UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 001-01011

CVS HEALTH CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
One CVS Drive, Woonsocket, Rhode Island
(Address of principal executive offices)

05-0494040
(I.R.S. Employer Identification No.)
02895
(Zip Code)

(401) 765-1500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, par value $0.01 per share
Title of each class

New York Stock Exchange
Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ⌧

Accelerated filer

Non-accelerated filer
(Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $87,242,957,318 as of June 30, 2014, based on the closing price of the common stock on the New York Stock Exchange. For purposes of this calculation, only executive officers and directors are deemed to be the affiliates of the registrant.
As of February 3, 2015, the registrant had 1,125,252,739 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Filings made by companies with the Securities and Exchange Commission sometimes “incorporate information by reference.” This means that the company is referring you to information that was previously filed or is to be filed with the SEC, and this information is considered to be part of the filing you are reading.
The following materials are incorporated by reference into this Form 10-K:
·
Portions of our Annual Report to Stockholders for the fiscal year ended December 31, 2014 are incorporated by reference in our response to Items
7, 8 and 9 of Part II.
·
Information contained in our Proxy Statement for the 2015 Annual Meeting of Stockholders is incorporated by reference in our response to Items
10 through 14 of Part III.

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TABLE OF CONTENTS

Page

Part I
Item 1:
Business
Item 1A:
Risk Factors
Unresolved Staff Comments
Item 1B:
Item 2:
Properties
Item 3:
Legal Proceedings
Mine Safety Disclosures
Item 4:
Executive Officers of the Registrant
Part II
Item 5:
Item 6:
Item 7:
Item 7A:
Item 8:
Item 9:
Item 9A:
Item 9B:
Part III
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:

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15
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services

