated balance sheets. All restricted cash is invested in time deposits
which are classified within Level 1 of the fair value hierarchy.
47
2017 Annual Report Short-term investments The Company’s short-term investments consist of certificates of deposit with initial maturities of
greater than three months when purchased that mature in less than one year from the balance sheet date. These investments,
which were classified as available-for-sale within Level 1 of the fair value hierarchy, were carried at fair value, which approximated
their historical cost at December 31, 2017 and 2016.
Fair value of financial instruments As of December 31, 2017, the Company’s financial instruments include cash and cash
equivalents, short-term and long-term investments, accounts receivable, accounts payable and short-term debt approximate
their fair value due to the nature of these financial instruments. The carrying amount and estimated fair value of total long-term
debt was $25.7 billion and $26.8 billion, respectively, as of December 31, 2017. The fair value of the Company’s long-term debt
was estimated based on quoted rates currently offered in active markets for the Company’s debt, which is considered Level 1
of the fair value hierarchy.
Derivative financial instruments The Company is exposed to interest rate risk and management considers it prudent to
periodically reduce the Company’s exposure to cash flow variability resulting from interest rate fluctuations. In December 2017,
the Company entered into several interest rate swap transactions. These agreements were designated as cash flow hedges and
were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the antici-
pated issuance of long-term debt in connection with the proposed acquisition of Aetna Inc. (“Aetna”). The interest rate swaps
had notional amounts totaling $4.75 billion. At December 31, 2017, the fair value of these agreements were a $5 million asset
recorded in other current assets and a $23 million liability recorded in accrued expenses. The fair value of these derivative financial
instruments was determined using quoted prices in markets that are not active or inputs that are observable for the asset or
liability and therefore they are classified as Level 2 in the fair value hierarchy. The Company has deferred gains and losses in
accumulated other comprehensive income which are expected to be reclassified to interest expense over the life of the underlying
forecasted debt. The hedges are expected to be highly effective; therefore, no ineffectiveness was recognized in earnings. There
were no outstanding derivative financial instruments as of December 31, 2016.
Foreign currency translation and transactions For local currency functional currency, assets and liabilities are translated at
end-of-period rates while revenues and expenses are translated at average rates in effect during the period. Equity is translated at
historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other compre-
hensive income (loss).
For U.S. dollar functional currency locations, foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-
period exchange rates, except for nonmonetary balance sheet accounts, which are remeasured at historical exchange rates.
Revenue and expense are remeasured at average exchange rates in effect during each period, except for those expenses related
to the nonmonetary balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign
currency remeasurement are included in income.
Gains and losses arising from foreign currency transactions and the effects of remeasurements were not material for all
periods presented.
Accounts receivable Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable
balance primarily includes amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies,
governmental agencies and long-term care facilities), clients, members and private pay customers, as well as vendors and
manufacturers. Charges to bad debt are based on both historical write-offs and specifically identified receivables.
The activity in the allowance for doubtful accounts receivable for the years ended December 31 is as follows:
in millions
Beginning balance
Additions charged to bad debt expense
Write-offs charged to allowance
Ending balance
2017
286
177
(156)
307
$
$
2016
161
221
(96)
286
$
$
$
$
2015
256
216
(311)
161
Inventories Inventories are stated at the lower of weighted average cost or market. Physical inventory counts are taken on a
regular basis in each retail store and long-term care pharmacy and a continuous cycle count process is the primary procedure
used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected
in the accompanying consolidated financial statements are properly stated. During the interim period between physical inventory
counts, the Company accrues for anticipated physical inventory losses on a location-by-location basis based on historical results
and current trends.
48
CVS HealthNotes to Consolidated Financial Statements
Property and equipment Property, equipment and improvements to leased premises are depreciated using the straight-line
method over the estimated useful lives of the assets, or when applicable, the term of the lease, whichever is shorter. Estimated
useful lives generally range from 10 to 40 years for buildings, building improvements and leasehold improvements and 3 to 10
years for fixtures, equipment and internally developed software. Repair and maintenance costs are charged directly to expense
as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.
Application development stage costs for significant internally developed software projects are capitalized and depreciated.
The following are the components of property and equipment at December 31:
in millions
Land
Building and improvements
Fixtures and equipment
Leasehold improvements
Software
Accumulated depreciation and amortization
Property and equipment, net
$
2017
1,707
3,343
11,963
4,793
2,484
24,290
(13,998)
$
2016
1,734
3,226
10,956
4,494
2,392
22,802
(12,627)
$ 10,292
$
10,175
The gross amount of property and equipment under capital leases was $588 million and $547 million as of December 31, 2017
and 2016, respectively. Accumulated amortization of property and equipment under capital lease was $140 million and $119 million
as of December 31, 2017 and 2016, respectively. Amortization of property and equipment under capital lease is included within
depreciation expense. Depreciation expense totaled $1.7 billion in both 2017 and 2016, and $1.5 billion in 2015.
Goodwill and other indefinitely-lived assets Goodwill and other indefinitely-lived assets are not amortized, but are subject to
impairment reviews annually, or more frequently if necessary. See Note 3 “Goodwill and Other Intangibles” for additional informa-
tion on goodwill and other indefinitely-lived assets.
Intangible assets Purchased customer contracts and relationships are amortized on a straight-line basis over their estimated
useful lives between 9 and 20 years. Purchased customer lists are amortized on a straight-line basis over their estimated useful
lives of up to 10 years. Purchased leases are amortized on a straight-line basis over the remaining life of the lease. See Note 3
“Goodwill and Other Intangibles” for additional information about intangible assets.
Impairment of long-lived assets The Company groups and evaluates fixed and finite-lived intangible assets for impairment
at the lowest level at which individual cash flows can be identified, whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. If indicators of impairment are present, the Company first compares the
carrying amount of the asset group to the estimated future cash flows associated with the asset group (undiscounted and without
interest charges). If the estimated future cash flows used in this analysis are less than the carrying amount of the asset group, an
impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the
asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for
the portion of the asset group’s carrying value that exceeds the asset group’s estimated future cash flows (discounted and with
interest charges).
Redeemable noncontrolling interest As a result of the acquisition of Omnicare in 2015, the Company obtained a 73%
ownership interest in a limited liability company (“LLC”). Due to the change in control in Omnicare, the noncontrolling member of
the LLC had the contractual right to put its membership interest to the Company at fair value. Consequently, the noncontrolling
interest in the LLC was recorded as a redeemable noncontrolling interest at fair value. During 2016, the noncontrolling shareholder
of the LLC exercised its option to sell its ownership interest and the Company purchased the noncontrolling interest in the LLC for
approximately $39 million.
49
2017 Annual Report
Below is a summary of the changes in redeemable noncontrolling interest for the years ended December 31:
in millions
Beginning balance
Acquisition of noncontrolling interest
Net income attributable to noncontrolling interest
Distributions
Purchase of noncontrolling interest
Reclassification to capital surplus in connection with purchase of noncontrolling interest
Ending balance
Revenue Recognition
PHARMACY SERVICES SEGMENT
2016
2015
$
$
39
—
1
(2)
(39)
1
—
$
$
—
39
1
(1)
—
—
39
The PSS sells prescription drugs directly through its mail service dispensing pharmacies and indirectly through its retail pharmacy
network. The PSS recognizes revenue from prescription drugs sold by its mail service dispensing pharmacies and under retail
pharmacy network contracts where it is the principal using the gross method at the contract prices negotiated with its clients. Net
revenues include: (i) the portion of the price the client pays directly to the PSS, net of any volume-related or other discounts paid
back to the client (see “Drug Discounts” 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) administrative fees for retail pharmacy network contracts where the PSS is not the principal as discussed
below. Sales taxes are not included in revenue.
Revenue is recognized when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been
rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. 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
is delivered. At the time of delivery, the PSS has performed substantially all of its 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 associ-
ated administrative fees are recognized at the PSS’ point-of-sale, which is when the claim is adjudicated by the PSS online
claims processing system.
The PSS determines whether it is the principal or agent for its retail pharmacy network transactions on a contract by contract
basis. In the majority of its contracts, the PSS has determined it is the principal due to it: (i) being the primary obligor in the
arrangement, (ii) having latitude in establishing the price, changing the product or performing part of the service, (iii) having
discretion in supplier selection, (iv) having involvement in the determination of product or service specifications, and (v) having
credit risk. The PSS’ obligations under its client contracts for which revenues are reported using the gross method are separate
and distinct from its obligations to the third party pharmacies included in its retail pharmacy network contracts. Pursuant to these
contracts, the PSS is contractually required to pay the third party pharmacies in its retail pharmacy network for products sold,
regardless of whether the PSS is paid by its clients. The PSS’ responsibilities under its client contracts typically include validating
eligibility and coverage levels, communicating the prescription price and the co-payments due to the third party retail pharmacy,
identifying possible adverse drug interactions for the pharmacist to address with the prescriber prior to dispensing, suggesting
generic alternatives where clinically appropriate and approving the prescription for dispensing. Although the PSS does not have
credit risk with respect to Retail Co-Payments or inventory risk related to retail network claims, management believes that all of
the other applicable indicators of gross revenue reporting are present. For contracts under which the PSS acts as an agent,
revenue is recognized using the net method.
Drug Discounts The PSS deducts from its revenues any rebates, inclusive of discounts and fees, earned by its clients. Rebates
are paid to clients in accordance with the terms of client contracts, which are normally based on fixed rebates per prescription for
specific products dispensed or a percentage of manufacturer discounts received for specific products dispensed. The liability for
rebates due to clients is included in “Claims and discounts payable” in the accompanying consolidated balance sheets.
50
CVS HealthNotes to Consolidated Financial Statements
Medicare Part D The PSS, through its SilverScript subsidiary, participates in the federal government’s Medicare Part D program
as a Prescription Drug Plan (“PDP”). 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 Centers for Medicare and Medicaid Services (“CMS”).
The insurance premiums include a direct premium paid by CMS and a beneficiary premium, which is the responsibility of the PDP
member, but which is subsidized by CMS in the case of low-income members. Premiums collected in advance are initially deferred
in accrued expenses and are then recognized in net revenues 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 (collec-
tively, the “Member Co-Payments”) related to PDP members’ actual prescription claims. In certain cases, CMS subsidizes a
portion of these Member Co-Payments and pays the PSS an estimated prospective Member Co-Payment subsidy amount each
month. The prospective Member Co-Payment subsidy amounts received from CMS are also included in net revenues. SilverScript
assumes no risk for these amounts. If the prospective Member Co-Payment subsidies received differ from the amounts based on
actual prescription claims, the difference is recorded in either accounts receivable or accrued expenses.
The PSS accounts for CMS obligations and Member Co-Payments (including the amounts subsidized by CMS) using the gross
method consistent with its revenue recognition policies for Mail Co-Payments and Retail Co-Payments (discussed previously in
this document).
RETAIL/LTC SEGMENT
Retail Pharmacy The retail drugstores recognize revenue at the time the customer takes possession of the merchandise.
Customer returns are not material. Revenue generated from the performance of services in the RLS’ health care clinics is recog-
nized at the time the services are performed. Sales taxes are not included in revenue.
Long-term Care Revenue is recognized when products are delivered or services are rendered or provided to the customer, prices
are fixed and determinable, and collection is reasonably assured. A significant portion of the revenues from sales of pharmaceuti-
cal and medical products are reimbursed by the federal Medicare Part D program and, to a lesser extent, state Medicaid
programs. Payments for services rendered to patients covered by these programs are generally less than billed charges. The
Company monitors its revenues and receivables from these reimbursement sources, as well as other third party insurance payors,
and record an estimated contractual allowance for sales and receivable balances at the revenue recognition date, to properly
account for anticipated differences between billed and reimbursed amounts. Accordingly, the total net sales and receivables
reported in the Company’s consolidated financial statements are recorded at the amount expected to be ultimately received from
these payors. Since billing functions for a portion of the Company’s revenue systems are largely computerized, enabling on-line
adjudication at the time of sale to record net revenues, the Company’s exposure in connection with estimating contractual
allowance adjustments is limited primarily to unbilled and initially rejected Medicare, Medicaid and third party claims (typically
approved for reimbursement once additional information is provided to the payor). For the remaining portion of the Company’s
revenue systems, the contractual allowance is estimated for all billed, unbilled and initially rejected Medicare, Medicaid and third
party claims. The Company evaluates several criteria in developing the estimated contractual allowances on a monthly basis,
including historical trends based on actual claims paid, current contract and reimbursement terms, and changes in customer
base and payor/product mix. Contractual allowance estimates are adjusted to actual amounts as cash is received and claims
are settled, and the aggregate impact of these resulting adjustments was not significant to our results of operations for any of
the periods presented.
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 our normal billing procedures and subject to our normal accounts receivable collections procedures.
Health Care Clinics For services provided by our 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.
Loyalty Program The Company’s customer loyalty program, ExtraCare®, is comprised of two components, ExtraSavingsTM and
ExtraBucks® Rewards. ExtraSavings coupons redeemed by customers are recorded as a reduction of revenue when redeemed.
ExtraBucks Rewards are accrued as a charge to cost of revenues when earned, net of estimated breakage. The Company
determines breakage based on historical redemption patterns.
See Note 13 “Segment Reporting” for additional information about the revenues of the Company’s business segments.
51
2017 Annual Report Cost of revenues
Pharmacy Services Segment The PSS’ cost of revenues includes: (i) the cost of prescription drugs sold during the reporting
period directly through its mail service dispensing pharmacies and indirectly through its retail pharmacy network, (ii) shipping and
handling costs, and (iii) the operating costs of its mail service dispensing pharmacies and client service operations and related
information technology support costs including depreciation and amortization. The cost of prescription drugs sold component
of cost of revenues includes: (i) the cost of the prescription drugs purchased from manufacturers or distributors and shipped to
members in clients’ benefit plans from the PSS’ mail service dispensing pharmacies, net of any volume-related or other discounts
(see “Vendor allowances and purchase discounts” below) and (ii) the cost of prescription drugs sold (including Retail Co-Payments)
through the PSS’ retail pharmacy network under contracts where it is the principal, net of any volume-related or other discounts.
Retail/LTC Segment The RLS’ cost of revenues includes: the cost of merchandise sold during the reporting period and the
related purchasing costs, warehousing and delivery costs (including depreciation and amortization) and actual and estimated
inventory losses.
See Note 13 “Segment Reporting” for additional information about the cost of revenues of the Company’s business segments.
Vendor allowances and purchase discounts
The Company accounts for vendor allowances and purchase discounts as follows:
Pharmacy Services Segment The PSS receives purchase discounts on products purchased. The PSS’ contractual arrangements
with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the PSS to receive purchase
discounts from established list prices in one, or a combination, of the following forms: (i) a direct discount at the time of purchase,
(ii) a discount for the prompt payment of invoices, or (iii) when products are purchased indirectly from a manufacturer (e.g., through
a wholesaler or retail pharmacy), a discount (or rebate) paid subsequent to dispensing. These rebates are recognized when prescrip-
tions are dispensed and are generally calculated and billed to manufacturers within 30 days of the end of each completed quarter.
Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected
has not been material to the PSS’ results of operations. The PSS accounts for the effect of any such differences as a change in
accounting estimate in the period the reconciliation is completed. The PSS also receives additional discounts under its wholesaler
contracts if it exceeds contractually defined annual purchase volumes. In addition, the PSS receives fees from pharmaceutical
manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction of
“Cost of revenues.”
