| Segment Reporting |
Segment Reporting
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 Company’s chief operating decision maker (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, which 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. See the reconciliations of 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.
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 | | Consolidated
Totals | Three Months Ended | | | | | | | | | | | | June 30, 2020 | | | | | | | | | | | | Revenues from external customers | $ | 32,623 |
| | $ | 14,187 |
| | $ | 18,318 |
| | $ | 29 |
| | $ | — |
| | $ | 65,157 |
| Intersegment revenues | 2,266 |
| | 7,475 |
| | 23 |
| | — |
| | (9,764 | ) | | — |
| Net investment income | — |
| | — |
| | 127 |
| | 57 |
| | — |
| | 184 |
| Total revenues | 34,889 |
| | 21,662 |
| | 18,468 |
| | 86 |
| | (9,764 | ) | | 65,341 |
| Adjusted operating income (loss) | 1,327 |
| | 1,057 |
| | 3,464 |
| | (343 | ) | | (177 | ) | | 5,328 |
| | | | | | | | | | | | | June 30, 2019 | | | | | | | | | | | | Revenues from external customers | $ | 31,988 |
| | $ | 13,885 |
| | $ | 17,249 |
| | $ | 16 |
| | $ | — |
| | $ | 63,138 |
| Intersegment revenues | 2,854 |
| | 7,562 |
| | 6 |
| | — |
| | (10,422 | ) | | — |
| Net investment income | — |
| | — |
| | 148 |
| | 145 |
| | — |
| | 293 |
| Total revenues | 34,842 |
| | 21,447 |
| | 17,403 |
| | 161 |
| | (10,422 | ) | | 63,431 |
| Adjusted operating income (loss) | 1,296 |
| | 1,669 |
| | 1,438 |
| | (202 | ) | | (170 | ) | | 4,031 |
| | | | | | | | | | | | | Six Months Ended | | | | | | | | | | | | June 30, 2020 | | | | | | | | | | | | Revenues from external customers | $ | 64,741 |
| | $ | 29,544 |
| | $ | 37,415 |
| | $ | 50 |
| | $ | — |
| | $ | 131,750 |
| Intersegment revenues | 5,131 |
| | 14,867 |
| | 31 |
| | — |
| | (20,029 | ) | | — |
| Net investment income | — |
| | — |
| | 220 |
| | 126 |
| | — |
| | 346 |
| Total revenues | 69,872 |
| | 44,411 |
| | 37,666 |
| | 176 |
| | (20,029 | ) | | 132,096 |
| Adjusted operating income (loss) | 2,508 |
| | 2,959 |
| | 4,955 |
| | (628 | ) | | (353 | ) | | 9,441 |
| | | | | | | | | | | | | June 30, 2019 | | | | | | | | | | | | Revenues from external customers | $ | 61,814 |
| | $ | 27,731 |
| | $ | 34,949 |
| | $ | 41 |
| | $ | — |
| | $ | 124,535 |
| Intersegment revenues | 6,586 |
| | 14,831 |
| | 12 |
| | — |
| | (21,429 | ) | | — |
| Net investment income | — |
| | — |
| | 312 |
| | 230 |
| | — |
| | 542 |
| Total revenues | 68,400 |
| | 42,562 |
| | 35,273 |
| | 271 |
| | (21,429 | ) | | 125,077 |
| Adjusted operating income (loss) | 2,243 |
| | 3,158 |
| | 3,000 |
| | (433 | ) | | (342 | ) | | 7,626 |
|
_____________________________________________ | | (1) | Total revenues of the Pharmacy Services segment include approximately $2.6 billion and $2.9 billion of retail co-payments for the three months ended June 30, 2020 and 2019, respectively, and $6.0 billion and $6.2 billion of retail co-payments for the six months ended June 30, 2020 and 2019, respectively. |
The following are reconciliations of consolidated operating income to adjusted operating income for the three and six months ended June 30, 2020 and 2019: | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | In millions | 2020 | | 2019 | | 2020 | | 2019 | Operating income (GAAP measure) | $ | 4,680 |
| | $ | 3,332 |
| | $ | 8,138 |
| | $ | 6,022 |
| Amortization of intangible assets (1) | 578 |
| | 593 |
| | 1,164 |
| | 1,215 |
| Acquisition-related integration costs (2) | 70 |
| | 106 |
| | 139 |
| | 254 |
| Store rationalization charge (3) | — |
| | — |
| | — |
| | 135 |
| Adjusted operating income | $ | 5,328 |
| | $ | 4,031 |
| | $ | 9,441 |
| | $ | 7,626 |
|
_____________________________________________ | | (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 unaudited GAAP condensed consolidated 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 six months ended June 30, 2020 and 2019, acquisition-related integration costs relate to the Aetna Acquisition. The acquisition-related integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within the Corporate/Other segment. |
(3) During the six months ended June 30, 2019, the store rationalization charge primarily relates to operating lease right-of-use asset impairment charges in connection with the planned closure of 46 underperforming retail pharmacy stores in the second quarter of 2019. The store rationalization charge is reflected in the Company’s unaudited GAAP condensed consolidated statement of operations in operating expenses within the Retail/LTC segment.
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