Part IV
Item 15:
Exhibits and Financial Statement Schedules
Signatures

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PART I
Item 1. Business
Overview
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.
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 our 7,800 retail pharmacies, more than 900 walk-in medical clinics, a leading pharmacy benefits manager with more than 65 million plan members, and expanding specialty pharmacy services, we enable people, businesses, and communities to manage health in more 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, or by expanding access to high-quality, low-cost care at CVS/minuteclinic.
We currently have three reportable segments: Pharmacy Services, Retail Pharmacy and Corporate.
Pharmacy Services Segment
The Pharmacy Services Segment provides a full range of pharmacy benefit management (“PBM”) services, as described more fully below, to our clients consisting primarily of employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, plans offered on the public and private exchanges, other sponsors of health benefit plans and individuals throughout the United States. 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. The Pharmacy Services Segment operates under the CVS/caremarkTM Pharmacy Services, Caremark®, CarePlus
CVS/pharmacy®, RxAmerica®, Accordant®, SilverScript®, Coram® CVS/specialtyTM, NovoLogix® and Navarro® Health Services names. As of December 31, 2014, the Pharmacy Services Segment operated 27 retail specialty pharmacy stores, 11 specialty mail order pharmacies and four mail order dispensing pharmacies, and 86 branches, including approximately 70 ambulatory infusion suites, and six centers of excellence for infusion and enteral services, located in 40 states, Puerto Rico and the District of Columbia. During the year ended December 31, 2014, our PBM filled or managed approximately 932 million prescriptions.
Pharmacy Services Business Strategy - Our business strategy centers on providing innovative pharmaceutical solutions and quality client service in order to help improve clinical outcomes for our clients’ health benefit plan members while assisting our clients and their plan members in better managing overall health care costs. Our goal is to produce superior results for our clients and their plan members by leveraging our expertise in core PBM 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.
In addition, as a fully integrated pharmacy services company, we are able to offer our clients and their plan members a variety of programs and plan designs that benefit from our integrated systems and the ability of our more than 26,000 pharmacists, nurses, nurse practitioners and physician assistants to interact personally with the many plan members who shop our stores every day. Through our multiple member touch points (retail stores, mail order, infusion and specialty pharmacies, retail medical clinics, call centers, proprietary websites and mobile devices), we seek to engage plan members in behaviors that help lower cost and improve health care outcomes. Examples of these programs and services include: Maintenance Choice®, a program where eligible client plan members can elect to fill their maintenance prescriptions at our retail pharmacy stores for the same price as mail order; Pharmacy Advisor®, a program that facilitates face-to-face and telephone counseling by our pharmacists to help participating plan members with certain chronic diseases, such as diabetes and cardiovascular conditions, to identify gaps in care, adhere to their prescribed medications and manage their health conditions; compliance and persistency programs designed to help ensure that patients take their medications in the proper manner; enhanced disease management programs that are targeted at managing chronic disease states; and an ExtraCare® Health Card program which offers discounts to eligible plan members on certain over-the-counter health care products sold in our CVS/pharmacy stores. In addition,
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MinuteClinic® is an important and differentiated part of the enterprise that offers certain capabilities available to PBM members. Ways we are working with our clients include partnerships with health plan clients sponsoring patient centered medical homes, biometric screening opportunities, closing gaps in care, plan sponsored co-pay reductions to encourage use of
MinuteClinic and onsite clinics at client corporate headquarters.
PBM Services - Our PBM services are described more fully below.
Plan Design Offerings and Administration - Our clients sponsor pharmacy benefit plans that facilitate the ability of eligible members in these plans to receive prescribed medications. We assist our clients in designing pharmacy benefit plans that help minimize the costs to the client while prioritizing the welfare and safety of the clients’ members and helping improve health outcomes. We also administer these benefit plans selected by our clients and assist them in monitoring the effectiveness of these plans through frequent, informal communications as well as through a formal annual client review.
We make recommendations to our clients helping them to design benefit plans promoting the use of the lower cost, clinically appropriate drug. We help our clients control costs by offering plan designs that encourage the use of generic equivalents of brand name drugs when such equivalents are available. Our clients also have the option, through plan design, to further lower their pharmacy benefit plan costs by setting different member payment levels for different products on their drug lists or
“formularies”.
Formulary Management - We utilize an independent panel of doctors, pharmacists and other medical experts, referred to as our
Pharmacy and Therapeutics Committee, to select drugs that meet the highest standards of safety and efficacy for inclusion on our formularies. Our formularies provide recommended products in numerous drug classes to ensure member access to clinically appropriate alternatives under the client’s pharmacy benefit plan. To help improve clinical outcomes for members and clients, we conduct ongoing, independent reviews of all drugs, including, but not limited to, those appearing on the formularies and generic equivalent products, as well as our clinical programs. Many of our clients choose to adopt our template formulary offerings as part of their plan design.
Medicare Part D Services - We participate in the administration of the drug benefit added to the Medicare program under
Part D of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) through the provision of
PBM services to our health plan clients and other clients that have qualified as Medicare Part D prescription drug plans
(“PDP”) and by offering Medicare Part D pharmacy benefits through SilverScript, a PDP approved by the Centers for Medicare and Medicaid Services (“CMS”). We also assist employer, union and other health plan clients that qualify for the retiree drug subsidy made available under the MMA by collecting and submitting eligibility and/or drug cost data to CMS in order for them to obtain the subsidy.
Mail Order Pharmacy - As of December 31, 2014, we operated four mail order dispensing pharmacies in the United States.
Plan members or their prescribers submit prescriptions or refill requests, primarily for maintenance medications, to these pharmacies via mail, telephone, fax, e-prescribing or the Internet. We also operate a network of smaller mail order specialty pharmacies described below. Our staff pharmacists review mail order prescriptions and refill requests with the assistance of our prescription management systems. This review may involve communications with the prescriber and, with the prescriber’s approval when required, can result in generic substitution, therapeutic interchange or other actions designed to help reduce cost and/or improve quality of treatment. These pharmacies have been awarded Mail Order Pharmacy accreditation from Utilization
Review Accreditation Commission (“URAC”), a Washington DC-based health care accrediting organization that establishes quality standards for the health care industry.
Specialty Pharmacy - Our specialty pharmacies support individuals that require complex and expensive drug therapies. As of
December 31, 2014, our specialty pharmacy operations included 11 specialty mail order pharmacies located throughout the
United States that are used for delivery of advanced medications to individuals with chronic or genetic diseases and disorders.
Substantially all of these pharmacies have been accredited by the Joint Commission, which is an independent, not-for-profit organization that accredits and certifies more than 20,500 health care organizations and programs in the United States. These pharmacies have also been awarded Specialty Pharmacy accreditation from URAC. As of December 31, 2014, the Company operated a network of 27 retail specialty pharmacy stores, which operate under the CarePlus CVS/pharmacy® and Navarro®
Health Services names. These stores average 2,600 square feet in size and sell prescription drugs and a limited assortment of front store items such as alternative medications, homeopathic remedies and vitamins. In January 2014, we enhanced our offerings of specialty infusion services and began offering enteral nutrition services through Coram LLC and its subsidiaries
(collectively, “Coram”), which we acquired on January 16, 2014. Coram is one of the nation’s largest providers of comprehensive infusion services, caring for approximately 240,000 patients annually. In May 2014, we implemented Specialty
ConnectTM, which integrates our specialty pharmacy mail and retail capabilities, providing members with disease-state specific counseling from our experienced specialty pharmacists and the choice to bring their specialty prescriptions to a CVS/pharmacy
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location. Whether submitted through our mail order pharmacy or at 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.
Retail Pharmacy Network Management - We maintain a national network of more than 68,000 retail pharmacies, consisting of approximately 41,000 chain pharmacies (which includes our CVS/pharmacy stores) and 27,000 independent pharmacies, in the
United States, Puerto Rico, District of Columbia, Guam and the Virgin Islands. When a customer fills a prescription in a retail pharmacy, the pharmacy sends prescription data electronically to us from the point-of-sale. This data interfaces with our proprietary prescription management systems, which verify relevant plan member data and eligibility, while also performing a drug utilization review to help evaluate clinical appropriateness and safety and confirming that the pharmacy will receive payment for the prescription.
Prescription Management Systems - We dispense prescription drugs both directly, through one of our mail order or specialty pharmacies, or through a network of retail pharmacies, described above. All prescriptions processed through our systems, whether they are filled through one of our mail order dispensing pharmacies or through a pharmacy in our retail network, are analyzed, processed and documented by our proprietary prescription management systems. These systems assist staff and network pharmacists in processing prescriptions by automating review of various items, including, but not limited to, plan eligibility, early refills, duplicate dispensing, appropriateness of dosage, drug interactions or allergies, over-utilization and potential fraud.
Clinical Services - We offer multiple clinical programs and services to help clients manage overall pharmacy and health care costs in a clinically appropriate manner. Our programs are primarily designed to promote safety, and to help target inappropriate utilization and non-adherence to medication, each of which may result in adverse medical events that negatively impact member health and client pharmacy and medical spend. In this regard, we offer various utilization management, medication management, quality assurance, adherence and counseling programs to complement the client’s plan design and clinical strategies.
Disease Management Programs - Our clinical services utilize advanced protocols and offer clients convenience in working with health care providers and other third parties. Our Accordant® programs include integrated rare disease management programs, which cover diseases such as rheumatoid arthritis, Parkinson’s disease, seizure disorders and multiple sclerosis. The majority of these integrated programs are accredited by the National Committee for Quality Assurance (“NCQA”), a private, not-for-profit organization that evaluates, accredits and certifies a wide range of health care organizations. They have also been awarded Case Management Accreditation from URAC.
Medical Pharmacy Management - We offer a technology platform that helps identify and capture cost savings opportunities for specialty drugs billed under the medical benefit, and that helps ensure appropriate clinical use of these drugs.
Pharmacy Services Information Systems - We currently operate a small number of claim adjudication platforms to support our Pharmacy Services Segment. However, the majority of our clients have migrated to one destination platform. These information systems incorporate architecture that centralizes the data generated from filling mail order prescriptions, adjudicating retail pharmacy claims and fulfilling other services we provide to PBM clients.
Pharmacy Services Clients - Our clients are primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans and plans offered on public and private exchanges, other sponsors of health benefit plans and individuals located throughout the United States. We provide pharmaceuticals to eligible members in benefit plans maintained by our clients and utilize our information systems, among other things, to help perform safety checks, drug interaction screening and identify opportunities for generic substitution. We generate substantially all of our Pharmacy Services
Segment net revenue from dispensing prescription drugs to eligible members in benefit plans maintained by our clients. No single PBM client accounts for 10% or more of our annual consolidated revenues.
Pharmacy Services Seasonality - The majority of our Pharmacy Services Segment revenues are not seasonal in nature.
However, our quarterly earnings and operating cash flows are impacted by the Medicare Part D benefit design and changes in the composition of our membership. The Medicare Part D standard benefit design results in coverage that varies with a member's cumulative annual out-of-pocket costs. The benefit design generally results in plan sponsors sharing a greater portion of the responsibility for total prescription drug costs in the early part of the year. As a result, the PDP plan pay percentage or benefit ratio generally decreases and operating profit generally increases as the year progresses.