Retail/LTC Segment Vendor allowances received by the RLS reduce the carrying cost of inventory and are recognized in cost
of revenues when the related inventory is sold, unless they are specifically identified as a reimbursement of incremental costs
for promotional programs and/or other services provided. Amounts that are directly linked to advertising commitments are
recognized as a reduction of advertising expense (included in operating expenses) when the related advertising commitment is
satisfied. Any such allowances received in excess of the actual cost incurred also reduce the carrying cost of inventory. The total
value of any upfront payments received from vendors that are linked to purchase commitments is initially deferred. The deferred
amounts are then amortized to reduce cost of revenues over the life of the contract based upon purchase volume. The total value
of any upfront payments received from vendors that are not linked to purchase commitments is also initially deferred. The deferred
amounts are then amortized to reduce cost of revenues on a straight-line basis over the life of the related contract. The total
amortization of these upfront payments was not material to the accompanying consolidated financial statements.
Insurance The Company is self-insured for certain losses related to general liability, workers’ compensation and auto liability. The
Company obtains third party insurance coverage to limit exposure from these claims. The Company is also self-insured for certain
losses related to health and medical liabilities. The Company’s self-insurance accruals, which include reported claims and claims
incurred but not reported, are calculated using standard insurance industry actuarial assumptions and the Company’s historical
claims experience.
Facility opening and closing costs New facility opening costs, other than capital expenditures, are charged directly to
expense when incurred. When the Company closes a facility, the present value of estimated unrecoverable costs, including
the remaining lease obligation less estimated sublease income and the book value of abandoned property and equipment,
are charged to expense. The long-term portion of the lease obligations associated with facility closings was $306 million and
$181 million in 2017 and 2016, respectively.
Advertising costs Advertising costs are expensed when the related advertising takes place. Advertising costs, net of vendor
funding (included in operating expenses), were $230 million, $216 million and $221 million in 2017, 2016 and 2015, respectively.
52
CVS HealthNotes to Consolidated Financial Statements Interest expense, net The following are the components of net interest expense for the years ended December 31:
in millions
Interest expense
Interest income
Interest expense, net
2017
$
1,062
(21)
$
1,041
2016
1,078
(20)
1,058
$
$
$
$
2015
859
(21)
838
Capitalized interest totaled $8 million, $13 million and $12 million in 2017, 2016 and 2015, respectively.
Shares held in trust The Company maintains grantor trusts, which held approximately one million shares of its common stock
at December 31, 2017 and 2016, respectively. These shares are designated for use under various employee compensation plans.
Since the Company holds these shares, they are excluded from the computation of basic and diluted shares outstanding.
Accumulated other comprehensive income Accumulated other comprehensive income (loss) consists of changes in the
net actuarial gains and losses associated with pension and other postretirement benefit plans, net losses on cash flow hedge
derivative instruments associated with forecasted debt issuances, and foreign currency translation adjustments. The amount
included in accumulated other comprehensive loss related to the Company’s pension and postretirement plans was $34 million
pre-tax ($21 million after-tax) as of December 31, 2017 and $284 million pre-tax ($173 million after-tax) as of December 31, 2016.
The net impact on cash flow hedges totaled $24 million pre-tax ($15 million after-tax) and $9 million pre-tax ($5 million after-tax)
as of December 31, 2017 and 2016, respectively. Cumulative foreign currency translation adjustments at December 31, 2017 and
2016 were $129 million and $127 million, respectively.
Changes in accumulated other comprehensive income (loss) by component are shown below:
Year Ended December 31, 2017 (1)
in millions
Foreign
Currency
Losses on
Cash Flow
Hedges
Balance, December 31, 2016
$
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other
comprehensive income (2)
Net other comprehensive income (loss)
$
(127)
(2)
—
(2)
Balance, December 31, 2017
$
(129)
$
(5)
(11)
1
(10)
(15)
Pension
and Other
Post-
retirement
Benefits
$
$
(173)
—
152
152
Total
(305)
(13)
153
140
$
(21)
$
(165)
Year Ended December 31, 2016 (1)
in millions
Foreign
Currency
Losses on
Cash Flow
Hedges
Balance, December 31, 2015
$
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other
comprehensive income (2)
$
(165)
38
—
38
$
(127)
$
(7)
—
2
2
(5)
Net other comprehensive income
Balance, December 31, 2016
(1) All amounts are net of tax.
Pension
and Other
Post-
retirement
Benefits
$
(186)
—
13
13
Total
$
(358)
38
15
53
$
(173)
$
(305)
(2) The amounts reclassified from accumulated other comprehensive income for cash flow hedges are recorded within interest expense, net on the consolidated
statement of income. The amounts reclassified from accumulated other comprehensive income for pension and other postretirement benefits are included in other
expense on the consolidated statement of income.
53
2017 Annual Report
Stock-based compensation Stock-based compensation is measured at the grant date based on the fair value of the award
and is recognized as expense over the applicable requisite service period of the stock award (generally 3 to 5 years) using the
straight-line method.
Variable interest entity In 2014, the Company and Cardinal Health, Inc. (“Cardinal”) established Red Oak Sourcing, LLC (“Red
Oak”), a generic pharmaceutical sourcing entity in which the Company and Cardinal each own 50%. The Red Oak arrangement
has an initial term of ten years. Under this arrangement, the Company and Cardinal contributed their sourcing and supply chain
expertise to Red Oak and agreed to source and negotiate generic pharmaceutical supply contracts for both companies through
Red Oak; however, Red Oak does not own or hold inventory on behalf of either company. No physical assets (e.g., property and
equipment) were contributed to Red Oak by either company and minimal funding was provided to capitalize Red Oak.
The Company has determined that it is the primary beneficiary of this variable interest entity because it has the ability to direct the
activities of Red Oak. Consequently, the Company consolidates Red Oak in its consolidated financial statements within the Retail/
LTC Segment.
Cardinal is required to pay the Company 39 quarterly payments beginning in October 2014. As milestones are met, the quarterly
payments increase. The Company received approximately $183 million, $163 million and $122 million from Cardinal during the
years ended December 31, 2017, 2016 and 2015, respectively. The payments reduce the Company’s carrying value of inventory
and are recognized in cost of revenues when the related inventory is sold. Revenues associated with Red Oak expenses reim-
bursed by Cardinal for the years ended December 31, 2017, 2016 and 2015, as well as amounts due to or due from Cardinal at
December 31, 2017 and 2016 were immaterial.
Related party transactions The Company has an equity method investment in SureScripts, LLC (“SureScripts”), which operates
a clinical health information network. The Pharmacy Services and Retail/LTC segments utilize this clinical health information
network in providing services to its client plan members and retail customers. The Company expensed fees of approximately
$35 million, $39 million and $50 million in the years ended December 31, 2017, 2016 and 2015, respectively, for the use of this
network. The Company’s investment in and equity in earnings of SureScripts for all periods presented is immaterial.
The Company has an equity method investment in Heartland Healthcare Services (“Heartland”). Heartland operates several
long-term care pharmacies in four states. Heartland paid the Company approximately $139 million, $140 million and $25 million
for pharmaceutical inventory purchases during the years ended December 31, 2017, 2016 and 2015, respectively. Additionally,
the Company performs certain collection functions for Heartland and then passes those customer cash collections to Heartland.
The Company’s investment in and equity in earnings of Heartland as of and for the years ended December 31, 2016 and 2015
is immaterial.
In 2016, the Company made charitable contributions of $32 million to the CVS Foundation (the “Foundation”) to fund future
giving. The Foundation is an unconsolidated non-profit entity managed by employees of the Company that focuses on health,
education and community involvement programs. The charitable contributions were recorded as operating expenses in the
Company’s consolidated statement of income for the year ended December 31, 2016.
Income taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated
financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between
the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year or years
in which the differences are expected to reverse. The effect of a change in the tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
On December 22, 2017, the President signed into law the “Tax Cuts and Jobs Act” (the “TCJA”). Among numerous changes to
existing tax laws, the TCJA permanently reduces the federal corporate income tax rate from 35% to 21% effective January 1,
2018. The effects on deferred tax balances of changes in tax rates are required to be taken into consideration in the period in
which the changes are enacted, regardless of when they are effective. As the result of the reduction of the corporate income tax
rate under the TCJA, the Company estimated the revaluation of its net deferred tax liabilities and recorded a provisional noncash
income tax benefit of approximately $1.5 billion for year ended December 31, 2017. The Company has not completed all of its
processes to determine the TCJA’s final impact. The final impact may differ from this provisional amount due to, among other
things, changes in interpretations and assumptions the Company has made thus far and the issuance of additional regulatory
or other guidance. The accounting is expected to be completed by the time the 2017 federal income tax return is filed in 2018.
54
CVS HealthNotes to Consolidated Financial Statements The Company recognizes net deferred tax assets to the extent that it believes these assets are more likely than not to be realized.
In making such a determination, the Company considers all available positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations.
To the extent that the Company does not consider it more likely than not that a deferred tax asset will be recovered, a valuation
allowance is established.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it
is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those
tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit
that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
Interest and/or penalties related to uncertain tax positions are recognized in income tax expense.
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
which filed for bankruptcy in 2016 and 2008, respectively. Additionally, the Company’s recently acquired Bluegrass Pharmacy
is considered held for sale and is included in discontinued operations (see Note 2 “Acquisitions” for additional information).
The Company’s loss from discontinued operations in 2017 and 2016 primarily includes lease-related costs which the Company
believes it will likely be required to satisfy pursuant to its lease guarantees. The Company’s income from discontinued operations
in 2015 of $9 million, net of tax, was related to the release of certain store lease guarantees due to a settlement with a landlord.
See Note 12 “Commitments and Contingencies” of the consolidated financial statements.
Below is a summary of the results of discontinued operations for the years ended December 31:
in millions
Income (loss) from discontinued operations
Income tax benefit (expense)
Income (loss) from discontinued operations, net of tax
2017
2016
2015
$
$
(13)
5
(8)
$
$
(2)
1
(1)
$
$
15
(6)
9
Earnings per common share Earnings per share is computed using the two-class method. Options to purchase 10.4 million,
6.7 million and 2.7 million shares of common stock were outstanding as of December 31, 2017, 2016 and 2015, respectively, but
were not included in the calculation of diluted earnings per share because the options’ exercise prices were greater than the
average market price of the common shares and, therefore, the effect would be antidilutive.
New accounting pronouncements recently adopted In July 2015, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2015-11, Inventory, which amends Accounting Standard Codification (“ASC”) Topic
330. This ASU simplifies current accounting treatments by requiring entities to measure most inventories at “the lower of cost and
net realizable value” rather than using lower of cost or market. This guidance does not apply to inventories measured using the
last-in, first-out method or the retail inventory method. The Company adopted this standard effective January 1, 2017. The adoption
of this new guidance did not have any impact on the Company’s consolidated results of operations, financial position or cash flows.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends
the accounting for certain aspects of share-based payments to employees in ASC Topic 718, Compensation Stock Compensation.
The new guidance eliminates the accounting for any excess tax benefits and deficiencies through equity, and requires all excess
tax benefits and deficiencies related to employee share-based compensation arrangements to be recorded in the income state-
ment. This aspect of the guidance is required to be applied prospectively. The guidance also requires the presentation of excess
tax benefits on the statement of cash flows as an operating activity rather than a financing activity, a change which may be
applied prospectively or retrospectively. The guidance further provides an accounting policy election to account for forfeitures as
they occur rather than utilizing the estimated amount of forfeitures at the time of issuance. The Company adopted this guidance
effective January 1, 2017. The primary impact of adopting this guidance was the recognition of excess tax benefits in the income
statement instead of recognizing them in equity. This income statement guidance was adopted on a prospective basis. As a
result, a discrete tax benefit of $53 million was recognized in the income tax provision in the year ended December 31, 2017.
55
2017 Annual Report
The Company elected to retrospectively adopt the guidance on the presentation of excess tax benefits in the statement of cash
flows. The following is a reconciliation of the effect of the resulting reclassification of the excess tax benefits on the Company’s
consolidated statements of cash flows for the years ended December 31, 2016 and 2015:
in millions
Year Ended December 31, 2016:
Cash paid to other suppliers and employees
Net cash provided by operating activities
Excess tax benefits from stock-based compensation
Net cash used in financing activities
Reconciliation of net income to net cash provided by operating activities:
Accrued expenses
Year Ended December 31, 2015:
Cash paid to other suppliers and employees
Net cash provided by operating activities
Excess tax benefits from stock-based compensation
Net cash provided by financing activities
Reconciliation of net income to net cash provided by operating activities:
Accrued expenses
As Previously
Reported
Adjustments
As Revised
$
(15,550)
$
10,069
72
(6,689)
59
(14,162)
8,412
127
5,006
765
72
72
(72)
(72)
72
127
127
(127)
(127)
127
$
(15,478)
10,141
—
(6,761)
131
(14,035)
8,539
—
4,879
892
The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be
recognized in each period. None of the other provisions in this guidance had a material impact on the Company’s consolidated
financial statements.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost, which amends ASC Topic 715, Compensation – Retirement Benefits. ASU 2017-07 requires entities
to disaggregate the current service cost component from the other components of net benefit cost and present it with other
current compensation costs for related employees in the income statement and present the other components of net benefit cost
elsewhere in the income statement and outside of operating income. Only the service cost component of net benefit cost is eligible
for capitalization. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is
permitted as of the beginning of any annual periods for which an entity’s financial statements have not been issued. Entities are
required to retrospectively apply the requirement for a separate presentation in the income statement of service costs and other
components of net benefit cost and prospectively adopt the requirement to limit the capitalization of benefit costs to the service
component. The Company adopted the income statement presentation aspects of this new guidance on a retrospective basis
effective January 1, 2017. Nearly all of the Company’s net benefit costs for the Company’s defined benefit pension and postretire-
ment plans do not contain a service cost component as most of these defined benefit plans have been frozen for an extended
period of time.
The following is a reconciliation of the effect of the reclassification of the net benefit cost from operating expenses to other
expense in the Company’s consolidated statements of income for the years ended December 31, 2016 and 2015:
in millions
Year Ended December 31, 2016:
Operating expenses
Operating profit
Other expense
Year Ended December 31, 2015:
Operating expenses
Operating profit
Other expense
56
As Previously
Reported
Adjustments
As Revised
$
18,519
$
10,338
—
17,074
9,454
—
(28)
28
28
(21)
21
21
$
18,491
10,366
28
17,053
9,475
21
CVS HealthNotes to Consolidated Financial Statements
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which amends ASC Topic 350,
Intangibles – Goodwill and Other. This ASU requires the Company to perform its annual, or applicable interim, goodwill impair-
ment test by comparing the fair value of each reporting unit with its carrying amount. An impairment charge must be recognized
at the amount by which the carrying amount exceeds the fair value of the reporting unit; however, the charge recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Income tax effects resulting from any tax deductible
goodwill should be considered when measuring a goodwill impairment charge, if applicable. The guidance in ASU 2017-04 is
effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company elected
to early adopt this standard as of January 1, 2017. At the date of adoption of this new guidance, the guidance did not have any
impact on the Company’s consolidated results of operations, financial position or cash flows.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends ASC
Topic 815, Derivative and Hedging. ASU 2017-12 expands an entity’s ability to hedge nonfinancial and financial risk components
and reduces complexity in fair value hedges of interest rate risk. It eliminates the requirement to separately measure and report
hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the
same income statement line as the hedged item. ASU 2017-12 also eases certain documentation and assessment requirements
and modifies the accounting for components excluded from the assessment of hedge effectiveness. The guidance is effective for
fiscal years beginning after December 15, 2018, and interims periods with those years. Early adoption is permitted. The guidance
with respect to cash flow and net investment hedge relationships existing on the date of adoption must be applied on a modified
retrospective basis, and the new presentation and disclosure requirements must be applied on a prospective basis. The Company
elected to early adopt this standard as of October 1, 2017. As the date of adoption of this new guidance, the guidance did not
have any impact on the Company’s consolidated results of operations, financial position or cash flows since the Company did not
have any outstanding derivative instruments at that time.
