Segment Reporting

9 Months Ended

Sep. 30, 2019

The Company has three operating segments, Pharmacy Services, Retail/LTC and Health Care Benefits, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the CODM evaluates the segments’ operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company’s segments based on adjusted operating income. Effective for the first quarter of 2019, adjusted operating income is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance. Segment financial information for the three and nine months ended September 30, 2018 has been retrospectively adjusted to conform with the current period presentation. See the reconciliation of consolidated operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company’s ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

Effective for the first quarter of 2019, the Company realigned the composition of its segments to correspond with changes to its operating model and reflect how the CODM reviews information and manages the business. See Note 1 ‘‘Significant Accounting Policies’’ for further discussion. Segment financial information for the three and nine months ended September 30, 2018, has been retrospectively adjusted to reflect these changes as shown below:



	Three Months Ended September 30, 2018
In millions	Pharmacy Services			Retail/ LTC		Health Care Benefits		Corporate/ Other			Intersegment Eliminations			Consolidated Totals
Revenues, as previously reported	$	33,767		$	20,856	$	—	$	217		$	(7,350	)	$	47,490
Adjustments	97			—		641		—			(738		)	—
Revenues, as adjusted	$	33,864		$	20,856	$	641	$	217		$	(8,088	)	$	47,490

Cost of products sold ⁽¹⁾	$	31,587		$	15,042	$	—	$	—		$	(7,127	)	$	39,502
Adjustments	651			—		—		—			(651		)	—
Cost of products sold, as adjusted	$	32,238		$	15,042	$	—	$	—		$	(7,778	)	$	39,502

Benefit costs ⁽¹⁾	$	439		$	—	$	—	$	—		$	—		$	439
Adjustments	(439		)	—		439		—			—			—
Benefit costs, as adjusted	$	—		$	—	$	439	$	—		$	—		$	439

Operating expenses, as previously reported	$	392		$	4,323	$	—	$	287		$	(27	)	$	4,975
Adjustments	(41		)	—		128		—			(87		)	—
Operating expenses, as adjusted	$	351		$	4,323	$	128	$	287		$	(114	)	$	4,975

Operating income (loss), as previously reported	$	1,349		$	1,491	$	—	$	(70	)	$	(196	)	$	2,574
Adjustments	(74		)	—		74		—			—			—
Operating income (loss), as adjusted	1,275			1,491		74		(70		)	(196		)	2,574
Segment measure adjustments	87			131		1		(143		)	—			76
Adjusted operating income (loss)	$	1,362		$	1,622	$	75	$	(213	)	$	(196	)	$	2,650

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(1)	The total of cost of products sold and benefit costs previously were reported as cost of revenues.



	Nine Months Ended September 30, 2018
In millions	Pharmacy Services			Retail/ LTC		Health Care Benefits			Corporate/ Other			Intersegment Eliminations			Consolidated Totals
Revenues, as previously reported	$	99,238		$	61,960	$	—		$	475		$	(21,518	)	$	140,155
Adjustments	599			—		2,723			—			(3,322		)	—
Revenues, as adjusted	$	99,837		$	61,960	$	2,723		$	475		$	(24,840	)	$	140,155

Cost of products sold ⁽¹⁾	$	92,459		$	44,318	$	—		$	—		$	(20,894	)	$	115,883
Adjustments	3,059			—		—			—			(3,059		)	—
Cost of products sold, as adjusted	$	95,518		$	44,318	$	—		$	—		$	(23,953	)	$	115,883

Benefit costs ⁽¹⁾	$	2,399		$	—	$	—		$	—		$	—		$	2,399
Adjustments	(2,399		)	—		2,399			—			—			—
Benefit costs, as adjusted	$	—		$	—	$	2,399		$	—		$	—		$	2,399

Operating expenses, as previously reported	$	1,176		$	12,831	$	—		$	814		$	(66	)	$	14,755
Adjustments	(125		)	—		388			—			(263		)	—
Operating expenses, as adjusted	$	1,051		$	12,831	$	388		$	814		$	(329	)	$	14,755

Operating income (loss), as previously reported	$	3,204		$	890	$	—		$	(339	)	$	(558	)	$	3,197
Adjustments	64			—		(64		)	—			—			—
Operating income (loss), as adjusted	3,268			890		(64		)	(339		)	(558		)	3,197
Segment measure adjustments	262			4,389		2			(308		)	—			4,345
Adjusted operating income (loss)	$	3,530		$	5,279	$	(62	)	$	(647	)	$	(558	)	$	7,542

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(1)	The total of cost of products sold and benefit costs previously were reported as cost of revenues.