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Pharmacy Services Competition - We believe the primary competitive factors in the industry include: (i) the ability to negotiate favorable discounts from drug manufacturers; (ii) the ability to negotiate favorable discounts from, and access to, retail pharmacy networks; (iii) responsiveness to clients’ needs; (iv) the ability to identify and apply effective cost management programs utilizing clinical strategies; (v) the ability to develop and utilize preferred formularies; (vi) the ability to market PBM products and services; (vii) the commitment to provide flexible, clinically-oriented services to clients; (viii) the quality, scope and costs of products and services offered to clients and their members, and (ix) operational excellence in delivering services.
The Pharmacy Services Segment has a significant number of competitors offering PBM services (e.g., Express Scripts,
OptumRx, Catamaran, Prime Therapeutics, MedImpact and Humana) including large, national PBM companies, PBMs owned by large national health plans and smaller standalone PBMs.
Retail Pharmacy Segment
As of December 31, 2014, the Retail Pharmacy Segment included 7,822 retail drugstores, of which 7,765 operated a pharmacy, our online retail pharmacy websites, CVS.com®, Navarro.comTM and Onofre.com.brTM, 17 onsite pharmacy stores and our retail health care clinics. The retail drugstores are located in 44 states, the District of Columbia, Puerto Rico and Brazil operating primarily under the CVS/pharmacy®, CVS®, Longs Drugs®, Navarro Discount Pharmacy® and Drogaria OnofreTM names. We currently operate in 98 of the top 100 United States drugstore markets and hold the number one or number two market share in
88 of these markets. The Retail Pharmacy Segment sells prescription drugs and a wide assortment of over-the-counter and personal care products, beauty and cosmetic products, and general merchandise, which we refer to as “front store” products.
Existing retail stores range in size from approximately 5,000 to 30,000 square feet, although most new stores range in size from approximately 8,000 to 13,000 square feet and typically include a drive-thru pharmacy. During 2014, we filled 756 million retail prescriptions (counting 90-day prescriptions as one prescription), or approximately 21% of the United States retail pharmacy market. In 2014, our retail drugstores became the first pharmacies in the nation to receive Community Pharmacy
Accreditation from URAC.
Retail Pharmacy Business Strategy - Our integrated pharmacy services model has enhanced the ability of our retail pharmacy stores to expand customer access to care while helping to lower overall health care costs and improve health outcomes. In that regard, the role of our retail pharmacist is shifting 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 recommending more cost effective drug therapies. In addition, personalization is central to our retail strategy. Our customerdriven personalization through ExtraCare®, ExtraCare Beauty Club® and MyWeeklyAdTM are designed to help us connect directly with individual consumers to deliver a personalized experience. We also provide a broad assortment of quality merchandise at competitive prices using a retail format that emphasizes service, innovation and convenience. One of the keys to our strategy is technology, which allows us to focus on constantly improving service and exploring ways to provide more personalized product offerings and services. We believe that continuing to be the first to market with new and unique products and services, using innovative marketing and adjusting our mix of merchandise to match our customers’ needs and preferences is very important to our ability to continue to improve customer satisfaction.
Retail Pharmacy Products and Services - A typical retail store sells prescription drugs and a wide assortment of high-quality, nationally advertised brand name and proprietary brand merchandise. Front store categories include over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, photo finishing services, seasonal merchandise and greeting cards. We purchase our merchandise from numerous manufacturers and distributors. We believe that competitive sources are readily available for substantially all of the products we carry and the loss of any one supplier would not likely have a material effect on the business.
Retail Pharmacy Segment net revenues by major product group are as follows:
Percentage of Net Revenues(1)
2014

Prescription drugs
Over-the-counter and personal care
Beauty/cosmetics
General merchandise and other

(1)

2013

70.7%
11.0
4.7
13.6
100.0%

Percentages are estimates based on store point-of-sale data.