New accounting pronouncements not yet adopted In May 2014, the FASB issued 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 new revenue standard is effective for annual reporting periods (including interim reporting periods within those
periods) beginning January 1, 2018. The Company does not expect that the implementation of the new standard will have a
material effect on the Company’s consolidated results of operations, cash flows or financial position. The new standard will
however require more extensive revenue-related disclosures. The Company has identified one difference in its Retail/LTC Segment
related to the accounting for its ExtraBucks Rewards customer loyalty program, which is currently accounted for under a cost
deferral method. Under the new standard, this program will be accounted for under a revenue deferral method. On January 1,
2018, the Company adopted the new revenue standard on a modified retrospective basis and recorded an after-tax transition
adjustment to reduce retained earnings as of January 1, 2018 by approximately $13 million.
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 determin-
able 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. Separate presentation of financial assets and liabilities by measurement category is required.
The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adop-
tion is permitted for fiscal years or interim periods that have not yet been issued as of the beginning of the fiscal year of adoption.
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. The Company is evaluating the effect of
adopting this guidance but does not expect the adoption to have a material impact on the Company’s consolidated results of
operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Lessees will be required to recognize a right-of-use asset
and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will
be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial
direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or
finance leases. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will
57
2017 Annual Report result in a front-loaded expense pattern (similar to current capital leases). Lessor accounting is similar to the current model, but
updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated)
and the new revenue recognition standard. The standard is effective for public companies for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company believes that the new
standard will have a material impact on its consolidated balance sheet. The Company is currently evaluating the effect that
implementation of this standard will have on the Company’s consolidated results of operations, cash flows, financial position and
related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is
intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and
to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting
periods beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the effect of adopting this
guidance but does not expect the adoption will have a material impact on the Company’s consolidated cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, which amends 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 state-
ment of cash flows. As a result, entities will no longer be 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 reconcilia-
tion of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the
nature of their restricted cash and restricted cash equivalent balances. The guidance is effective for fiscal years beginning after
December 15, 2017 and interim periods within those years. Early adoption is permitted. Entities are required to apply the guid-
ance retrospectively. The Company is evaluating the effect of adopting this guidance but does not expect the adoption will have
a material impact on the Company’s consolidated cash flows.
2 | Acquisitions
Proposed Aetna Acquisition
On December 3, 2017, the Company entered into a definitive merger agreement to acquire all of the outstanding shares of Aetna
for a combination of cash and stock. Under the terms of the merger agreement, Aetna shareholders will receive $145.00 per share
in cash and 0.8378 CVS Health shares for each Aetna share. The transaction values Aetna at approximately $207 per share or
approximately $69 billion based on the Company’s 5-day volume weighted average price ending December 1, 2017 of $74.21 per
share. Including the assumption of Aetna’s debt, the total value of the transaction is approximately $77 billion. The final purchase
price will be determined based on the Company’s stock price on the date of closing of the transaction.
The proposed acquisition remains subject to approval by CVS Health and Aetna shareholders and customary closing conditions,
including the expiration of the waiting period under the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 and
approvals of state departments of insurance and U.S. and international regulators.
If the transaction is not completed, the Company could be liable to Aetna for a termination fee of $2.1 billion in connection with
the merger agreement, depending on the reasons leading to such termination.
During the year ended December 31, 2017, the Company recorded $34 million of transaction-related costs in operating expenses
in connection with the proposed acquisition.
Wellpartner Acquisition
On November 30, 2017, the Company acquired Wellpartner, Inc. (“Wellpartner”) for approximately $380 million. The purchase
price is subject to a working capital adjustment. Wellpartner is a provider of specialty pharmacy services which provides products
and services under the Section 340B drug discount program, which is a U.S. federal government program that requires drug
manufacturers participating in the Medicaid program to provide outpatient drugs to eligible health care organizations and covered
entities at significantly reduced prices. Wellpartner has two specialty pharmacies, one in Oregon, and the other, Bluegrass
Pharmacy of Lexington, LLC (“Bluegrass Pharmacy”), is located in Kentucky. The fair value of the assets acquired and liabilities
assumed were $532 million and $152 million, respectively, which included identifiable intangible assets of $233 million and
goodwill of $182 million that were recorded in the PSS. The allocation of the purchase price is preliminary and is based on
information that was available to management at the time the consolidated financial statements were prepared, accordingly,
the allocation may change. The Company has classified the assets of Bluegrass Pharmacy as held for sale, and has reported
Bluegrass Pharmacy as a discontinued operation. The assets held for sale and the operating results of Bluegrass Pharmacy as
of and for the month ended December 31, 2017 are immaterial.
58
CVS HealthNotes to Consolidated Financial Statements Target Pharmacy Acquisition
On December 16, 2015, the Company acquired the pharmacy and clinic businesses of Target for approximately $1.9 billion,
plus contingent consideration of up to $60 million based on future prescription growth over a three year period through 2019.
The Company acquired Target’s 1,672 pharmacies which operate in 47 states and will operate them through a store-within-a-
store format, branded as CVS Pharmacy. The Company also acquired 79 Target clinic locations which were rebranded as
MinuteClinic. The Company acquired the Target pharmacy and clinic businesses primarily to expand the geographic reach of
its retail pharmacy business.
The fair values of the assets acquired at the date of acquisition were approximately as follows:
in millions
Accounts receivable
Inventories
Property and equipment
Intangible assets
Goodwill
Total cash consideration
$
2
467
9
490
900
$
1,868
Intangible assets acquired include customer relationships with an estimated useful life of 13 years. The goodwill represents future
economic benefits expected to arise from the Company’s expanded geographic presence in the retail pharmacy market, the
assembled workforce acquired, expected purchasing and revenue synergies, as well as operating efficiencies and cost savings.
The goodwill is deductible for income tax purposes. As of December 31, 2017 and 2016, no liability for any potential contingent
consideration has been recorded based on projections for future prescription growth over the relevant period.
In connection with the closing of the transaction, the Company and Target entered into pharmacy and clinic operating and master
lease agreements. See Note 7 “Leases” of the consolidated financial statements for disclosures of the Company’s leasing
arrangements.
During the year ended December 31, 2015, the Company incurred transaction costs of approximately $26 million associated
with the acquisition that were recorded within operating expenses. The results of the Target pharmacies and clinics are included
in the Company’s Retail/LTC Segment beginning on December 16, 2015. Pro forma financial information for this acquisition is not
presented as such results are immaterial to the Company’s consolidated financial statements.
Omnicare Acquisition
On August 18, 2015, the Company acquired 100% of the outstanding common shares and voting interests of Omnicare, for
$98 per share for a total of $9.6 billion and assumed long-term debt with a fair value of approximately $3.1 billion. Omnicare is
a leading health care services company that specializes in the management of complex pharmaceutical care. Omnicare’s LTC
business is the nation’s largest provider of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic
care facilities and other care settings. In addition, Omnicare has a specialty pharmacy business operating primarily under the
name of ACS Pharmacy, and provides commercialization services under the name of RxCrossroads®. The Company includes
LTC and the commercialization services business in the Retail/LTC Segment, and includes the specialty pharmacy business in
its Pharmacy Services Segment. The Company acquired Omnicare to expand its operations in dispensing prescription drugs to
assisted-living and long-term care facilities, and to broaden its presence in the specialty pharmacy business as the Company
seeks to serve a greater percentage of the growing senior patient population in the United States.
59
2017 Annual Report
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
in millions
Current assets (including cash of $298)
Property and equipment
Goodwill
Intangible assets
Other noncurrent assets
Current liabilities
Long-term debt
Deferred income tax liabilities
Other noncurrent liabilities
Redeemable noncontrolling interest
Total consideration
$
1,657
313
9,139
3,962
63
(773)
(3,110)
(1,498)
(69)
(39)
$
9,645
The goodwill represents future economic benefits expected to arise from the Company’s expanded presence in the pharmaceuti-
cal care market, the assembled workforce acquired, expected purchasing and revenue synergies, as well as operating efficiencies
and cost savings. Goodwill of $8.7 billion was allocated to the Retail/LTC Segment and the remaining goodwill of $0.4 billion was
allocated to the Pharmacy Services Segment. Approximately $0.4 billion of the goodwill is deductible for income tax purposes.
Intangible assets acquired include customer relationships and trade names of $3.9 billion and $74 million, respectively, with
estimated weighted average useful lives of 19.1 and 2.9 years, respectively, and 18.8 years in total.
During the year ended December 31, 2015, the Company incurred transaction costs of $70 million associated with the acquisition
of Omnicare that were recorded within operating expenses.
The Company’s consolidated results of operations for the year ended December 31, 2015, include $2.6 billion of net revenues and
net income of $61 million associated with the operating results of Omnicare from August 18, 2015 to December 31, 2015. These
Omnicare operating results include severance costs and accelerated stock-based compensation.
The following unaudited pro forma information presents a summary of the Company’s combined results of operations for the year
ended December 31, 2015 as if the Omnicare acquisition and the related financing transactions had occurred on January 1, 2015.
The following pro forma financial information is not necessarily indicative of the results of operations as they would have been had
the transactions been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of
reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic
shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of
incremental costs incurred in integrating the businesses.
in millions, except per share data
Total revenues
Income from continuing operations
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
$
156,798
5,277
4.70
4.66
Pro forma income from continuing operations for the year ended December 31, 2015, excludes $135 million related to severance
costs, accelerated stock-based compensation and transaction costs incurred in connection with the Omnicare acquisition.
60
CVS HealthNotes to Consolidated Financial Statements
3 | Goodwill and Other Intangibles
Goodwill and other indefinitely-lived assets are not amortized, but are subject to annual impairment reviews, or more frequent
reviews if events or circumstances indicate an impairment may exist.
When evaluating goodwill for potential impairment, the Company compares the fair value of its reporting units to their respective
carrying amounts. The Company estimates the fair value of its reporting units using a combination of a discounted cash flow
method and a market multiple method. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment
loss is recognized in an amount equal to that excess.
During 2017, the Company began pursuing various strategic alternatives for its RxC reporting unit. In connection with this effort,
the Company performed an interim goodwill impairment test in the second quarter of 2017. The results of the impairment test
determined that the fair value of the RxC reporting unit was lower than the carrying value, resulting in a $135 million goodwill
impairment charge within operating expenses during the second quarter of 2017.
During the third quarter of 2017, the Company performed its required annual impairment tests of its reporting units and concluded
there was no impairment of goodwill.
On January 2, 2018, the Company sold RxC to McKesson Corporation for $725 million. The transaction is subject to a working
capital adjustment.
The TCJA enacted on December 22, 2017 reduces the U.S. federal corporate income tax rate from 35% to 21%, effective
January 1, 2018 (see Note 11 “Income Taxes”). As a result, the RxC deferred income tax liabilities were reduced by $47 million
and an income tax benefit of $47 million was recorded in the 2017 income statement. The reduction in the deferred income tax
liabilities increased the carrying value of the RxC reporting unit by $47 million which triggered an additional goodwill impairment
in the RxC reporting unit of $46 million during the fourth quarter of 2017.
The Company has cumulative goodwill impairments of $181 million as of December 31, 2017.
Below is a summary of the changes in the carrying amount of goodwill by segment for the years ended December 31, 2017
and 2016:
in millions
Balance, December 31, 2015
Acquisitions
Foreign currency translation adjustments
Other (1)
Balance, December 31, 2016
Acquisitions
Foreign currency translation adjustments
Impairments
Balance, December 31, 2017
Pharmacy Services
Retail/LTC
Total
$
21,685
$
16,421
$
38,106
—
—
(48)
126
17
48
126
17
—
21,637
16,612
38,249
182
—
—
203
(2)
(181)
385
(2)
(181)
$ 21,819
$ 16,632
$
38,451
(1) “Other” represents immaterial purchase accounting adjustments for acquisitions.
Indefinitely-lived intangible assets are tested for impairment by comparing the estimated fair value of the asset to its carrying
value. The Company estimates the fair value of its indefinitely-lived trademark using the relief from royalty method under the
income approach. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized and the
asset is written down to its estimated fair value. During the third quarter of 2017, the Company performed its annual impairment
test of the indefinitely-lived trademark and concluded there was no impairment as of the testing date.
61
2017 Annual Report
The following table is a summary of the Company’s intangible assets as of December 31:
in millions
Trademark (indefinitely-lived)
Customer contracts and
relationships and covenants
not to compete
Favorable leases and other
2017
2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
6,398
$
—
$
6,398
$
6,398
$
—
$
6,398
12,341
1,190
(5,536)
(763)
6,805
427
11,485
1,123
(4,802)
(693)
6,683
430
$ 19,929
$
(6,299)
$ 13,630
$
19,006
$
(5,495)
$
13,511
The Company amortizes intangible assets with finite lives over the estimated useful lives of the respective assets, which have
a weighted average useful life of 15.4 years. The weighted average useful life of the Company’s customer contracts and relation-
ships and covenants not to compete is 15.3 years. The weighted average life of the Company’s favorable leases and other
intangible assets is 16.2 years. Amortization expense for intangible assets totaled $817 million, $795 million and $611 million in
2017, 2016 and 2015, respectively. The anticipated annual amortization expense for these intangible assets for the next five years
is as follows:
in millions
2018
2019
2020
2021
2022
$
817
771
600
539
494
4 | Share Repurchase Programs
The following share repurchase programs were authorized by the Company’s Board of Directors:
in billions
Authorization Date
November 2, 2016 (“2016 Repurchase Program”)
December 15, 2014 (“2014 Repurchase Program”)
December 17, 2013 (“2013 Repurchase Program”)
Authorized
Remaining as of
December 31, 2017
$
15.0
10.0
6.0
$
13.9
—
—
The share Repurchase Programs, each of which was effective immediately, permit the Company to effect repurchases from time
to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase
(“ASR”) transactions, and/or other derivative transactions. The 2016 Repurchase Program can be modified or terminated by the
Board of Directors at any time.
Pursuant to the authorization under the 2014 Repurchase Program, in August 2016, the Company entered into two fixed dollar
ASRs with Barclays Bank PLC (“Barclays”) for a total of $3.6 billion. Upon payment of the $3.6 billion purchase price in January
2017, the Company received a number of shares of its common stock equal to 80% of the $3.6 billion notional amount of the
ASRs or approximately 36.1 million shares, which were placed into treasury stock in January 2017. The ASRs were accounted for
as an initial treasury stock transaction for $2.9 billion and a forward contract for $0.7 billion. In April 2017, the Company received
9.9 million shares of common stock, representing the remaining 20% of the $3.6 billion notional amount of the ASRs, thereby
concluding the ASRs. The remaining 9.9 million shares of common stock delivered to the Company by Barclays were placed into
treasury stock and the forward contract was reclassified from capital surplus to treasury stock in April 2017.