The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:



In millions	Pharmacy Services ⁽¹⁾		Retail/ LTC		Health Care Benefits			Corporate/ Other			Intersegment Eliminations ⁽²⁾			Consolidated Totals
Three Months Ended
September 30, 2019
Revenues from customers	$	36,018	$	21,466	$	17,035		$	35		$	(10,007	)	$	64,547
Net investment income	—		—		146			117			—			263
Total revenues	36,018		21,466		17,181			152			(10,007		)	64,810
Adjusted operating income (loss)	1,439		1,516		1,423			(252		)	(179		)	3,947

September 30, 2018
Revenues from customers	$	33,864	$	20,856	$	637		$	—		$	(8,088	)	$	47,269
Net investment income	—		—		4			217			—			221
Total revenues	33,864		20,856		641			217			(8,088		)	47,490
Adjusted operating income (loss)	1,362		1,622		75			(213		)	(196		)	2,650

Nine Months Ended
September 30, 2019
Revenues from customers	$	104,418	$	64,028	$	51,996		$	76		$	(31,436	)	$	189,082
Net investment income	—		—		458			347			—			805
Total revenues	104,418		64,028		52,454			423			(31,436		)	189,887
Adjusted operating income (loss)	3,682		4,674		4,423			(685		)	(521		)	11,573

September 30, 2018
Revenues from customers	$	99,837	$	61,960	$	2,713		$	—		$	(24,840	)	$	139,670
Net investment income	—		—		10			475			—			485
Total revenues	99,837		61,960		2,723			475			(24,840		)	140,155
Adjusted operating income (loss)	3,530		5,279		(62		)	(647		)	(558		)	7,542

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(1)	Total revenues of the Pharmacy Services segment include approximately $2.7 billion of retail co-payments for each of the three-month periods ended September 30, 2019 and 2018, and $8.9 billion and $8.8 billion of retail co-payments for the nine months ended September 30, 2019 and 2018, respectively.


(2)	Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services segment, the Retail/LTC segment and/or the Health Care Benefits segment.

The following are reconciliations of consolidated operating income to adjusted operating income for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30,					Nine Months Ended September 30,
In millions	2019		2018			2019		2018
Operating income (GAAP measure)	$	2,928	$	2,574		$	8,950	$	3,197
Amortization of intangible assets ⁽¹⁾	607		215			1,822		639
Acquisition-related transaction and integration costs ⁽²⁾	111		70			365		152
Store rationalization charges ⁽³⁾	96		—			231		—
Loss on divestiture of subsidiary ⁽⁴⁾	205		—			205		86
Goodwill impairment ⁽⁵⁾	—		—			—		3,921
Interest income on financing for the Aetna Acquisition ⁽⁶⁾	—		(209		)	—		(453		)
Adjusted operating income	$	3,947	$	2,650		$	11,573	$	7,542

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(1)

The Company’s acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the Company’s statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company’s revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company’s acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company’s GAAP financial statements and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised.

(2)

During the three and nine months ended September 30, 2019 and 2018, acquisition-related transaction and integration costs relate to the Aetna Acquisition. During the nine months ended September 30, 2018, acquisition-related integration costs also relate to the acquisition of Omnicare, Inc. The acquisition-related transaction and integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses primarily within the Corporate/Other segment.

(3)

During the three and nine months ended September 30, 2019, the store rationalization charges relate to the planned closure of 22 underperforming retail pharmacy stores in the first quarter of 2020. During the nine months ended September 30, 2019, the store rationalization charges also relate to the planned closure of 46 underperforming retail pharmacy stores in the second quarter of 2019. The store rationalization charges primarily relate to operating lease right-of-use asset impairment charges and are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within the Retail/LTC segment.

(4)

During the three and nine months ended September 30, 2019, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of Onofre, which occurred on July 1, 2019. The loss on divestiture primarily relates to the elimination of the cumulative translation adjustment from accumulated other comprehensive income and is reflected in operating expenses in the Company’s unaudited GAAP condensed consolidated statements of operations within the Retail/LTC segment. During the nine months ended September 30, 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company’s RxCrossroads subsidiary for $725 million and is reflected in operating expenses in the Company’s unaudited GAAP condensed consolidated statements of operations within the Retail/LTC segment.


(5)	During the nine months ended September 30, 2018, the goodwill impairment charge relates to the LTC reporting unit within the Retail/LTC segment.

(6)

During the three and nine months ended September 30, 2018, the Company recorded interest income of $209 million and $453 million, respectively, on the proceeds of its unsecured senior notes issued in March 2018 to partially fund the Aetna Acquisition. All amounts are for the periods prior to the close of the Aetna Acquisition, which occurred on November 28, 2018, and were recorded within the Corporate/Other segment.