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2012

69.5%
11.0
4.9
14.6
100.0%

68.8%
10.9
5.0
15.3
100.0%

Pharmacy - Pharmacy revenues represented more than two-thirds of Retail Pharmacy revenues in each of 2014, 2013 and 2012.
We believe that our pharmacy operations will continue to represent a critical part of our business due to favorable industry trends (e.g., an aging American population consuming a greater number of prescription drugs, pharmaceuticals being used more often as the first line of defense for managing illness, and the impact of expanded health insurance coverage through the Patient
Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, “ACA”), the introduction of new pharmaceutical products, and Medicare Part D. We believe our pharmacy business benefits from our investment in both people and technology, as well as our innovative partnerships with health plans, PBMs and providers. Given the nature of prescriptions, people want their prescriptions filled accurately by professional pharmacists using the latest tools and technology, and ready when promised. Consumers need medication management programs and better information to help them get the most out of their health care dollars. To assist our customers with these needs, we have introduced integrated pharmacy health care services that provide an earlier, easier and more effective approach to engaging them in behaviors that can help lower costs, improve health, and save lives. Examples include: our Patient Care Initiative, an enhanced medication adherence program; Maintenance Choice®, a program where eligible client plan members can elect to fill their maintenance prescriptions at our retail pharmacy stores for the same price as mail order; and Pharmacy Advisor®, our program that facilitates pharmacist counseling, both face-to-face and over the telephone, to help participating plan members with certain chronic diseases, such as diabetes and cardiovascular conditions, to identify gaps in care, adhere to their prescribed medications and manage their health conditions; as well as Specialty ConnectTM, our integrated specialty pharmacy offering that began in 2014 which integrates specialty mail and retail capabilities, providing members with disease-state specific counseling from our experienced specialty pharmacists and the choice to bring their specialty prescriptions to a CVS/pharmacy location or submit it through our specialty mail order pharmacies. Maintenance Choice, Pharmacy Advisor and Specialty Connect are all programs that demonstrate our ability to enhance the customer experience through our integrated enterprise products and services.
Further evidencing our belief in the importance of pharmacy service is our continuing investment in technology, such as our
Drug Utilization Review system that helps check for harmful interactions between prescription drugs and patient identified over-the-counter products, vitamins and herbal remedies; our proprietary pharmacy system that integrates our product delivery and clinical workflows as well as advanced patient safety functionality such as drug utilization review, Rx Connect; our prescription refill program, ReadyFill®; and our online retail businesses, CVS.com, Navarro.com and Onofre.com.br.
Front Store - Front store revenues benefited from our strategy to be the first to market with new and unique products and services, using innovative personalized marketing and adjusting our mix of merchandise to match our customers’ needs and preferences. A key component of our front store strategy is our ExtraCare® card program, which is helping us continue to build our loyal customer base. The ExtraCare program is one of the largest and most successful retail loyalty programs in the United
States. The ExtraCare program allows us to balance our marketing efforts so we can reward our best customers by providing them automatic sale prices, customized coupons, ExtraBucks® rewards and other benefits. Similar to ExtraCare is the Beauty
Club, another program that rewards our loyal customers with sales prices and customized coupons. We continue to launch new and exclusive brands like Salma Hayek NuanceTM, MakeUp AcademyTM and NYX® to create unmatched offerings in beauty.
Another component of our front store strategy is our unique product offerings, which include a full range of high-quality
CVS/pharmacy® and proprietary brand products that are only available through CVS/pharmacy stores. We currently carry over
5,200 CVS/pharmacy and proprietary brand products, which accounted for approximately 19.5% of our front store revenues during 2014. These products include expanded offerings of healthy foods and vitamins. Furthermore, we are tailoring certain groups of stores, such as suburban area stores, to better meet the needs of our customers.
MinuteClinic - As of December 31, 2014, we operated 971 MinuteClinic® locations in 31 states and the District of Columbia, of which 963 were located in CVS/pharmacy stores. We opened 175 new clinics during 2014. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally established guidelines to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions, provide wellness services and deliver vaccinations. Insurers value MinuteClinic because it provides convenient, high-quality, cost-effective care, in many cases offering an attractive alternative to more expensive sites of care. As a result, visits paid for by employers, health insurers or other third parties accounted for approximately 85% of MinuteClinic’s total revenues in 2014. MinuteClinic is collaborating with our Pharmacy
Services Segment to help meet the needs of CVS/caremark’s client plan members by offering programs that can improve member health and lower costs. MinuteClinic is now affiliated with 49 major health systems and continues to build a platform that supports primary care.
Onsite Pharmacies - We also operate a limited number of small pharmacies located at client sites under the CarePlus®, CarePlus
CVS/pharmacy®, CVS/pharmacy® or Wellness Works Pharmacy name, which provide certain health plan members and customers with a convenient alternative for filling their prescriptions.
Retail Pharmacy Store Development - The addition of new stores has played, and will continue to play, a key role in our continued growth and success. Our store development program focuses on three areas: entering new markets, adding stores within existing markets and relocating stores to more convenient sites. During 2014, we opened 151 new retail pharmacy
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stores, acquired 33 stores, relocated 60 stores and closed 22 stores. During the last five years, we opened more than 1,200 new and relocated stores, and acquired 125 stores. During 2015, we expect square footage growth of approximately 2%. We believe that continuing to grow our store base and locating stores in more accessible markets are essential components to compete effectively in the current health care environment. As a result, we believe that our store development program is an integral part of our ability to maintain our leadership position given the changing health care landscape and to meet the increasing needs of our customers.
Retail Pharmacy Information Systems - We have continued to invest in information systems to enable us to deliver exceptional customer service, enhance safety and quality, and expand our patient care services while lowering operating costs.
Leveraging our retail pharmacy fulfillment system, RxConnect and our proprietary WeCARE Workflow, supports our pharmacy teams by prioritizing work to meet customer expectations, facilitating prescriber outreach, and seamlessly integrating our clinical programs. This solution delivers improved efficiency and enhances the customer experience, as well as providing a framework to accommodate the evolution of pharmacy practice and the expansion of our clinical programs. Our Health
Engagement EngineTM technology and proprietary clinical algorithms enable us to help identify opportunities for our pharmacists to deliver face-to-face counseling regarding patient health and safety matters, including adherence issues, gaps in care and management of certain chronic health conditions. Our digital strategy empowers the consumer to navigate their pharmacy experience and manage their condition through our on-line and mobile tools that offer utility and convenience. This includes the ability to schedule an appointment at MinuteClinic, get next-in line alerts or health reminders and appointment updates via the phone. Our integrated digital offerings help patients seamlessly manage retail, mail and specialty prescriptions dispensed by a CVS/pharmacy location and enhance front store personalization to drive value for customers. We experienced strong adoption of our digital solutions with our mobile app receiving critical acclaim for ease of use and our text message program experiencing significant growth.
Retail Pharmacy Customers - Managed care organizations, government-funded health care programs (including state
Medicaid plans and Medicare Part D drug plans), commercial employers and other third party plans accounted for 98.6% of our
2014 pharmacy revenues. The loss of any one payor should not have a material effect on our business. No single retail payor accounts for 10% or more of our annual consolidated revenues. However, the success of our retail drugstore business is dependent upon our ability to establish and maintain contractual relationships with PBMs and other payors on acceptable terms.
Retail Pharmacy Seasonality - The majority of our revenues, particularly pharmacy revenues, are generally not seasonal in nature. However, front store revenues tend to be higher during the December holiday season. In addition, both pharmacy and front store revenues are affected by the timing and severity of the cough, cold and flu season. For additional information, we refer you to “Risks related to the seasonality of our business” in Item 1A. Risk Factors.
Retail Pharmacy Competition - The retail drugstore business is highly competitive. We believe that we compete principally on the basis of: (i) store location and convenience, (ii) customer service and satisfaction, (iii) product selection and variety and
(iv) price. In the markets we serve, we compete with other drugstore chains (e.g., Walgreens and Rite Aid), supermarkets, discount retailers (e.g., Wal-Mart and Target), independent pharmacies, restrictive pharmacy networks, membership clubs, Internet companies, and retail health clinics, as well as other mail order pharmacies and PBMs.
Corporate Segment
Our Corporate Segment provides management and administrative services to support the overall operations of the Company.
The Corporate Segment consists of certain aspects of our executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance departments.
Generic Sourcing Venture
In July 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.
Red Oak is a variable interest entity. 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 Pharmacy Segment. Cardinal is required to pay the Company 39 quarterly
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payments of $25.6 million which commenced in October 2014 and, if certain milestones are achieved, it will pay additional predetermined quarterly amounts to the Company beginning in the third quarter of 2015.
Working Capital Practices
We fund the growth of our business through a combination of cash flow from operations, commercial paper, proceeds from sale-leaseback transactions and long-term borrowings. For additional information on our working capital practices, we refer you to the caption “Management’s Discussion and Analysis - Liquidity and Capital Resources” in our Annual Report to
Stockholders for the year ended December 31, 2014, which section is incorporated by reference herein. The majority of our non-pharmacy revenues are paid in cash, or with debit or credit cards, while managed care and other third party insurance programs, which typically settle in less than 30 days, represented approximately 99.5% of our consolidated pharmacy revenues in 2014, including both Retail Pharmacy and Pharmacy Services. The remainder of consolidated pharmacy revenues are paid in cash, or with debit or credit cards. Our customer returns are not significant.
Colleague Development
As of December 31, 2014, we employed approximately 217,800 colleagues, which included more than 26,000 pharmacists, nurses, nurse practitioners and physician assistants. The total included approximately 80,000 part-time colleagues who work less than 30 hours per week. To deliver the highest levels of service to our customers, we devote considerable time and attention to our people and service standards. We emphasize attracting and training knowledgeable, friendly and helpful associates to work in our organization.
Intellectual Property
We have registered and/or applied to register a variety of our trademarks and service marks used throughout our business, as well as domain names, and rely on a combination of copyright, patent, trademark and trade secret laws, in addition to contractual restrictions, to establish and protect our proprietary rights. We regard our intellectual property as having significant value in our Pharmacy Services and Retail Pharmacy segments. We are not aware of any facts that could materially impact our continuing use of any of our intellectual property.
Government Regulation
Overview - Much of our business is subject to federal and state laws and regulations. In addition, many of our PBM clients and our payors in the Retail Pharmacy Segment, including insurers and managed care organizations (“MCOs”), are themselves subject to extensive regulations that affect the design and implementation of prescription drug benefit plans that they sponsor.
The application of these complex legal and regulatory requirements to the detailed operation of our business creates areas of uncertainty. Further, there are numerous proposed health care laws and regulations at the federal and state levels, some of which could adversely affect our business if they are enacted. We are unable to predict what federal or state legislation or regulatory initiatives may be enacted in the future relating to our business or the health care industry in general, or what effect any such legislation or regulations might have on our business. Any failure or alleged failure to comply with applicable laws and regulations as summarized below, or any adverse applications of, or changes in, the laws and regulations affecting our business, could have a material adverse effect on our operating results and/or financial condition. See Item 3, “Legal
Proceedings” for further information.
Although we believe that we are in material compliance with existing laws and regulations applicable to our various business lines, we cannot give any assurances that our business, financial condition and results of operations will not be materially adversely affected, or that we will not be required to materially change our 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, including the laws and regulations described in this Government Regulation section, as they may relate to our business, the pharmacy services, retail pharmacy or retail clinic industry or to the health care industry generally; (iii) pending or future federal or state governmental investigations of our business or the pharmacy services, retail pharmacy or retail clinic industry or of the health care industry generally; (iv) institution of government enforcement actions against us; (v) adverse developments in any pending qui tam lawsuit against us, whether sealed or unsealed, or in any future qui tam lawsuit that may be filed against us; or
(vi) adverse developments in other pending or future legal proceedings against us or affecting the pharmacy services, retail pharmacy or retail clinic industry or the health care industry generally.