62
CVS HealthNotes to Consolidated Financial Statements
Pursuant to the authorization under the 2014 Repurchase Program, in December 2015, the Company entered into a $725 million
fixed dollar ASR with Barclays. Upon payment of the $725 million purchase price in December 2015, the Company received a
number of shares of its common stock equal to 80% of the $725 million notional amount of the ASR or approximately 6.2 million
shares. The initial 6.2 million shares of common stock delivered to the Company by Barclays were placed into treasury stock in
December 2015. The ASR was accounted for as an initial treasury stock transaction of $580 million and a forward contract of
$145 million. The forward contract was classified as an equity instrument and was recorded within capital surplus on the consoli-
dated balance sheet. In January 2016, the Company received 1.4 million shares of common stock, representing the remaining
20% of the $725 million notional amount of the ASR, thereby concluding the ASR. The remaining 1.4 million shares of common
stock delivered to the Company by Barclays were placed into treasury stock in January 2016 and the forward contract was
reclassified from capital surplus to treasury stock.
Pursuant to the authorization under the 2013 Repurchase Programs, in January 2015, the Company entered into a $2.0 billion
fixed dollar ASR agreement with J.P. Morgan Chase Bank (“JP Morgan”). Upon payment of the $2.0 billion purchase price in
January 2015, the Company received a number of shares of its common stock equal to 80% of the $2.0 billion notional amount
of the ASR agreement or approximately 16.8 million shares, which were placed into treasury stock in January 2015. In May 2015,
the Company received approximately 3.1 million shares of common stock, representing the remaining 20% of the $2.0 billion
notional amount of the ASR, thereby concluding the ASR. The remaining 3.1 million shares of common stock delivered to the
Company by JP Morgan were placed into treasury stock in May 2015. The ASR was accounted for as an initial treasury stock
transaction of $1.6 billion and a forward contract of $0.4 billion. The forward contract was classified as an equity instrument and
was initially recorded within capital surplus on the consolidated balance sheet and was reclassified to treasury stock upon the
settlement of the ASR in May 2015.
In the ASR transactions described above, the initial repurchase of the shares and delivery of the remainder of the shares to
conclude the ASR, resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common
shares outstanding for basic and diluted earnings per share.
During the year ended December 31, 2017, the Company repurchased an aggregate of 55.4 million shares of common stock for
approximately $4.4 billion under the 2014 and 2016 Repurchase Programs. As of December 31, 2017, there remained an aggre-
gate of approximately $13.9 billion available for future repurchases under the 2016 Repurchase Program and the 2014 and 2013
Repurchase Programs were complete.
During the year ended December 31, 2016, the Company repurchased an aggregate of 47.5 million shares of common stock
for approximately $4.5 billion under the 2014 Repurchase Program. During the year ended December 31, 2015, the Company
repurchased an aggregate of 48.0 million shares of common stock for approximately $5.0 billion under the 2013 and 2014
Repurchase Programs.
63
2017 Annual Report 5 | Borrowings and Credit Agreements
The following table is a summary of the Company’s borrowings as of December 31:
in millions
Short-term debt
Commercial paper
Long-term debt
1.9% senior notes due 2018
2.25% senior notes due 2018
2.25% senior notes due 2019
2.8% senior notes due 2020
2.125% senior notes due 2021
4.125% senior notes due 2021
2.75% senior notes due 2022
3.5% senior notes due 2022
4.75% senior notes due 2022
4% senior notes due 2023
3.375% senior notes due 2024
5% senior notes due 2024
3.875% senior notes due 2025
2.875% senior notes due 2026
6.25% senior notes due 2027
3.25% senior exchange debentures due 2035
4.875% senior notes due 2035
6.125% senior notes due 2039
5.75% senior notes due 2041
5.3% senior notes due 2043
5.125% senior notes due 2045
Capital lease obligations
Other
Total debt principal
Debt premiums
Debt discounts and deferred financing costs
Less:
Short-term debt (commercial paper)
Current portion of long-term debt
Long-term debt
2017
2016
$
1,276
$
1,874
2,250
1,250
850
2,750
1,750
550
1,250
1,500
399
1,250
650
299
2,828
1,750
372
1
652
447
133
750
3,500
670
43
27,170
28
(196)
27,002
(1,276)
(3,545)
2,250
1,250
850
2,750
1,750
550
1,250
1,500
399
1,250
650
299
2,828
1,750
372
1
652
447
133
750
3,500
648
23
27,726
33
(228)
27,531
(1,874)
(42)
$ 22,181
$
25,615
The Company had approximately $1.3 billion of commercial paper outstanding at a weighted average interest rate of 2.0% as
of December 31, 2017. The Company had approximately $1.9 billion of commercial paper outstanding at a weighted average
interest rate of 1.22% as of December 31, 2016. In connection with its commercial paper program, the Company maintains
a $1.0 billion 364-day unsecured back-up credit facility, which expires on May 17, 2018, a $1.25 billion, five-year unsecured
back-up credit facility, which expires on July 24, 2019, a $1.25 billion, five-year unsecured back-up credit facility, which expires
on July 1, 2020, and a $1.0 billion, five-year unsecured back-up credit facility, which expires on May 18, 2022. The credit facilities
allow for borrowings at various rates that are dependent, in part, on the Company’s public debt ratings and require the Company
to pay a weighted average quarterly facility fee of approximately 0.02%, regardless of usage. As of December 31, 2017 and 2016,
there were no borrowings outstanding under the back-up credit facilities.
64
CVS HealthNotes to Consolidated Financial Statements
On December 3, 2017, in connection with the proposed acquisition of Aetna, the Company entered into a $49.0 billion unsecured
bridge loan facility. The Company paid approximately $221 million in fees upon entering into the agreement. The fees were
capitalized in other current assets and will be amortized as interest expense over the period the bridge facility is outstanding. The
bridge loan facility was reduced to $44.0 billion on December 15, 2017 upon the Company entering into a $5.0 billion term loan
agreement. The Company recorded $56 million of amortization of the bridge loan facility fees during the three months and year
ended December 31, 2017, which was recorded in interest expense. On December 15, 2017, in connection with the proposed
acquisition of Aetna, the Company entered into a $5.0 billion unsecured term loan agreement. The term loan facility under the
term loan agreement consists of a $3.0 billion three-year tranche and a $2.0 billion five-year tranche. The term loan facility allows
for borrowings at various rates that are dependent, in part, on the Company’s debt ratings and require the Company to pay a
weighted average quarterly commitment fee, regardless of usage.
On January 3, 2017, the Company entered into a $2.5 billion revolving credit facility. The credit facility allows for borrowings at
various rates that are dependent, in part, on the Company’s debt ratings and require the Company to pay a weighted average
quarterly facility fee of approximately 0.03%, regardless of usage. The Company terminated the credit facility in May 2017.
On May 16, 2016, the Company issued $1.75 billion aggregate principal amount of 2.125% unsecured senior notes due June 1,
2021 and $1.75 billion aggregate principal amount of 2.875% unsecured senior notes due June 1, 2026 (collectively, the “2016
Notes”) for total proceeds of approximately $3.5 billion, net of discounts and underwriting fees. The 2016 Notes pay interest
semi-annually and may be redeemed, in whole at any time, or in part from time to time, at the Company’s option at a defined
redemption price plus accrued and unpaid interest to the redemption date. The net proceeds of the 2016 Notes were used for
general corporate purposes and to repay certain corporate debt.
On May 16, 2016, the Company announced tender offers for (1) any and all of its 5.75% Senior Notes due 2017, its 6.60% Senior
Notes due 2019 and its 4.75% Senior Notes due 2020 (collectively, the “Any and All Notes”) and (2) up to $1.5 billion aggregate
principal amount of its 6.25% Senior Notes due 2027, its 6.125% Senior Notes due 2039, its 5.75% Senior Notes due 2041, the
5.00% Senior Notes due 2024 issued by its wholly-owned subsidiary, Omnicare, Inc. (“Omnicare”), the 4.75% Senior Notes due
2022 issued by Omnicare, its 4.875% Senior Notes due 2035 and its 3.875% Senior Notes due 2025 (collectively, the “Maximum
Tender Offer Notes” and together with the Any and All Notes, the “Notes”). On May 31, 2016, the Company increased the aggre-
gate principal amount of the tender offers for the Maximum Tender Offer Notes to $2.25 billion. The Company purchased
approximately $835 million aggregate principal amount of the Any and All Notes and $2.25 billion aggregate principal amount of
the Maximum Tender Offer Notes pursuant to the tender offers, which expired on June 13, 2016. The Company paid a premium
of $486 million in excess of the debt principal in connection with the purchase of the Notes, wrote off $50 million of unamortized
deferred financing costs and incurred $6 million in fees, for a total loss on the early extinguishment of debt of $542 million which
was recorded in income from continuing operations in the consolidated statement of income for the year ended December 31, 2016.
On June 27, 2016, the Company notified the holders of the remaining Any and All Notes that the Company was exercising its
option to redeem the outstanding Any and All Notes pursuant to the terms of the Any and All Notes and the Indenture dated as
of August 15, 2006, between the Company and The Bank of New York Mellon Trust Company, N.A. Approximately $1.1 billion
aggregate principal amount of Any and All Notes was redeemed on July 27, 2016. The Company paid a premium of $97 million
in excess of the debt principal and wrote off $4 million of unamortized deferred financing costs, for a total loss on early extin-
guishment of debt of $101 million during the year ended December 31, 2016.
The Company recorded a total loss on the early extinguishment of debt of $643 million which was recorded in the income from
continuing operations in the consolidated statement of income for the year ended December 31, 2016.
On May 20, 2015, in connection with the acquisition of Omnicare, the Company entered into a $13 billion unsecured bridge loan
facility. The Company paid approximately $52 million in fees in connection with the facility. The fees were capitalized and amor-
tized as interest expense over the period the bridge facility was outstanding. The bridge loan facility expired on July 20, 2015
upon the Company’s issuance of unsecured senior notes with an aggregate principal of $15 billion as discussed below. The
bridge loan facility fees became fully amortized in July 2015.
65
2017 Annual Report On July 20, 2015, the Company issued an aggregate of $2.25 billion of 1.9% unsecured senior notes due 2018 (“2018 Notes”),
an aggregate of $2.75 billion of 2.8% unsecured senior notes due 2020 (“2020 Notes”), an aggregate of $1.5 billion of 3.5%
unsecured senior notes due 2022 (“2022 Notes”), an aggregate of $3 billion of 3.875% unsecured senior notes due 2025 (“2025
Notes”), an aggregate of $2 billion of 4.875% unsecured senior notes due 2035 (“2035 Notes”), and an aggregate of $3.5 billion of
5.125% unsecured senior notes due 2045 (“2045 Notes” and, together with the 2018 Notes, 2020 Notes, 2022 Notes, 2025 Notes
and 2035 Notes, the “Notes”) for total proceeds of approximately $14.8 billion, net of discounts and underwriting fees. The Notes
pay interest semi-annually and contain redemption terms which allow or require the Company to redeem the Notes at a defined
redemption price plus accrued and unpaid interest at the redemption date. The net proceeds of the Notes were used to fund the
Omnicare acquisition and the acquisition of the pharmacies and clinics of Target. The remaining proceeds were used for general
corporate purposes.
Upon the closing of the Omnicare acquisition in August 2015, the Company assumed the long-term debt of Omnicare that had
a fair value of approximately $3.1 billion, $2.0 billion of which was previously convertible into Omnicare shares that holders were
able to redeem subsequent to the acquisition. During the period from August 18, 2015 to December 31, 2015, all but $5 million
of the $2.0 billion of previously convertible debt was redeemed and repaid and approximately $0.4 billion in Omnicare term debt
assumed was repaid for total repayments of Omnicare debt of approximately $2.4 billion in 2015.
The remaining principal of the Omnicare debt assumed was comprised of senior unsecured notes with an aggregate principal
amount of $700 million ($400 million of 4.75% senior notes due 2022 and $300 million of 5% senior notes due 2024). In
September 2015, the Company commenced exchange offers for the 4.75% senior notes due 2022 and the 5% senior notes
due 2024 to exchange all validly tendered and accepted notes issued by Omnicare for notes to be issued by the Company.
This offer expired on October 20, 2015 and the aggregate principal amounts of $388 million of the 4.75% senior notes due 2022
and $296 million of the 5% senior notes due 2024 were validly tendered and exchanged for notes issued by the Company. The
Company recorded this exchange transaction as a modification of the original debt instruments. Consequently, no gain or loss on
extinguishment was recognized in the Company’s consolidated income statement as a result of this exchange transaction and the
issuance costs of the new debt were expensed as incurred.
The back-up credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. The
covenants do not materially affect the Company’s financial or operating flexibility. As of December 31, 2017, the Company is in
compliance with all debt covenants.
The following is a summary of the Company’s required principal debt repayments due during each of the next five years and
thereafter, as of December 31, 2017:
in millions
2018
2019
2020
2021
2022
Thereafter
Total
$
4,821
873
2,775
2,327
3,178
13,196
$
27,170
6 | Store Closures
In December 2016, the Company announced an enterprise streamlining initiative designed to reduce costs and enhance
operating efficiencies to allow the Company to be more competitive in the current health care environment. In connection with
the enterprise streamlining initiative, the Company announced its intention to rationalize the number of retail stores by closing
approximately 70 underperforming stores during the year ending December 31, 2017. During the year ended December 31, 2017,
the Company closed 71 retail stores and recorded charges of $215 million within operating expenses in the Retail/LTC Segment.
The charges are primarily comprised of provisions for the present value of noncancelable lease obligations. The noncancelable
lease obligations associated with stores closed during the year ended December 31, 2017 extend through the year 2039.
66
CVS HealthNotes to Consolidated Financial Statements
7 | Leases
The Company leases most of its retail and mail order locations, 13 of its distribution centers and certain corporate offices under
noncancelable operating leases, typically with initial terms of 15 to 25 years and with options that permit renewals for additional
periods. The Company also leases certain equipment and other assets under noncancelable operating leases, typically with initial
terms of 3 to 10 years. In December 2015, in connection with the acquisition of the pharmacy and clinic businesses of Target,
the Company entered into lease agreements with Target for the pharmacy and clinic space within Target stores. Given that the
noncancelable contractual term of the pharmacy lease arrangement exceeds the remaining estimated economic life of the
buildings being leased, the Company concluded for accounting purposes that the lease term was the remaining economic life of
the buildings. Consequently, most of the individual pharmacy leases are capital leases. Approximately $0.3 billion of capital lease
obligations were recorded in connection with this transaction.
Minimum rent on operating leases is expensed on a straight-line basis over the term of the lease. In addition to minimum rental
payments, certain leases require additional payments based on sales volume, as well as reimbursement for real estate taxes,
common area maintenance and insurance, which are expensed when incurred.
The following table is a summary of the Company’s net rental expense for operating leases for the years ended December 31:
in millions
Minimum rentals
Contingent rentals
Less: sublease income
2017
2016
2015
$
2,455
$
2,418
$
2,317
29
2,484
(24)
35
2,453
(24)
34
2,351
(22)
$
2,460
$
2,429
$
2,329
The following table is a summary of the future minimum lease payments under capital and operating leases as of December 31, 2017:
in millions
2018
2019
2020
2021
2022
Thereafter
Total future lease payments (2)
Less: imputed interest
Present value of capital lease obligations
$
Capital
Leases
Operating
Leases (1)
74
74
74
73
73
974
$
2,493
2,361
2,201
2,072
1,934
16,090
1,342
$
27,151
(672)
670
$
(1) Future operating lease payments have not been reduced by minimum sublease rentals of $171 million due in the future under noncancelable subleases.