9

Laws and Regulations Related to Each Operating Segment of Our Business
Laws Related to Reimbursement by Government Programs - We are subject to various state and federal laws concerning our submission of claims for reimbursement by Medicare, Medicaid and other government-sponsored health care programs.
Potential sanctions for violating these laws include recoupment or reduction of government reimbursement amounts, civil penalties, multiples damages, and exclusion from participation in government health care programs. Such laws include the federal False Claims Act (“FCA”), various state false claims acts, the federal “Stark Law” and related state laws. In particular, the FCA prohibits intentionally submitting, conspiring to submit, or causing to be submitted, false claims, records, or statements to the federal government, or intentionally failing to return overpayments, in connection with reimbursement by federal government programs. As part of ACA, the federal Anti-Kickback Statute was amended in 2010 to provide that any claim for government reimbursement violates the FCA where it results from a violation of the Anti-Kickback Statute. Most states have enacted false claims laws analogous to the FCA, and both federal and state false claims laws permit private individuals to file qui tam or “whistleblower” lawsuits on behalf of the federal or state government. Further, the federal Stark
Law generally prohibits physicians from referring Medicare or Medicaid beneficiaries for certain services, including outpatient prescription drugs, to any entity with which the physician, or an immediate family member of the physician, has a financial relationship. The Stark Law further prohibits the entity receiving a prohibited referral from presenting a claim for reimbursement by Medicare or Medicaid for services furnished pursuant to the prohibited referral. Various states have enacted similar laws.
Anti-Remuneration Laws - Federal law prohibits, among other things, an entity from knowingly and willfully offering, paying, soliciting or receiving, subject to certain exceptions and “safe harbors,” any remuneration to induce the referral of individuals or the purchase, lease or order of items or services for which payment may be made under Medicare, Medicaid or certain other federal health care programs. A number of states have similar laws, some of which are not limited to services paid for with government funds. Sanctions for violating these federal and state anti-remuneration laws may include imprisonment, criminal and civil fines, and exclusion from participation in Medicare, Medicaid and other government-sponsored health care programs. Antitrust and Unfair Competition - The Federal Trade Commission (“FTC”) has authority under Section 5 of the Federal
Trade Commission Act (“FTCA”) to investigate and prosecute practices that are “unfair trade practices” or “unfair methods of competition.” Numerous lawsuits have been filed throughout the United States against pharmaceutical manufacturers, retail pharmacies and/or PBMs under various state and federal antitrust and unfair competition laws challenging, among other things:
(i) brand drug pricing practices of pharmaceutical manufacturers, (ii) the maintenance of retail pharmacy networks by PBMs, and (iii) various other business practices of PBMs and retail pharmacies. To the extent that we appear to have actual or potential market power in a relevant market or CVS/pharmacy plays a unique or expanded role in a PBM product offering, our business arrangements and uses of confidential information may be subject to heightened scrutiny from an anti-competitive perspective and possible challenge by state or federal regulators or private parties.
Privacy and Confidentiality Requirements - Many of our activities involve the receipt, use and disclosure by us of personally identifiable information (“PII”) as permitted in accordance with applicable federal and state privacy and data security laws, which require organizations to provide appropriate privacy and security safeguards for such information. In addition to PII, we use and disclose de-identified data for analytical and other purposes when permitted. Additionally, there are industry standards for handling credit card data known as the Payment Card Industry Data Security Standard, which are a set of requirements designed to help ensure that entities that process, store or transmit credit card information maintain a secure environment.
Certain states have recently incorporated these requirements into state laws.
The federal Health Insurance Portability and Accountability Act of 1996 and the regulations issued thereunder (collectively,
“HIPAA”) impose extensive requirements on the way in which health plans, health care providers, health care clearinghouses
(known as “covered entities”) and their business associates use, disclose and safeguard protected health information (“PHI”).
Criminal penalties and civil sanctions may be imposed for failing to comply with HIPAA standards. The Health Information
Technology for Economic and Clinical Health Act (the “HITECH Act”), enacted as part of the American Recovery and
Reinvestment Act of 2009, amended HIPAA to impose additional restrictions on third-party funded communications using PHI and the receipt of remuneration in exchange for PHI. It also extended HIPAA privacy and security requirements and penalties directly to business associates. In addition to HIPAA, state health privacy laws apply to the extent they are more protective of individual privacy than is HIPAA.
Finally, the Health Insurance Marketplaces (formerly known as the “exchanges”) are required to adhere to privacy and security standards with respect to PII, and to impose privacy and security standards that are at least as protective of PII as those the
Health Insurance Marketplace has implemented for itself or non-Health Insurance Marketplace entities, which include insurers
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offering plans through the Health Insurance Marketplaces and their designated downstream entities, including PBMs and other business associates. These standards may differ from, and be more stringent than, HIPAA.
Consumer Protection Laws - The federal government has many consumer protection laws, such as the FTCA, the Federal
Postal Service Act and the FTC’s Telemarketing Sales Rule. Most states also have similar consumer protection laws. These laws have been the basis for investigations, lawsuits and multi-state settlements relating to, among other matters, the marketing of loyalty programs and health care services, pricing accuracy, expired front store products, financial incentives provided by drug manufacturers to pharmacies in connection with therapeutic interchange programs and disclosures related to how personal data is used and protected.
Government Agreements and Mandates - The Company and/or its various affiliates are subject to certain consent decrees, settlement agreements, and corporate integrity agreements with various federal, state and local authorities relating to such matters as privacy practices, pseudoephedrine products, Medicare Part D prescription drug plans, expired products, environmental and safety matters, marketing and advertising practices, PBM and pharmacy operations and various other business practices. These agreements contain certain ongoing reporting, monitoring or other compliance requirements for the
Company. Failure to meet the Company’s obligations under these agreements could result in civil or criminal remedies, financial penalties, administrative remedies, and/or exclusion from participation in federal health care programs.
Environmental and Safety Regulation - Our business is subject to various federal, state and local laws, regulations and other requirements pertaining to protection of the environment, public health and employee safety, including, for example, regulations governing the management of hazardous substances, the cleaning up of contaminated sites, and the maintenance of safe working conditions in our stores, distribution centers and other facilities. Governmental agencies on the federal, state and local levels have, in recent years, increasingly focused on the retail and healthcare sectors’ compliance with such laws and regulations, and have at times pursued enforcement activities. Any failure to comply with these regulations could result in fines or other sanctions by government authorities.
Health Reform Legislation - Passed in 2010, ACA affects virtually every aspect of health care in the country. In addition to establishing the framework for every individual to have health coverage, ACA enacted a number of significant health care reforms. Many of these reforms affect the coverage and plan designs that are provided by our health plan clients. As a result, these reforms impact a number of our services and business practices. Given that many of the regulations implementing ACA are still being finalized and that sub-regulatory guidance is still being issued, the full impact of ACA on our Company is uncertain. Pharmacy and Professional Licensure and Regulation - We are subject to a variety of intersecting state and federal statutes and regulations that govern the wholesale distribution of drugs; operation of retail, specialty, infusion and mail order pharmacies; licensure of facilities and professionals, including pharmacists, technicians and nurses; registration of facilities with the United States Drug Enforcement Administration (“DEA”) and analogous state agencies that regulate controlled substances; packaging, storing and shipping of pharmaceuticals; repackaging of drug products; labeling, medication guides and other consumer disclosures; interactions with prescribers and healthcare professionals; compounding of prescription medications; dispensing of controlled and non-controlled substances; counseling of patients; transfers of prescriptions; advertisement of prescription products and pharmacy services; security; inventory control; recordkeeping; reporting to Boards of Pharmacy, the United States Food and Drug Administration (“FDA”), the Consumer Product Safety Commission, the DEA and related state agencies; and other elements of pharmacy practice. Pharmacies are highly regulated and have contact with a wide variety of local, state and federal agencies, with various powers to investigate, audit or solicit information, including
Boards of Pharmacy and Nursing, the DEA, the FDA, the United States Department of Justice, the United States Department of
Health and Human Services (“HHS”) and others. Many of these agencies have broad enforcement powers, conduct audits on a regular basis, can impose substantial fines and penalties, and may revoke the license, registration or program enrollment of a facility or professional.
Telemarketing and Other Outbound Contacts - Certain federal and state laws, such as the Telephone Consumer Protection
Act, give the FTC, Federal Communications Commission (“FCC”) and state attorneys general the ability to regulate, and bring enforcement actions relating to, telemarketing practices and certain automated outbound contacts such as phone calls, texts or emails. Under certain circumstances, these laws may provide consumers with a private right of action. Violations of these laws could result in substantial statutory penalties and other sanctions.

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Laws and Regulations Related to Our Pharmacy Services Segment
In addition to the laws and regulations discussed above that may affect our business as a whole, we are subject to federal, state and local statutes and regulations governing the operation of our Pharmacy Services Segment specifically. Among these are the following: PBM Laws and Regulation - Legislation seeking to regulate PBM activities in a comprehensive manner has been introduced or enacted in a number of states. This legislation could adversely impact our ability to conduct business on commercially reasonable terms in states where the legislation is in effect.
In addition, certain quasi-regulatory organizations, including the National Association of Boards of Pharmacy and the National
Association of Insurance Commissioners (“NAIC”) have issued model regulations or may propose future regulations concerning PBMs and/or PBM activities. Similarly, credentialing organizations such as the NCQA and URAC may establish voluntary standards regarding PBM or specialty pharmacy activities. While the actions of these quasi-regulatory or standardsetting organizations do not have the force of law, they may influence states to adopt their requirements or recommendations and influence client requirements for PBM or specialty pharmacy services. Moreover, any standards established by these organizations could also impact our health plan clients and/or the services we provide to them.
Medicare Part D - The Medicare Part D program, which makes prescription drug coverage available to eligible Medicare beneficiaries through private insurers, regulates all aspects of the provision of Medicare drug coverage, including enrollment, formularies, pharmacy networks, marketing, and claims processing. The Medicare Part D program has undergone significant legislative and regulatory changes since its inception, and continues to attract a high degree of legislative and regulatory scrutiny. The applicable government rules and regulations continue to evolve. CMS has imposed restrictions and issued new requirements to protect Medicare Part D beneficiaries and has used its authority to sanction and impose civil monetary penalties on plans for non-compliance.
Network Access Legislation - Medicare Part D and a majority of states now have some form of legislation affecting the ability to limit access to a pharmacy provider network or remove network providers. Certain “any willing provider” legislation may require us or our clients to admit a non-participating pharmacy if such pharmacy is willing and able to meet the plan’s price and other applicable terms and conditions for network participation. These laws could negatively impact the services and economic benefits achievable through a limited pharmacy provider network.
Also, a majority of states now have some form of legislation affecting our ability (and the health plans’ ability) to conduct audits of network pharmacies regarding claims submitted to us for payment. These laws could negatively impact our ability to recover overpayments in health care payments stemming from pharmacy audits. Lastly, several states have passed legislation regulating our ability to manage and establish maximum allowable costs (“MAC”). MAC methodology is a common cost management practice used to pay pharmacies for dispensing generic prescription drugs, including private and public payors.
MAC prices specify the allowable reimbursement by a PBM for a particular strength and dosage of a generic drug that is available from multiple manufacturers but sold at different prices. State legislation can regulate the disclosure of MAC prices and MAC price methodologies, the kinds of drugs that a PBM can pay at a MAC price, and the rights of pharmacies to appeal a
MAC price established by a PBM. These laws could negatively impact our ability to establish MAC prices for generic drugs.
Contract Audits - We are subject to audits of many of our contracts, including our PBM client contracts, our PBM rebate contracts, our contracts relating to Medicare Part D and the agreement our pharmacies enter into with payors. Because some of our contracts are with state or federal governments or with entities contracted with state or federal agencies, audits of these agreements are often regulated by the federal or state agencies responsible for administering federal or state benefits programs, including those which operate Medicaid fee for service plans, Managed Medicaid plans, Medicare Part D plans or Medicare
Advantage organizations.
Federal Employee Health Benefits Program - We have a contractual arrangement with the BlueCross BlueShield Association to provide pharmacy services to federal employees, postal workers, annuitants, and their dependents under the Governmentwide Service Benefit Plan, as authorized by the Federal Employees Health Benefits Act (“FEHBA”) and as part of the Federal
Employees Health Benefits Program. This arrangement subjects us to FEHBA, and other federal regulations, such as the
Federal Employees Health Benefits Acquisition Regulation, that otherwise are not applicable to us.
State Insurance Laws - PDPs and our PBM service contracts, including those in which we assume certain risk under performance guarantees or similar arrangements, are generally not subject to insurance regulation by the states. However, as a
PDP, SilverScript is subject to state insurance laws limited to licensure and solvency. In addition, PBM offerings of prescription drug coverage on a capitated basis, or otherwise accepting material financial risk in providing pharmacy benefits, may be
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subject to laws and regulations in various states. Such laws may require that the party at risk become licensed as an insurer, establish reserves or otherwise demonstrate financial viability. Laws that may apply in such cases include insurance laws and laws governing MCOs and limited prepaid health service plans.
Some states have laws that prohibit submitting a false claim or making a false record or statement in order to secure reimbursement from an insurance company. These state laws vary, and violation of them may lead to the imposition of civil or criminal penalties. Additionally, several states have passed legislation governing the prompt payment of claims that requires, among other things, that health plans and payors pay claims within certain prescribed time periods or pay specified interest penalties. These laws vary from state to state in regard to scope, requirements and application.
ERISA Regulation - The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), provides for comprehensive federal regulation of certain employee pension and benefit plans, including private employer and union sponsored health plans and certain other plans that contract with us to provide PBM services. In general, we assist plan sponsors in the administration of the prescription drug portion of their health benefit plans in accordance with the plan designs adopted by the plan sponsors. We do not believe that the conduct of our business subjects us to the fiduciary obligations of
ERISA, except when we have specifically contracted with a plan sponsor to accept limited fiduciary responsibility, such as for the adjudication of initial prescription drug benefit claims and/or the appeals of denied claims under a plan, and with respect to the Contraceptive Coverage Mandate, one of the health reforms included in ACA.
In addition to its fiduciary provisions, ERISA imposes civil and criminal liability on service providers to health plans and certain other persons if certain forms of illegal remuneration are made or received. These provisions of ERISA are broadly written and their application to specific business practices is often uncertain.
Formulary and Plan Design Regulation - A number of government entities regulate the administration of prescription drug benefits. HHS regulates how Medicare Part D formularies are developed and administered, including requiring the inclusion of all drugs in certain classes and categories, subject to limited exceptions. Under ACA, CMS imposes drug coverage requirements for health plans required to cover essential health benefits, including plans offered through federal or state exchanges. Additionally, the NAIC and health care accreditation agencies like the NCQA and URAC have developed model acts and standards for formulary development that are often incorporated into government requirements. Many states regulate the scope of prescription drug coverage, as well as the delivery channels to receive such prescriptions, for insurers, MCOs and
Medicaid managed care plans. The increasing government regulation of formularies could significantly affect our ability to develop and administer formularies, networks and other plan design features on behalf of our insurer, MCO and other clients.
Similarly, some states prohibit health plan sponsors from implementing certain restrictive design features. This regulation could limit or preclude (i) limited networks, (ii) a requirement to use particular providers, (iii) copayment differentials among providers and (iv) formulary tiering practices.
Managed Care Reform - In addition to health reforms enacted by ACA, proposed legislation has been considered at the state level, and legislation has been enacted in several states, aimed primarily at providing additional rights and access to drugs to individuals enrolled in managed care plans. This legislation may impact the design and implementation of prescription drug benefit plans sponsored by our PBM health plan clients and/or the services we provide to them. Both the scope of the managed care reform proposals considered by state legislatures and reforms enacted by states to date vary greatly, and the scope of future legislation that may be enacted is uncertain.
Disease Management Services Regulation - We provide disease management programs to PBM plan members for rare medical conditions and arrange for them to receive disease management programs for common medical conditions. State laws regulate the practice of medicine, the practice of pharmacy and the practice of nursing. Clinicians engaged in a professional practice in connection with the provision of disease management services must satisfy applicable state licensing requirements and must act within their scope of practice.
Third Party Administration and Other State Licensure Laws - Many states have licensure or registration laws governing certain types of administrative organizations, such as preferred provider organizations, third party administrators and companies that provide utilization review services. Several states also have licensure or registration laws governing the organizations that provide or administer consumer card programs (also known as cash card or discount card programs).