(2) The Company leases pharmacy and clinic space from Target. Amounts related to such capital and operating leases are reflected above. Amounts due in excess of
the remaining estimated economic life of the buildings of approximately $1.9 billion are not reflected herein since the estimated economic life of the buildings is
shorter than the contractual term of the lease arrangement.
The Company finances a portion of its store development program through sale-leaseback transactions. The properties are
generally sold at net book value, which generally approximates fair value, and the resulting leases generally qualify and are
accounted for as operating leases. The operating leases that resulted from these transactions are included in the above table.
The Company does not have any retained or contingent interests in the stores and does not provide any guarantees, other than
a guarantee of lease payments, in connection with the sale-leaseback transactions. Proceeds from sale-leaseback transactions
totaled $265 million in 2017, $230 million in 2016 and $411 million in 2015.
67
2017 Annual Report
8 | Medicare Part D
The Company offers Medicare Part D benefits through SilverScript, which has contracted with CMS to be a PDP and, pursuant to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003, must be a risk-bearing entity regulated under state
insurance laws or similar statutes.
SilverScript is a licensed domestic insurance company under the applicable laws and regulations. Pursuant to these laws and
regulations, SilverScript must file quarterly and annual reports with the National Association of Insurance Commissioners (“NAIC”)
and certain state regulators, must maintain certain minimum amounts of capital and surplus under a formula established by the
NAIC and must, in certain circumstances, request and receive the approval of certain state regulators before making dividend
payments or other capital distributions to the Company. The Company does not believe these limitations on dividends and
distributions materially impact its financial position.
The Company has recorded estimates of various assets and liabilities arising from its participation in the Medicare Part D program
based on information in its claims management and enrollment systems. Significant estimates arising from its participation in this
program include: (i) estimates of low-income cost subsidy, reinsurance amounts, and coverage gap discount amounts ultimately
payable to or receivable from CMS based on a detailed claims reconciliation that will occur in the following year; (ii) an estimate of
amounts receivable from or payable to CMS under a risk-sharing feature of the Medicare Part D program design, referred to as
the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for
our estimate of claims that have been incurred but have not yet been reported.
9 | Pension Plans and Other Postretirement Benefits
Defined Contribution Plans
The Company sponsors several voluntary 401(k) savings plans that cover all employees who meet plan eligibility requirements.
The Company makes matching contributions consistent with the provisions of the plans.
At the participant’s option, account balances, including the Company’s matching contribution, can be transferred without restric-
tion among various investment options, including the Company’s common stock fund under one of the defined contribution plans.
The Company also maintains a nonqualified, unfunded deferred compensation plan for certain key employees. This plan provides
participants the opportunity to defer portions of their eligible compensation and receive matching contributions equivalent to what
they could have received under the CVS Health 401(k) Plan absent certain restrictions and limitations under the Internal Revenue
Code. The Company’s contributions under the above defined contribution plans were $314 million, $295 million and $251 million
in 2017, 2016 and 2015, respectively.
Defined Benefit Pension Plans
As of December 31, 2016 and 2015, the Company sponsored seven defined benefit pension plans, all of which are closed to new
participants. Two of the plans are tax-qualified plans that are funded based on actuarial calculations and applicable federal laws
and regulations. The other five plans are unfunded nonqualified supplemental retirement plans. In 2015, the Company terminated
its largest tax-qualified plan and in 2017, the Company terminated the other tax-qualified plan.
During the year ended December 31, 2017, the Company settled the pension obligations of its two tax-qualified plans by irrevo-
cably transferring pension liabilities to an insurance company through the purchase of group annuity contracts and through lump
sum distributions. These purchases, funded with pension plan assets, resulted in pre-tax settlement losses of $187 million in the
year ended December 31, 2017, related to the recognition of accumulated deferred actuarial losses. The settlement losses are
included in other expense in the consolidated statement of income.
The following tables outline the change in benefit obligations and plan assets over the comparable periods:
in millions
Change in benefit obligation:
Benefit obligation at beginning of year
Interest cost
Actuarial loss (gain)
Benefit payments
Settlements
Benefit obligation at end of year
68
2017
2016
$
844
$
20
(31)
(35)
(667)
131
$
$
844
27
13
(37)
(3)
844
CVS HealthNotes to Consolidated Financial Statements
in millions
Change in plan assets:
2017
2016
Fair value of plan assets at the beginning of the year
$
624
$
Actual return on plan assets
Employer contributions
Benefit payments
Settlements
Fair value of plan assets at the end of the year
Funded status
32
46
(35)
(667)
—
$
(131)
$
613
26
25
(37)
(3)
624
(220)
The components of net periodic benefit costs for the years ended December 31 are shown below:
in millions
Components of net periodic benefit cost:
Interest cost
Expected return on plan assets
Amortization of net loss
Settlement losses
Net periodic pension cost
Pension Plan Assumptions
2017
2016
2015
$
$
20
(20)
21
187
208
$
$
27
(32)
32
—
27
$
$
31
(33)
21
—
19
The Company uses a series of actuarial assumptions to determine the benefit obligations and the net benefit costs. The discount
rate is determined by examining the current yields observed on the measurement date of fixed-interest, high quality investments
expected to be available during the period to maturity of the related benefits on a plan by plan basis. In 2016, the discount rate
for the qualified plan that had been terminated was determined by examining the current assumed lump sum and annuity
purchase rates. The expected long-term rate of return on plan assets is determined by using the plan’s target allocation and
historical returns for each asset class on a plan by plan basis. Certain of the Company’s pension plans use assumptions on
expected compensation increases of plan participants. These increases are determined by an actuarial analysis of the plan
participants, their expected compensation increases, and the duration of their earnings period until retirement. Each of these
assumptions is reviewed as plan characteristics change and on an annual basis with input from senior pension and financial
executives and the Company’s external actuarial consultants.
The discount rate for determining plan benefit obligations was 3.5% in 2017 and 4.0% in 2016 for all plans, except the terminated
qualified plan. The discount rate for the terminated qualified plan was 3.09% in 2016. The expected long-term rate of return for
the plans ranged from 4.0% to 5.5% in 2017 and 2016. The rate of compensation increases for certain of the plans with active
participants ranged from 4.0% to 6.0% in 2017 and 2016.
Return on Plan Assets
The Company’s investment strategy for its two qualified pension plans was liability management driven. The asset allocation
targets were to hold fixed income investments based upon this strategy. The following tables show the fair value allocation of plan
assets by asset category as of December 31, 2016.
Cash and money market funds
Fixed income funds
Equity mutual funds
Total assets at fair value
Fair value of plan assets at December 31, 2016
Level 1
Level 2
Level 3
$
$
8
3
33
44
$
$
—
580
—
580
$
$
—
—
—
—
$
$
Total
8
583
33
624
69
2017 Annual Report
As of December 31, 2016, the Company’s qualified defined benefit pension plan assets consisted of 5% equity, 94% fixed income
and 1% money market securities of which 7% were classified as Level 1 and 93% as Level 2 in the fair value hierarchy. The
Company had no investments in Level 3 alternative investments during the year ended December 31, 2016.
As of December 31, 2017, the assets in the Company’s qualified defined benefit pension plans had been fully liquidated through
the purchase of group annuity contracts and through lump sum distributions.
Cash Flows
The Company contributed $46 million, $25 million and $22 million to the pension plans during 2017, 2016 and 2015, respectively.
The Company plans to make approximately $21 million in contributions to the pension plans during 2018. These contributions
include contributions made to certain nonqualified benefit plans for which there is no funding requirement. The Company esti-
mates the following future benefit payments which are calculated using the same actuarial assumptions used to measure the
benefit obligation as of December 31, 2017:
in millions
2018
2019
2020
2021
2022
Thereafter
$
21
14
12
23
8
31
Multiemployer Pension Plans
The Company also contributes to a number of multiemployer pension plans under the terms of collective-bargaining agreements
that cover its union-represented employees. The risks of participating in these multiemployer plans are different from single-em-
ployer pension plans in the following aspects: (i) assets contributed to the multiemployer plan by one employer may be used to
provide benefits to employees of other participating employers, (ii) if a participating employer stops contributing to the plan, the
unfunded obligations of the plan may be borne by the remaining participating employers, and (iii) if the Company chooses to stop
participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the
underfunded status of the plan, referred to as a withdrawal liability.
None of the multiemployer pension plans in which the Company participates are individually significant to the Company. Total
Company contributions to multiemployer pension plans were $17 million in 2017, $15 million in 2016 and $14 million in 2015.
Other Postretirement Benefits
The Company provides postretirement health care and life insurance benefits to certain retirees who meet eligibility requirements.
The Company’s funding policy is generally to pay covered expenses as they are incurred. For retiree medical plan accounting, the
Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rates.
As of December 31, 2017 and 2016, the Company’s other postretirement benefits had an accumulated postretirement benefit
obligation of $25 million and $24 million, respectively. Net periodic benefit costs related to these other postretirement benefits
were $1 million in both 2017 and 2016, and $2 million in 2015.
Pursuant to various collective bargaining agreements, the Company also contributes to multiemployer health and welfare plans
that cover certain union-represented employees. The plans provide postretirement health care and life insurance benefits to
certain employees who meet eligibility requirements. Total Company contributions to multiemployer health and welfare plans were
$58 million, $52 million and $60 million in 2017, 2016 and 2015, respectively.
70
CVS HealthNotes to Consolidated Financial Statements
10 | Stock Incentive Plans
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over
the requisite service period of the stock award (generally three to five years) using the straight-line method. The following table is
a summary of stock-based compensation for each of the respective periods:
in millions
Stock options (1)
Restricted stock awards (2)
Total stock-based compensation
2017
65
169
234
$
$
2016
79
143
222
$
$
2015
90
140
230
$
$
(1) Includes the Employee Stock Purchase Plan (the “ESPP”)
(2) Stock-based compensation for the year ended December 31, 2015 includes $38 million associated with accelerated vesting of restricted stock replacement awards
issued to Omnicare executives who were terminated subsequent to the acquisition.
The ESPP provides for the purchase of up to 30 million shares of common stock. Under the ESPP, beginning in 2016, eligible
employees could purchase common stock at the end of each six month offering period at a purchase price equal to 90% of the
lower of the fair market value on the first day or the last day of the offering period. Prior to 2016, the purchase price was equal
to 85% of the lower of the fair market value on the first day or the last day of the offering period. During 2017, approximately one
million shares of common stock were purchased under the provisions of the ESPP at an average price of $71.66 per share. As
of December 31, 2017, approximately 11 million shares of common stock were available for issuance under the ESPP.
The fair value of stock-based compensation associated with the ESPP is estimated on the date of grant (the first day of the six
month offering period) using the Black-Scholes option pricing model.
The following table is a summary of the assumptions used to value the ESPP awards for each of the respective periods:
Dividend yield (1)
Expected volatility (2)
Risk-free interest rate (3)
Expected life (in years) (4)
2017
1.24 %
22.70 %
0.86 %
0.5
2016
0.88 %
20.64 %
0.45 %
0.5
2015
0.71 %
13.92 %
0.11 %
0.5
Weighted-average grant date fair value
$
13.01
$
14.98
$
18.72
(1) The dividend yield is calculated based on semi-annual dividends paid and the fair market value of the Company’s stock at the grant date.
(2) The expected volatility is based on the historical volatility of the Company’s daily stock market prices over the previous six month period.
(3) The risk-free interest rate is based on the Treasury constant maturity interest rate whose term is consistent with the expected term of ESPP options (i.e., six
months).
(4) The expected life is based on the semi-annual purchase period.
The terms of the Company’s Incentive Compensation Plan (“ICP”) provide for grants of annual incentive and long-term perfor-
mance awards to executive officers and other officers and employees of the Company or any subsidiary of the Company.
Payment of such annual incentive and long-term performance awards will be in cash, stock, other awards or other property, at
the discretion of the Management Planning and Development Committee of the Company’s Board of Directors. The ICP allows
for a maximum of 74 million shares to be reserved and available for grants. The ICP is the only compensation plan under which
the Company grants stock options, restricted stock and other stock-based awards to its employees, with the exception of the
Company’s ESPP. As of December 31, 2017, there were approximately 32 million shares available for future grants under the ICP.
The Company’s restricted awards are considered nonvested share awards and require no payment from the employee.
Compensation cost is recorded based on the market price of the Company’s common stock on the grant date and is recognized
on a straight-line basis over the requisite service period. As of December 31, 2017, there was $350 million of total unrecognized
compensation cost related to the restricted stock units that are expected to vest. These costs are expected to be recognized
over a weighted-average period of 2.25 years. The total fair value of restricted shares vested during 2017, 2016 and 2015 was
$175 million, $218 million and $164 million, respectively.
71
2017 Annual Report
The following table is a summary of the restricted stock unit and restricted share award activity for the year ended December 31, 2017.
Units in thousands
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year
Weighted
Average
Grant Date
Fair Value
$
$
$
$
$
55.56
78.35
78.92
89.21
86.92
Units
4,876
2,873
(2,340)
(395)
5,014
All grants under the ICP are awarded at fair value on the date of grant. The fair value of stock options is estimated using the
Black-Scholes option pricing model and stock-based compensation is recognized on a straight-line basis over the requisite
service period. Stock options granted generally become exercisable over a four-year period from the grant date. Stock options
generally expire seven years after the grant date.
Cash received from stock options exercised, which includes the ESPP, totaled $329 million, $296 million and $362 million during
2017, 2016 and 2015, respectively. Payments for taxes for net share settlement of equity awards totaled $71 million in 2017,
$72 million in 2016 and $63 million in 2015, respectively. The total intrinsic value of stock options exercised was $176 million,
$244 million and $394 million in 2017, 2016 and 2015, respectively. The total fair value of stock options vested during 2017, 2016
and 2015 was $341 million, $298 million and $334 million, respectively.
The fair value of each stock option is estimated using the Black-Scholes option pricing model based on the following assump-
tions at the time of grant:
Dividend yield (1)
Expected volatility (2)
Risk-free interest rate (3)
Expected life (in years) (4)
2017
2.56 %
18.39 %
1.77 %
4.1
2016
1.62 %
17.22 %
1.24 %
4.2
2015
1.37 %
18.07 %
1.24 %
4.2
Weighted-average grant date fair value
$
9.43
$
13.00
$
14.01
(1) The dividend yield is based on annual dividends paid and the fair market value of the Company’s stock at the grant date.
(2) The expected volatility is estimated using the Company’s historical volatility over a period equal to the expected life of each option grant after adjustments for
infrequent events such as stock splits.
(3) The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options
being valued.
(4) The expected life represents the number of years the options are expected to be outstanding from grant date based on historical option holder exercise experience.
As of December 31, 2017, unrecognized compensation expense related to unvested options totaled $57 million, which the
Company expects to be recognized over a weighted-average period of 1.76 years. After considering anticipated forfeitures,
the Company expects approximately 9 million of the unvested stock options to vest over the requisite service period.