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Laws and Regulations Related to Our Retail Pharmacy Segment
In addition to the laws and regulations discussed above that may affect our business as a whole, we are subject to federal, state and local statutes and regulations governing the operation of our Retail Pharmacy Segment specifically. Among these are the following: Specific FDA Regulation - The FDA generally has authority to, among other things, regulate the manufacture, distribution, sale and labeling of many products sold through retail pharmacies, including prescription drugs, over-the-counter medications, medical devices (including mobile medical devices), cosmetics, dietary supplements and certain food items.
Retail Clinics - States regulate retail clinics operated by nurse practitioners or physician assistants through physician oversight, lab licensing and the prohibition of the corporate practice of medicine. A number of states have implemented or proposed laws or regulations that impact certain components of retail clinic operations such as physician oversight, signage, third party contracting requirements, bathroom facilities, and scope of services. These laws and regulations may affect the operation and expansion of our owned and managed retail clinics.
Available Information
CVS Health Corporation is a Delaware corporation. Our corporate office is located at One CVS Drive, Woonsocket, Rhode
Island 02895, telephone (401) 765-1500. Our common stock is listed on the New York Stock Exchange under the trading symbol “CVS.” General information about CVS Health is available through the Company’s Web site at http://www.cvshealth.com. Our financial press releases and filings with the United States Securities and Exchange Commission
(“SEC”) are available free of charge within the Investors section of our Web site at http://www.cvshealth.com/investors. In addition, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, such as the Company, that file electronically with the SEC. The address of that Web site is http://www.sec.gov. 14