72
CVS HealthNotes to Consolidated Financial Statements
The following table is a summary of the Company’s stock option activity for the year ended December 31, 2017:
Shares in thousands
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Vested at December 31, 2017 and
expected to vest in the future
Shares
23,275
3,513
(4,814)
(889)
(555)
20,530
11,365
20,114
Weighted
Average
Exercise Price
$
$
$
$
$
$
$
$
68.60
78.05
43.07
94.25
60.00
75.32
61.37
75.00
Weighted
Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
3.62
2.30
$ 180,318,054
$ 179,628,690
3.57
$ 180,299,134
11 | Income Taxes
The income tax provision for continuing operations consisted of the following for the years ended December 31:
in millions
Current:
Federal
State
Deferred:
Federal
State
Total
2017
2016
2015
$
2,594
$
2,803
$
464
3,058
(1,435)
14
(1,421)
511
3,314
5
(2)
3
3,065
555
3,620
(180)
(54)
(234)
$
1,637
$
3,317
$
3,386
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “TCJA”). Among numerous changes to
existing tax laws, the TCJA permanently reduces the federal corporate income tax rate from 35% to 21% effective on January 1,
2018. The effects on deferred tax balances of changes in tax rates are required to be taken into consideration in the period in
which the changes are enacted, regardless of when they are effective. As the result of the reduction of the corporate income tax
rate under the TCJA, the Company estimated the revaluation of its net deferred tax liabilities and recorded a provisional income
tax benefit of approximately $1.5 billion for year ended December 31, 2017. The Company has not completed all of its processes
to determine the TCJA’s final impact. The final impact may differ from this provisional amount due to, among other things, changes in
interpretations and assumptions the Company has made thus far and the issuance of additional regulatory or other guidance. The
accounting is expected to be completed by the time the 2017 federal corporate income tax return is filed in 2018.
The following table is a reconciliation of the statutory income tax rate to the Company’s effective income tax rate for continuing
operations for the years ended December 31:
Statutory income tax rate
State income taxes, net of federal tax benefit
Provisional effect of the Tax Cuts and Jobs Act
Other
Effective income tax rate
2017
35.0 %
4.1
(18.3)
(1.0)
19.8 %
2016
35.0 %
4.1
—
(0.7)
2015
35.0 %
4.0
—
0.3
38.4 %
39.3 %
73
2017 Annual Report
The Company has $3.0 billion and $4.2 billion of net deferred income tax liabilities as of December 31, 2017 and 2016, respec-
tively. The following table is a summary of the components of the Company’s deferred income tax assets and liabilities as of
December 31:
in millions
Deferred income tax assets:
Lease and rents
Inventory
Employee benefits
Allowance for doubtful accounts
Retirement benefits
Net operating loss and capital loss carryforwards
Deferred income
Other
Valuation allowance
Total deferred income tax assets
Deferred income tax liabilities:
Depreciation and amortization
Total deferred income tax liabilities
Net deferred income tax liabilities
2017
2016
$
291
31
246
187
40
101
93
18
(77)
930
(3,926)
(3,926)
$
375
57
400
301
65
125
144
336
(135)
1,668
(5,882)
(5,882)
$
(2,996)
$
(4,214)
The Company assesses positive and negative evidence to determine whether it is more likely than not some portion of a deferred
tax asset would not be realized. When it would not, a valuation allowance is established for such portion of a deferred tax asset.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
in millions
Beginning balance
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Reductions for tax positions of prior years
Expiration of statutes of limitation
Settlements
Ending balance
2017
$
307
$
62
32
(28)
(10)
(19)
$
344
$
2016
338
68
70
(100)
(22)
(47)
307
$
$
2015
188
57
122
(11)
(13)
(5)
338
The Company and most of its subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and
local jurisdictions. The Company is a participant in the Compliance Assurance Process (“CAP”), which is a program made
available by the Internal Revenue Service (“IRS”) to certain qualifying large taxpayers, under which participants work collabora-
tively with the IRS to identify and resolve potential tax issues through open, cooperative and transparent interaction prior to the
annual filing of their federal income tax return. The IRS is currently examining the Company’s 2016 and 2017 consolidated U.S.
federal income tax returns.
The Company and its subsidiaries are also currently under income tax examinations by a number of state and local tax authori-
ties. As of December 31, 2017, no examination has resulted in any proposed adjustments that would result in a material change
to the Company’s results of operations, financial condition or liquidity.
Substantially all material state and local income tax matters have been concluded for fiscal years through 2011. Certain state
exams are expected to/likely to be concluded and certain state statutes will lapse in 2018, but the change in the balance of our
uncertain tax positions will be immaterial. In addition, it is reasonably possible that the Company’s unrecognized tax benefits
could change within the next twelve months due to the anticipated conclusion of various examinations with the IRS for various
years. An estimate of the range of the possible change cannot be made at this time.
74
CVS HealthNotes to Consolidated Financial Statements
The Company records interest expense related to unrecognized tax benefits and penalties in income tax expense. The Company
accrued interest expense of approximately $11 million in 2017, $10 million in 2016 and $5 million in 2015. The Company had
approximately $34 million and $30 million accrued for interest and penalties as of December 31, 2017 and 2016, respectively.
There are no material uncertain tax positions as of December 31, 2017 the ultimate deductibility of which is highly certain but for
which there is uncertainty about the timing.
As of December 31, 2017, the total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax
rate is approximately $317 million, after considering the federal benefit of state income taxes.
12 | Commitments and Contingencies
Lease Guarantees
Between 1995 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores, Linens ‘n Things,
and Marshalls. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the store’s lease
obligations. When the subsidiaries were disposed of and accounted for as discontinued operations, the Company’s guarantees
remained in place, although each initial purchaser has agreed to indemnify the Company for any lease obligations the Company
was required to satisfy. If any of the purchasers or any of the former subsidiaries were to become insolvent and failed to make the
required payments under a store lease, the Company could be required to satisfy these obligations. As of December 31, 2017, the
Company guaranteed approximately 85 such store leases (excluding the lease guarantees related to Linens ‘n Things, which have
been recorded as a liability on the consolidated balance sheet), with the maximum remaining lease term extending through 2029.
Legal Matters
The Company is a party to legal proceedings, investigations and claims in the ordinary course of its business, including the
matters described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss
will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in
legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable
and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued
liability. None of the Company’s accruals for outstanding legal matters are material individually or in the aggregate to the
Company’s financial position.
Except as otherwise noted, the Company cannot predict with certainty the timing or outcome of the legal matters described
below, and is unable to reasonably estimate a possible loss or range of possible loss in excess of amounts already accrued for
these matters.
• Indiana State District Council of Laborers and HOD Carriers Pension and Welfare Fund v. Omnicare, Inc., et al. (U.S. District
Court for the Eastern District of Kentucky). In February 2006, two substantially similar putative class action lawsuits were filed
and subsequently consolidated. The consolidated complaint was filed against Omnicare, three of its officers and two of its
directors and purported to be brought on behalf of all open-market purchasers of Omnicare common stock from August 3,
2005 through July 27, 2006, as well as all purchasers who bought shares of Omnicare common stock in Omnicare’s public
offering in December 2005. The complaint alleged violations of the Securities Exchange Act of 1934 and Section 11 of the
Securities Act of 1933 and sought, among other things, compensatory damages and injunctive relief. After dismissals and
appeals to the United States Court of Appeals for the Sixth Circuit, the United States Supreme Court remanded the case to
the district court. In October 2016, Omnicare filed an answer to plaintiffs’ third amended complaint, and discovery commenced.
In August 2017, the plaintiffs moved for class certification, which Omnicare has opposed.
• FTC and Multi-State Investigation. In March 2010, the Company learned that various State Attorneys General offices and
certain other government agencies were conducting a multi-state investigation of certain of the Company’s business practices
similar to those being investigated at that time by the U.S. Federal Trade Commission (“FTC”). Twenty-eight states, the District
of Columbia and the County of Los Angeles are known to be participating in this investigation. The prior FTC investigation,
which commenced in August 2009, was officially concluded in May 2012 when the consent order entered into between the
FTC and the Company became final. The Company has cooperated with the multi-state investigation.
75
2017 Annual Report • United States ex rel. Jack Chin v. Walgreen Company, et al. (U.S. District Court for the Central District of California). In March
2010, the Company received a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector
General requesting information about programs under which the Company has offered customers remuneration conditioned
upon the transfer of prescriptions for drugs or medications to the Company’s pharmacies in the form of gift cards, cash,
non-prescription merchandise or discounts or coupons for non-prescription merchandise. In October 2016, the U.S. District
Court for the Central District of California unsealed a qui tam complaint, filed in April 2009 against CVS Pharmacy and other
retail pharmacies, alleging that the Company violated the federal False Claims Act, and the False Claims Acts of several states,
by offering such programs. The complaint was served on the Company in January 2017. In December 2017, the same court
unsealed a second qui tam complaint filed by the same relator in September 2017. The complaint is based on the same factual
allegations but asserts a legal theory the Court did not permit him to add to the original case. The federal government has
declined intervention in both cases. The Company is defending both lawsuits.
• United States ex rel. Anthony R. Spay v. CVS Caremark Corporation, et al. (U.S. District Court for the Eastern District of
Pennsylvania). In January 2012, the court unsealed a first amended qui tam complaint filed in August 2011 by an individual
relator, Anthony Spay, who is described in the complaint as having once been employed by a firm providing pharmacy prescrip-
tion benefit audit and recovery services. The complaint seeks monetary damages and alleges that CVS Caremark’s processing
of Medicare claims on behalf of one of its clients violated the federal False Claims Act. The United States declined to intervene
in the lawsuit. In September 2015, the Court granted CVS Caremark’s motion for summary judgment in its entirety, and entered
judgment in favor of CVS Caremark and against Spay. Spay appealed. In December 2017, the United States Court of Appeals
for the Third Circuit affirmed the court’s judgment in favor of CVS Caremark.
• State of Texas ex rel. Myron Winkelman and Stephani Martinson, et al. v. CVS Health Corporation, (Travis County Texas District
Court). In February 2012, the Attorney General of the State of Texas issued Civil Investigative Demands and has issued a series
of subsequent requests for documents and information in connection with its investigation concerning the CVS Health Savings
Pass program and other pricing practices with respect to claims for reimbursement from the Texas Medicaid program. In
January 2017, the court unsealed a first amended petition. The amended petition alleges the Company violated the Texas
Medicaid Fraud Prevention Act by submitting false claims for reimbursement to Texas Medicaid by, among other things, failing
to use the price available to members of the CVS Health Savings Pass program as the usual and customary price. The amended
petition was unsealed following the Company’s filing of CVS Pharmacy, Inc. v. Charles Smith, et al. (Travis County District Court),
a declaratory judgment action against the State of Texas in December 2016 seeking a declaration that the prices charged to
members of the CVS Health Savings Pass program do not constitute usual and customary prices under the Medicaid regulation.
The State of Texas is also pursuing temporary injunctive relief.
• Subpoena Concerning PBM Administrative Fees. In March 2014, the Company received a subpoena from the United States
Attorney’s Office for the District of Rhode Island, requesting documents and information concerning bona fide service fees and
rebates received from pharmaceutical manufacturers in connection with certain drugs utilized under Medicare Part D, as well as
the reporting of those fees and rebates to Part D plan sponsors. The Company has been cooperating with the government and
providing documents and information in response to the subpoena.
• Corcoran et al. v. CVS Health Corporation (U.S. District Court for the Northern District of California) and Podgorny et al. v. CVS
Health Corporation (U.S. District Court for the Northern District of Illinois). These putative class actions were filed against the
Company in July and September 2015. The cases were consolidated in United States District Court in the Northern District of
California. Plaintiffs seek damages and injunctive relief on behalf of a class of consumers who purchased certain prescription
drugs under the consumer protection statutes and common laws of certain states. Several third-party payors filed similar
putative class actions on behalf of payors captioned Sheet Metal Workers Local No. 20 Welfare and Benefit Fund v. CVS Health
Corp. and Plumbers Welfare Fund, Local 130 v. CVS Health Corporation (both pending in the U.S. District Court for the District
of Rhode Island) in February and August 2016. In all of these cases the plaintiffs allege the Company overcharged for certain
prescription drugs by not submitting the price available to members of the CVS Health Savings Pass program as the pharma-
cy’s usual and customary price. In the consumer case (Corcoran), the Court granted summary judgment to CVS on plaintiffs’
claims in their entirety and certified certain subclasses in September 2017. The plaintiffs have filed a notice of appeal to the
Ninth Circuit. The Company continues to defend these actions.
76
CVS HealthNotes to Consolidated Financial Statements • Omnicare DEA Subpoena. In September 2015, Omnicare was served with an administrative subpoena by the U.S. Drug
Enforcement Administration (“DEA”). The subpoena seeks documents related to controlled substance policies, procedures, and
practices at eight pharmacy locations from May 2012 to the present. In September 2017, the DEA expanded the investigation
to include an additional pharmacy. The Company has been cooperating and providing documents in response to this adminis-
trative subpoena.
• Omnicare Cycle Fill Civil Investigative Demand. In October 2015, Omnicare received a Civil Investigative Demand from the
United States Attorney’s Office for the Southern District of New York requesting information and documents concerning
Omnicare’s cycle fill process for assisted living facilities. The Company has been cooperating with the government and provid-
ing documents and information in response to the Civil Investigative Demand. In July 2017, Omnicare also received a subpoena
from the California Department of Insurance requesting documents on similar subject matter.
• PBM Pricing Civil Investigative Demand. In October 2015, the Company received from the U.S. Department of Justice (the
“DOJ”) a Civil Investigative Demand requesting documents and information in connection with a federal False Claims Act
investigation concerning allegations that the Company submitted, or caused to be submitted, to the Medicare Part D program
prescription drug event data that misrepresented true prices paid by the Company’s PBM to pharmacies for drugs dispensed to
Part D beneficiaries with prescription benefits administered by the Company’s PBM. The Company has been cooperating with
the government and providing documents and information in response to the Civil Investigative Demand.
• United States ex rel. Sally Schimelpfenig and John Segura v. Dr. Reddy’s Laboratories Limited and Dr. Reddy’s Laboratories,
Inc. (U.S. District Court for the Eastern District of Pennsylvania). In November 2015, the court unsealed a second amended
qui tam complaint filed in September 2015. The DOJ declined to intervene in this action. The relators allege that the Company,
Walgreens, Wal-Mart, and Dr. Reddy’s Laboratories violated the federal and various state False Claims Acts by dispensing
prescriptions in unit dose packaging supplied by Dr. Reddy’s that was not compliant with the Consumer Product Safety
Improvement Act and the Poison Preventive Packaging Act and thereby allegedly rendering the drugs misbranded under the
Food, Drug and Cosmetic Act. In March 2017, the Court granted the Company’s motion to dismiss with leave to file an
amended complaint. In June 2017, the Company moved to dismiss relators’ third amended complaint.
• Barchock et al. v. CVS Health Corporation, et al. (U.S. District Court for the District of Rhode Island). In February 2016, a class
action lawsuit was filed against the Company, the Benefit Plans Committee of the Company, and Galliard Capital Management,
Inc., by Mary Barchock, Thomas Wasecko, and Stacy Weller, purportedly on behalf of the 401(k) Plan and the Employee Stock
Ownership Plan of the Company (the “Plan”), and participants in the Plan. The complaint alleged that the defendants breached
fiduciary duties owed to the plaintiffs and the Plan by investing too much of the Plan’s Stable Value Fund in short-term money
market funds and cash management accounts. The court recently granted the Company’s motion to dismiss the plaintiffs’
amended complaint. In May 2017, plaintiffs appealed that ruling in the United States Court of Appeals for the First Circuit.
• State of California ex rel. Matthew Omlansky v. CVS Caremark Corporation (Superior Court of the State of California, County
of Sacramento). In April 2016, the court unsealed a first amended qui tam complaint filed in July 2013. The government has
declined intervention in this case. The relator alleges that the Company submitted false claims for payment to California
Medicaid in connection with reimbursement for drugs available through the CVS Health Savings Pass program as well as
certain other generic drugs. The case has been stayed pending the relator’s appeal of the judgment against him in a similar
case against another retailer.
• Retail DEA Matters. The Company has been also undergoing several audits by the DEA Administrator and is in discussions with
the DEA and the U.S. Attorney’s Offices in several locations concerning allegations that the Company has violated certain
requirements of the Controlled Substance Act.
• National Opioid Litigation. In December 2017, the United States Judicial Panel on Multidistrict Litigation ordered consolidated
numerous cases filed against various defendants by plaintiffs such as counties, cities, hospitals, Indian tribes, and third-party
payors, alleging claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation is
In re National Prescription Opiate Litigation (MDL No. 2804), pending in the U.S. District Court for the Northern District of Ohio.
This multidistrict litigation presumptively includes relevant federal court cases that name the Company, including actions filed
by several counties in West Virginia; actions filed by several counties and cities in Michigan; actions filed by hospitals in Florida
and Mississippi; and an action filed by the St. Croix Chippewa Indians of Wisconsin. Similar cases that name the Company in
some capacity have been filed in state courts, including cases filed by Shelby County, Tennessee, Shelby County (Tennessee)
v. Purdue Pharma, L.P., et al. (Shelby County Circuit Court, No. CT-004500-17), and several counties in West Virginia, Brooke
County (West Virginia) et al. v. Purdue Pharma, L.P., et al. (Marshall County Circuit Court, Nos. 17-C-248 – 17-C-255). The
Company is defending all such matters.
77
2017 Annual Report • Cherokee Nation Opioid Litigation. In April 2017, the Company was named as a defendant in an action filed on behalf of the
Cherokee Nation in the District Court of Cherokee Nation (the “Cherokee Action”) asserting various causes of action allegedly
arising from the widespread abuse of opioids. In June 2017, the Company filed a motion to dismiss the Cherokee Action.
The Cherokee Nation has since filed an amended petition in the Cherokee Action. Also in June 2017, the six defendants in the
Cherokee Action collectively filed a complaint in the U.S. District Court for the Northern District of Oklahoma, McKesson, et al.
v. Hembree, et al., seeking a declaration and preliminary injunction prohibiting the District Court of Cherokee Nation from
exercising jurisdiction over the Cherokee Action. In January 2018, the U.S. District Court granted the preliminary injunction
motion and issued an order enjoining the Cherokee Nation Attorney General and the judicial officers of the Cherokee Nation
District Court from taking any action with respect to the Cherokee Action pending resolution of the federal court case.
• State of Mississippi v. CVS Health Corporation, et al. (Chancery Court of DeSoto County, Mississippi, Third Judicial District). In
July 2016, the Company was served with a complaint filed on behalf of the State of Mississippi alleging that CVS retail pharma-
cies in Mississippi submitted false claims for reimbursement to Mississippi Medicaid by not submitting the price available to
members of the CVS Health Savings Pass program as the pharmacy’s usual and customary price. The Company has responded
to the complaint, filed a counterclaim, and moved to transfer the case to circuit court. The motion to transfer was granted,
which the State has appealed, and the motion to dismiss remains pending.
• Part B Insulin Products Civil Investigative Demand. In December 2016, the Company received a Civil Investigative Demand from
the U.S. Attorney’s Office for the Northern District of New York, requesting documents and information in connection with a
False Claims Act investigation concerning whether the Company’s retail pharmacies improperly submitted certain insulin claims
to Medicare Part D rather than Part B. The Company has cooperated with the government and provided documents and
information in response to the Civil Investigative Demand.
• Cold Chain Logistics Civil Investigative Demand. In September 2016, the Company received from the DOJ a Civil Investigative
Demand in connection with an investigation as to whether the Company’s handling of certain temperature-sensitive pharma-
ceuticals violates the federal Food, Drug and Cosmetic Act and the False Claims Act. The Company has been cooperating with
the government and providing documents and information in response to the Civil Investigative Demand.
• Amburgey, et al. v. CaremarkPCS Health, L.L.C. (U.S. District Court for the Central District of California). In March 2017, the
Company was served with a complaint challenging the policies and procedures used by CVS Specialty pharmacies to ship
temperature-sensitive medications. The case is similar to a matter already pending against the Company in the Superior Court
of California (Los Angeles County), Bertram v. Immunex Corp., et al., which was filed in October 2014. In November 2017, the
plaintiffs voluntarily dismissed the Amburgey case without prejudice. The Company continues to defend the Bertram matter.
• Barnett, et al. v. Novo Nordisk Inc., et al. and Boss, et al. v. CVS Health Corporation, et al., and Christensen, et al., v. Novo
Nordisk Inc. et al., (all pending in the U.S. District Court for the District of New Jersey). These putative class actions were filed
against the Company and other PBMs and manufacturers of insulin in March and April 2017. Plaintiffs in all cases allege that
the PBMs and manufacturers have engaged in a conspiracy whereby the PBMs sell access to their formularies by demanding
the highest rebates, which in turn causes increased list prices for insulin. The primary claims are antitrust claims, claims under
the Racketeer Influenced and Corrupt Organizations Act (“RICO”), violations of state unfair competition and consumer protec-
tion laws and in Boss, claims pursuant to the Employee Retirement Income Security Act (“ERISA”). In December 2017, the
attorney appointed as interim lead counsel in Barnett, Boss and Christensen filed a consolidated amended class action com-
plaint in a related action, In re Insulin Pricing Litigation, against only the drug manufacturers, and not against the PBMs.
• Insulin Products Investigation. In April 2017, the Company received a Civil Investigative Demand from the Attorney General
of Washington, seeking documents and information regarding pricing and rebates for insulin products in connection with a
pending investigation into unfair and deceptive acts or practice regarding insulin pricing. We have been notified by the Office of
the Attorney General of Washington that information provided in response to the Civil Investigative Demand will be shared with
the Attorneys General of California, Florida, Minnesota, New Mexico and the District of Columbia. In July 2017, the Company
received a Civil Investigative Demand from the Attorney General of Minnesota, seeking documents and information regarding
pricing and rebates for insulin and epinephrine products in connection with a pending investigation into unfair and deceptive
acts or practices regarding insulin and epinephrine pricing.
78
CVS HealthNotes to Consolidated Financial Statements • Bewley, et al. v. CVS Health Corporation, et al. and Prescott, et al. v. CVS Health Corporation, et al. (both pending in the U.S.
District Court for the Western District of Washington). These putative class actions were filed in May 2017 against the Company
and other pharmacy benefit managers and manufacturers of glucagon kits (Bewley) and diabetes test strips (Prescott). Both
cases allege that, by contracting for rebates with the manufacturers of these diabetes products, the Company and other PBMs
caused list prices for these products to increase, thereby harming certain consumers. The primary claims are made under
federal antitrust laws, RICO, state unfair competition and consumer protection laws, and ERISA. These cases have both been
transferred to the United States District Court for the District of New Jersey on defendants’ motions. The Company is defending
these lawsuits.
• Klein, et al. v. Prime Therapeutics, et al. (U.S. District Court for the District of Minnesota). In June 2017, a putative class action
complaint was filed against the Company and other pharmacy benefit managers on behalf of ERISA plan members who
purchased and paid for EpiPen or EpiPen Jr. Plaintiffs allege that the pharmacy benefit managers are ERISA fiduciaries to plan
members and have violated ERISA by allegedly causing higher inflated prices for EpiPen through the process of negotiating
increased rebates from EpiPen manufacturer, Mylan. The Company is defending this lawsuit.
• Medicare Part D Civil Investigative Demand. In May 2017, the United States Attorney’s Office for the Southern District of New
York issued a Civil Investigative Demand to the Company concerning possible false claims submitted to Medicare in connection
with reimbursements for prescription drugs under the Medicare Part D program. The Company has been cooperating with the
government and providing documents and information in response to the Civil Investigative Demand.
• Shareholder Matters. In August and September 2017, four complaints were filed by putative derivative plaintiffs against certain
officers and directors of the Company. Three of those actions, Sherman v. Merlo, et al., Feghali v. Merlo, et al., and Banchalter
v. Merlo, et al., were filed in the U.S. District Court for the District of Rhode Island. A fourth, Boron v. Bracken, et al., was filed
in Rhode Island Superior Court. These matters assert a variety of causes of action, including breach of fiduciary duty, waste of
corporate assets, unjust enrichment, civil conspiracy and violation of Section 14(a) of the Exchange Act, and are premised on
the allegation that the defendants approved business plans that exposed the Company to various litigations and investigations.
The three federal matters have been stayed pending resolution of certain of the underlying matters, and the Company has filed
a motion to stay the state court action.
• MSP Recovery Claims Series, LLC, et al. v. CVS Health Corporation, et al. (U.S. District Court for the Western District of Texas).
In September 2017, a putative class action complaint was filed against the company, Express Scripts, Inc., and the manufacturers
of insulin on behalf of assignees of claims of Medicare Advantage Organizations. Plaintiffs assert that the PBMs and manufac-
turers have engaged in a conspiracy whereby the PBMs sell access to their formularies by demanding the highest rebates,
which in turn causes increased list prices for insulin. The plaintiffs assert claims on behalf of two putative classes: (1) all
Medicare C payors and (2) all Medicare D payors. The complaint asserts claims under RICO, and for common law fraud and
unjust enrichment.
The Company is also a party to other legal proceedings, government investigations, inquiries and audits, and has received and
is cooperating with subpoenas or similar process from various governmental agencies requesting information, all arising in the
normal course of its business, none of which is expected to be material to the Company. The Company can give no assurance,
however, that its business, financial condition and results of operations will not be materially adversely affected, or that the
Company will not be required to materially change its business practices, based on: (i) future enactment of new health care or
other laws or regulations; (ii) the interpretation or application of existing laws or regulations as they may relate to the Company’s
business, the pharmacy services, specialty pharmacy, retail pharmacy, long-term care pharmacy or retail clinic industries or to
the health care industry generally; (iii) pending or future federal or state governmental investigations of the Company’s business
or the pharmacy services, specialty pharmacy, retail pharmacy, long-term care pharmacy or retail clinic industry or of the health
care industry generally; (iv) pending or future government enforcement actions against the Company; (v) adverse developments in
any pending qui tam lawsuit against the Company, whether sealed or unsealed, or in any future qui tam lawsuit that may be filed
against the Company; or (vi) adverse developments in pending or future legal proceedings against the Company or affecting the
pharmacy services, specialty pharmacy, retail pharmacy, long-term care pharmacy or retail clinic industry or the health care
industry generally.
79
2017 Annual Report Notes
to Consolidated Financial Statements
13 | Segment Reporting
The Company currently has three reportable segments: Pharmacy Services, Retail/LTC and Corporate. The Retail/LTC Segment
includes the operating results of the Company’s Retail Pharmacy and LTC/RxCrossroads operating segments as the operations
and economics characteristics are similar. The Company’s segments maintain separate financial information for which operating
results are evaluated on a regular basis by the Company’s chief operating decision maker in deciding how to allocate resources
and in assessing performance.
The Company evaluates its Pharmacy Services and Retail/LTC segments’ performance based on net revenue, gross profit and
operating profit before the effect of nonrecurring charges and gains and certain intersegment activities. The Company evaluates
the performance of its Corporate Segment based on operating expenses before the effect of nonrecurring charges and gains and
certain intersegment activities. The chief operating decision maker does not use total assets by segment to make decisions
regarding resources, therefore the total asset disclosure by segment has not been included. See Note 1 “Significant Accounting
Policies” for a description of the Pharmacy Services, Retail/LTC and Corporate segments and related significant accounting
policies.
In 2017, 2016 and 2015, approximately 12.3%, 11.7% and 10.0%, respectively, of the Company’s consolidated net revenues
were from Aetna, a Pharmacy Services Segment client. More than 99% of the Company’s consolidated net revenues are earned
in, and long-lived assets are located in the United States.
80
CVS Health The following table is a reconciliation of the Company’s business segments to the consolidated financial statements:
in millions
2017:
Net revenues
Gross profit (3)
Operating profit (loss) (4) (5)
Depreciation and amortization
Additions to property and equipment
2016:
Net revenues
Gross profit (3)
Operating profit (loss) (4) (5) (6) (7)
Depreciation and amortization
Additions to property and equipment
2015:
Net revenues
Gross profit
Operating profit (loss) (4) (5) (7)
Depreciation and amortization
Additions to property and equipment
Pharmacy
Services
Segment (1)(2)
Retail/LTC
Segment (2)
Corporate
Segment
Intersegment
Eliminations (2)
Consolidated
Totals
$
$ 130,596
6,040
4,755
712
311
$ 79,398
23,317
6,469
1,651
1,398
119,963
5,901
4,676
714
295
100,363
5,227
3,992
654
359
81,100
23,738
7,302
1,642
1,732
72,007
21,992
7,146
1,336
1,883
—
—
(966)
117
340
—
—
(891)
119
252
—
—
(1,035)
102
125
$
(25,229)
(812)
(741)
—
—
(23,537)
(782)
(721)
—
—
(19,080)
(691)
(628)
—
—
$ 184,765
28,545
9,517
2,480
2,049
$ 177,526
28,857
10,366
2,475
2,279
$ 153,290
26,528
9,475
2,092
2,367
(1) Net revenues of the Pharmacy Services Segment include approximately $10.8 billion, $10.5 billion and $8.9 billion of Retail Co-Payments for 2017, 2016 and 2015,
respectively. See Note 1 “Significant Accounting Policies” to the consolidated financial statements for additional information about Retail Co-P ayments.
(2) Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services Segment and the Retail/LTC Segment.
These occur in the following ways: when members of Pharmacy Services Segment clients (“members”) fill prescriptions at the Company’s retail pharmacies to
purchase covered products, when members enrolled in programs such as Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company’s
retail pharmacies instead of receiving them through the mail, or when members have prescriptions filled at the Company’s long-term care pharmacies. When these
occur, both the Pharmacy Services and Retail/LTC segments record the revenues, gross profit and operating profit on a standalone basis.
(3) The Retail/LTC Segment gross profit for the years ended December 31, 2017 and 2016 includes $2 million and $46 million, respectively of acquisition-related
integration costs. The integration costs in 2017 are related to the acquisition of Omnicare and the integration costs in 2016 are related to the acquisitions of
Omnicare and the pharmacies and clinics of Target.
(4) The Retail/LTC Segment operating profit for the year ended December 31, 2017 includes $215 million of charges associated with store closures and $181 million of
goodwill impairment charges related to its RxCrossroads reporting unit. The Retail/LTC Segment operating profit for the year ended December 31, 2016 includes a
$34 million asset impairment charge in connection with planned store closures in 2017 related to the Company’s enterprise streamlining initiative. The Retail/LTC
Segment operating profit for the years ended December 31, 2017, 2016 and 2015, include $34 million, $281 million and $64 million, respectively, of acquisition-re-
lated integration costs. The integration costs in 2017 are related to the acquisition of Omnicare and the integration costs in 2016 are related to the acquisitions of
Omnicare and the pharmacies and clinics of Target.
(5) The Corporate Segment operating loss for the year ended December 31, 2017 includes a $3 million reduction in integration costs for a change in estimate related to
the acquisition of Omnicare. In addition, the Corporate Segment operating loss for the year ended December 31, 2017 includes $34 million in acquisition-related
transaction costs related to the proposed Aetna acquisition and $9 million of transaction costs related to the divestiture of RxCrossroads. For the year ended
December 31, 2016, the Corporate Segment operating loss includes $10 million of integration costs related to the acquisitions of Omnicare and the pharmacies and
clinics of Target. For the year ended December 31, 2015, the Corporate Segment operating loss includes $156 million of acquisition-related transaction and
integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target. The Corporate Segment operating loss for 2015 also includes a
$90 million charge related to a legacy lawsuit challenging the 1999 legal settlement by MedPartners of various securities class actions and a related derivative claim.
(6) The Pharmacy Services Segment operating profit for the year ended December 31, 2016 includes the reversal of an accrual of $88 million in connection with a legal
settlement.
(7) Amounts revised to reflect the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which increased consolidated operating profit by $28 and $21 million for the years ended December 31, 2016 and 2015, respectively.
81
2017 Annual Report
14 | Earnings Per Share
The following is a reconciliation of basic and diluted earnings per share from continuing operations for the years ended December 31:
in millions, except per share amounts
2017
2016
2015
Numerator for earnings per share calculation:
Income from continuing operations
Income allocated to participating securities
Net income attributable to noncontrolling interest
$
6,631
$
5,320
$
5,230
(24)
(1)
(27)
(2)
(26)
(2)
Income from continuing operations attributable to CVS Health
$
6,606
$
5,291
$
5,202
Denominator for earnings per share calculation:
Weighted average shares, basic
Effect of dilutive securities
Weighted average shares, diluted
Earnings per share from continuing operations:
Basic
Diluted
1,020
4
1,024
1,073
6
1,079
$
$
6.48
6.45
$
$
4.93
4.91
$
$
1,118
8
1,126
4.65
4.62
82
CVS HealthNotes to Consolidated Financial Statements
15 | Quarterly Financial Information (Unaudited)
in millions, except per share amounts
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
2017:
Net revenues
Gross profit
Operating profit
Income from continuing operations
Income (loss) from discontinued operations,
net of tax
Net income attributable to CVS Health
Basic earnings per share:
Income from continuing operations attributable
to CVS Health
Income (loss) from discontinued operations
attributable to CVS Health
Net income attributable to CVS Health
Diluted earnings per share:
Income from continuing operations
attributable to CVS Health
Income (loss) from discontinued operations
attributable to CVS Health
Net income attributable to CVS Health
Dividends per share
Stock price: (New York Stock Exchange)
High
Low
in millions, except per share amounts
2016:
Net revenues
Gross profit
Operating profit
Income from continuing operations
Loss from discontinued operations, net of tax
Net income attributable to CVS Health
Basic earnings per share:
Income from continuing operations attributable
to CVS Health
Income (loss) from discontinued operations
attributable to CVS Health
Net income attributable to CVS Health
Diluted earnings per share:
Income from continuing operations
attributable to CVS Health
Income (loss) from discontinued operations
attributable to CVS Health
Net income attributable to CVS Health
Dividends per share
Stock price: (New York Stock Exchange)
High
Low
$ 44,514
6,580
1,793
962
$ 45,685
6,935
2,117
1,097
$ 46,181
7,126
2,499
1,285
$ 48,385
7,904
3,108
3,287
$ 184,765
28,545
9,517
6,631
(9)
952
0.93
(0.01)
0.92
0.92
(0.01)
0.92
0.50
83.92
74.80
First
Quarter
43,215
6,744
2,185
1,147
—
1,146
1.04
—
1.04
1.04
—
1.04
0.425
104.05
89.65
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1
1,098
—
1,285
—
3,287
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.07
—
1.07
1.07
—
1.07
0.50
82.79
75.95
Second
Quarter
43,725
7,015
2,357
924
—
924
0.86
—
0.86
0.86
—
0.86
0.425
106.10
93.21
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.26
—
1.26
1.26
—
1.26
0.50
83.31
75.35
Third
Quarter
44,615
7,492
2,824
1,542
(1)
1,540
1.44
—
1.44
1.43
—
1.43
0.425
98.06
88.99
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3.23
—
3.23
3.22
—
3.22
0.50
80.91
66.80
Fourth
Quarter
45,971
7,606
3,000
1,707
—
1,707
1.60
—
1.60
1.59
—
1.59
0.425
88.80
73.53
(8)
6,622
6.48
(0.01)
6.47
6.45
(0.01)
6.44
2.00
83.92
66.80
Year
177,526
28,857
10,366
5,320
(1)
5,317
4.93
—
4.93
4.91
—
4.90
1.70
106.10
73.53
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
83
2017 Annual Report
Five-Year Financial Summary
in millions, except per share amounts
2017
2016
2015
2014
2013
$ 184,765
28,545
19,028
$
177,526
28,857
18,491
$
153,290
26,528
17,053
$
139,367
25,367
16,545
$
126,761
23,783
15,713
Statement of operations data:
Net revenues
Gross profit
Operating expenses (1)
Operating profit
Interest expense, net
Loss on early extinguishment of debt
Other expense (1)
Income tax provision
Income from continuing operations
Income (loss) from discontinued operations,
net of tax
Net income
Net income attributable to noncontrolling interest
9,517
1,041
—
208
1,637
6,631
(8)
6,623
(1)
10,366
1,058
643
28
3,317
5,320
(1)
5,319
(2)
9,475
838
—
21
3,386
5,230
9
5,239
(2)
Net income attributable to CVS Health
$
6,622
$
5,317
$
5,237
$
Per share data:
Basic earnings per share:
Income from continuing operations attributable
to CVS Health
Income (loss) from discontinued operations
attributable to CVS Health
Net income attributable to CVS Health
Diluted earnings per share:
Income from continuing operations attributable
to CVS Health
Income (loss) from discontinued operations
attributable to CVS Health
Net income attributable to CVS Health
Cash dividends per share
Balance sheet and other data:
Total assets
Long-term debt
Total shareholders’ equity
Number of stores (at end of year)
$
$
$
$
$
$
$
6.48
(0.01)
6.47
6.45
(0.01)
6.44
2.00
$ 95,131
$ 22,181
$ 37,695
9,846
$
$
$
$
$
$
$
$
$
$
4.93
—
4.93
4.91
—
4.90
1.70
94,462
25,615
36,834
9,750
$
$
$
$
$
$
$
$
$
$
4.65
0.01
4.66
4.62
0.01
4.63
1.40
92,437
26,267
37,203
9,681
$
$
$
$
$
$
$
$
$
$
8,822
600
521
23
3,033
4,645
(1)
4,644
—
4,644
3.98
—
3.98
3.96
—
3.96
1.10
73,202
11,630
37,963
7,866
8,070
509
—
33
2,928
4,600
(8)
4,592
—
4,592
3.78
(0.01)
3.77
3.75
(0.01)
3.74
0.90
70,550
12,767
37,938
7,702
$
$
$
$
$
$
$
$
$
$
$
(1) As of January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost, which resulted in a retrospective reclassification of $28 million, $21 million, $23 million and $33 million of net benefit costs
from operating expenses to other expense in the years ended December 31, 2016, 2015, 2014, and 2013, respectively.
84
CVS Health
Report of Ernst & Young LLP,
Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of CVS Health Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CVS Health Corporation (the Company) as of December 31,
2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consoli-
dated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 14, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2007.
Boston, Massachusetts
February 14, 2018
85
2017 Annual Report Stock Performance Graph
The following graph shows changes over the past five-year period in the value of $100 invested in: (1) our common stock;
(2) S&P 500 Index; (3) S&P 500 Food and Staples Retailing Industry Group Index, which currently includes seven retail companies;
(4) S&P 500 Health Care Sector Group Index, which currently includes 61 health care companies.
Relative Total Returns Since 2012 – Annual
December 31, 2012 to December 29, 2017
$275
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
2012
2013
2014
2015
2016
2017
CVS Health
S&P 500
S&P 500 Food & Staples Retail Group Index
S&P 500 Health Care Group Index
CVS Health Corporation
S&P 500 (1)
S&P 500 Food & Staples
2012
2013
2014
2015
2016
2017
YEAR END
1 YR CAGR
2016-17
3 YR CAGR
2014-17
5 YR CAGR
2012-17
$100
$100
$150
$132
$205
$150
$211
$153
$174
$171
$164
$208
-5.7%
21.8%
-7.3%
11.4%
10.3%
15.8%
Retail Group Index (2)
$100
$133
$163
$161
$160
$181
13.4%
3.5%
12.6%
S&P 500 Health Care
Group Index (3)
$100
$141
$177
$190
$184
$225
22.1%
8.3%
17.6%
Note: Analysis assumes reinvestment of dividends.
(1) Includes CVS Health.
(2) Includes seven companies: (COST, CVS, KR, SYY, WBA, WFM, WMT).
(3) Includes 61 companies.
The year-end values of each investment shown in the preceding graph are based on share price appreciation plus dividends, with
the dividends reinvested as of the last business day of the month during which such dividends were ex-dividend. The calculations
exclude trading commissions and taxes. Total stockholder returns from each investment, whether measured in dollars or percent-
ages, can be calculated from the year-end investment values shown beneath the graph.
86
CVS Health
Shareholder Information
Officers
Larry J. Merlo
President and Chief Executive Officer
David M. Denton
Executive Vice President and
Chief Financial Officer
Jonathan C. Roberts
Executive Vice President and
Chief Operating Officer
Lisa G. Bisaccia
Executive Vice President and
Chief Human Resources Officer
Eva C. Boratto
Executive Vice President – Controller
and Chief Accounting Officer
Troyen A. Brennan, M.D.
Executive Vice President and
Chief Medical Officer
Directors
C. Daniel Haron
Executive Vice President and
President – Omnicare
J. David Joyner
Executive Vice President, Sales and
Account Services – CVS Caremark
Thomas M. Moriarty
Executive Vice President, Chief Policy and
External Affairs Officer and General Counsel
Derica W. Rice
Executive Vice President and
President – CVS Caremark
Carol A. DeNale
Senior Vice President and Treasurer
David A. Falkowski
Senior Vice President and Chief
Compliance Officer
John P. Kennedy
Senior Vice President and Chief Tax Officer
Michael P. McGuire
Senior Vice President – Investor Relations
Colleen M. McIntosh
Senior Vice President, Corporate Secretary and
Assistant General Counsel – Corporate Services
Thomas S. Moffatt
Vice President, Assistant Secretary and Assistant
General Counsel – Corporate Services
OFFICERS’ CERTIFICATIONS
The Company has filed the required certifications under
Section 302 of the Sarbanes-Oxley Act of 2002 regarding
the quality of our public disclosures as Exhibits 31.1 and
31.2 to our annual report on Form 10-K for the fiscal year
ended December 31, 2017. After our 2017 annual meeting
of stockholders, the Company filed with the New York Stock
Exchange the CEO certification regarding its compliance
with the NYSE corporate governance listing standards as
required by NYSE Rule 303A.12(a).
Richard M. Bracken (1) (2) (5)
Former Chairman and Chief Executive Officer
HCA Holdings, Inc.
Anne M. Finucane (1) (3)
Vice Chairman
Bank of America Corporation
William C. Weldon (1) (3)
Former Chairman and Chief Executive Officer
Johnson & Johnson
C. David Brown II (1) (3) (5)
Chairman of the Firm
Broad and Cassel
Larry J. Merlo (5)
President and Chief Executive Officer
CVS Health Corporation
Alecia A. DeCoudreaux (2) (4)
Former President, Mills College
and Former Executive, Eli Lilly & Company
Jean-Pierre Millon (2) (4)
Former President and Chief Executive Officer
PCS Health Systems, Inc.
Nancy-Ann M. DeParle (2) (4)
Partner
Consonance Capital Partners, LLC
David W. Dorman (1) (3) (5)
Chairman of the Board
CVS Health Corporation
Mary L. Schapiro (4)
Vice Chair of the Advisory Board
Promontory Financial Group
Richard J. Swift (4) (5)
Former Chairman, President and
Chief Executive Officer
Foster Wheeler Ltd.
Tony L. White (2) (3)
Former Chairman, President and
Chief Executive Officer
Applied Biosystems, Inc.
(1) Member of the Nominating and
Corporate Governance Committee
(2) Member of the Patient Safety and
Clinical Quality Committee
(3) Member of the Management Planning
and Development Committee
(4) Member of the Audit Committee
(5) Member of the Executive Committee
Shareholder Information
Corporate Headquarters
CVS Health Corporation
One CVS Drive, Woonsocket, RI 02895
(401) 765-1500
Annual Shareholders’ Meeting
June 4, 2018
CVS Health Corporate Headquarters
Stock Market Listing
The New York Stock Exchange
Symbol: CVS
designed and produced by see see eye
Transfer Agent and Registrar
Questions regarding stock holdings, certificate
replacement/transfer, dividends and address
changes should be directed to:
Equiniti Trust Company
P.O. Box 64874
St. Paul, MN 55164-0874
Toll-free: (877) CVS-PLAN (287-7526)
International: +1 (651) 450-4064
Email: stocktransfer@eq-us.com
Website: www.shareowneronline.com
Direct Stock Purchase/Dividend
Reinvestment Program
Shareowner Services Plus PlanSM provides a
convenient and economical way for you to
purchase your first shares or additional shares
of CVS Health common stock. The program is
sponsored and administered by Equiniti Trust
Company. For more information, including an
enrollment form, please contact Equiniti Trust
Company at (877) 287-7526.
Financial and Other Company
Information
The Company’s Annual Report on Form 10-K
will be sent without charge to any shareholder
upon request by contacting:
Michael P. McGuire
Senior Vice President – Investor Relations
CVS Health Corporation
One CVS Drive, MC 1008
Woonsocket, RI 02895
(800) 201-0938
In addition, financial reports and recent
filings with the Securities and Exchange
Commission, including our Form 10-K,
as well as other Company information,
are available via the Internet at
investors.cvshealth.com.
WE ARE
A pharmacy innovation company
OUR STRATEGY
Reinventing pharmacy
OUR PURPOSE
Helping people on their
path to better health
OUR VALUES
Innovation
Collaboration
Caring
Integrity
Accountability
C
C
C
V
V
V
S
S
S
H
H
H
e
e
e
a
a
a
l
l
l
t
t
t
h
h
h
2
2
2
0
0
0
1
1
1
5
7
6
A
A
A
n
n
n
n
n
n
u
u
u
a
a
a
l
l
l
R
R
R
e
e
e
p
p
p
o
o
o
r
r
r
t
t
t
The CVS Health 2017 Annual Report achieved the following
results by printing a portion of this project on paper contain-
ing 10 percent post-consumer recycled content. FSC® is not
responsible for any calculations from choosing this paper.
Trees
Saved
59
fully grown
Water
Saved
27,542
gallons
Energy
Saved
Solid Waste
Not Produced
Greenhouse Gases
Not Produced
Hazardous Air
Pollutants
Not Produced
2,000,000
MM BTUs
1,843
pounds
5,078
pounds
4
pounds
2017 Annual Report
CVS Health, One CVS Drive, Woonsocket, RI 02895 | 401.765.1500 | cvshealth.com
At the heart of health.