Item 1A. Risk Factors
Our business is subject to various industry, economic, regulatory and other risks and uncertainties. Our business, financial condition, results of operations, cash flows and prospects could be materially adversely affected by any one or more of the following risk factors and by additional risks and uncertainties not presently known to us or that we currently deem to be immaterial: Risks of declining gross margins in the PBM and retail pharmacy.
The PBM industry has been experiencing margin pressure as a result of competitive pressures and increased client demands for lower prices, enhanced service offerings and/or higher service levels. In that regard, we maintain contractual relationships with generic pharmaceutical manufacturers and brand name pharmaceutical manufacturers that provide for purchase discounts and/or rebates on drugs dispensed by pharmacies in our retail network and by our mail order pharmacies (all or a portion of which may be passed on to clients). Manufacturer rebates often depend on a PBM’s ability to meet contractual market share or other requirements, including in some cases the placement of a manufacturer’s products on the PBM’s formularies. If we lose our relationship with one or more pharmaceutical manufacturers, or if the discounts or rebates provided by pharmaceutical manufacturers decline, our business and financial results could be adversely affected. Further, competitive pressures in the
PBM industry have resulted in our clients sharing in a larger portion of rebates and/or discounts received from pharmaceutical manufacturers. Market dynamics and regulatory changes have impacted our ability to offer plan sponsors pricing that includes the use of retail “differential” or “spread”, which could negatively impact our future profitability. Further, changes in existing federal or state laws or regulations or the adoption of new laws or regulations relating to patent term extensions, purchase discount and rebate arrangements with pharmaceutical manufacturers, or to formulary management or other PBM services could also reduce the discounts or rebates we receive. In addition, changes in federal or state laws or regulations or the adoption of new laws or regulations relating to claims processing and billing, including our ability to collect transmission fees, could adversely impact our profitability.
Our Retail Pharmacy Segment has also been impacted by the margin pressures described above including client demands for lower prices, generic pricing and network reimbursement pressure. In addition, as competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, and this could require us to reevaluate our pricing structures to remain competitive. In addition, many pharmacy benefit plans have implemented plan designs that mandate or provide incentives to fill maintenance medications through mail order pharmacies. To the extent this trend continues, any negative impact in our retail pharmacy could outweigh an increase in our own mail order business and/or an increase in participation in our Maintenance Choice program.
Efforts to reduce reimbursement levels and alter health care financing practices.
The continued efforts of health maintenance organizations, managed care organizations, PBM companies, government entities, and other third party payors to reduce prescription drug costs and pharmacy reimbursement rates may impact our profitability.
In particular, increased utilization of generic pharmaceuticals (which normally yield a higher gross profit rate than equivalent brand named drugs) has resulted in pressure to decrease reimbursement payments to retail and mail order pharmacies for generic drugs, causing a reduction in the generic profit rate. Historically, the effect of this trend on generic profitability has been mitigated by our efforts to negotiate reduced acquisition costs of generic pharmaceuticals with manufacturers. However, in recent years, there has been significant consolidation within the generic manufacturing industry, and it is possible that this and other external factors may enhance the ability of manufacturers to sustain or increase pricing of generic pharmaceuticals and diminish our ability to negotiate reduced acquisition costs. Any inability to offset increased costs or to modify our activities to lessen the impact could have a significant adverse effect on our results of operations.
In addition, during the past several years, the United States health care industry has been subject to an increase in governmental regulation and audits at both the federal and state levels. Efforts to control health care costs, including prescription drug costs, are continuing at the federal and state government levels. Changing political, economic and regulatory influences may significantly affect health care financing and reimbursement practices. A change in the composition of pharmacy prescription volume toward programs offering lower reimbursement rates could negatively impact our profitability.
ACA made several significant changes to Medicaid rebates and to reimbursement. One of these changes was to revise the definition of the Average Manufacturer Price, a pricing element common to most payment formulas, and the reimbursement formula for multi-source (i.e., generic) drugs. In addition, ACA made other changes that affect the coverage and plan designs that are or will be provided by many of our health plan clients, including the requirement for health insurers to meet a minimum medical loss ratio to avoid having to pay rebates to enrollees. These ACA changes may not affect our business directly, but they could indirectly impact our services and/or business practices.
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A highly competitive business environment.
Each of the retail pharmacy business and the pharmacy services business currently operates in a highly competitive and evolving health care environment. Our competitive success is impacted by the ability of our retail pharmacy business to establish and maintain contractual relationships with PBMs and other payors on acceptable terms and by the ability of our pharmacy services business to establish and maintain contractual relationships with network pharmacies in an environment where some PBM clients are considering adopting narrow or restricted retail pharmacy networks.
As a pharmacy retailer, we compete with other drugstore chains, supermarkets, discount retailers, independent pharmacies, membership clubs, Internet companies, convenience stores and mass merchants, many of which are expanding into markets we serve. We also face competition from retail health clinics, as well as other mail order pharmacies and PBMs. In addition, some of these competitors may offer services and pricing terms that we may not be willing or able to offer. Competition may also come from other sources in the future.
Competitors in the PBM industry (e.g., Express Scripts, OptumRx, Catamaran, Prime Therapeutics, MedImpact and Humana), include large, national PBM companies, PBMs owned by large national health plans and smaller standalone PBMs. Some of these competitors may offer services and pricing terms that we may not be willing or able to offer. In addition, competition may also come from other sources in the future. Unless we can demonstrate enhanced value to our clients through innovative product and service offerings, particularly in a rapidly changing industry, we may be unable to remain competitive. In addition, changes in the overall composition of our pharmacy networks, or reduced pharmacy access under our networks, could adversely affect our claims volume and/or our competitiveness generally.
Risks related to compliance with a broad and complex regulatory framework.
Our business is subject to numerous federal, state and local laws and regulations. See “Business - Government Regulation.” In addition, during the past several years, the United States health care industry has been subject to an increase in governmental regulation and enforcement activity at both the federal and state levels. Changes in these regulations may require extensive system and operating changes that may be difficult to implement. Untimely compliance or noncompliance with applicable laws and regulations could adversely affect the continued operation of our business, including, but not limited to: imposition of civil or criminal penalties; suspension or disgorgement of payments from government programs; loss of required government certifications or approvals; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; or loss of registrations or licensure. The regulations to which we are subject include, but are not limited to: the laws and regulations described in the Government Regulation section; accounting standards; securities laws and regulations; tax laws and regulations; laws and regulations relating to the protection of the environment and health and safety matters, including those governing exposure to, and the management and disposal of, hazardous materials and wastes; and laws and regulations of the FTC, the FCC, and the Consumer Product Safety Commission, as well as state regulatory authorities, governing the sale, advertisement and promotion of products that we sell, such as Boards of Pharmacy.
The FDA, DEA and various states regulate the distribution of pharmaceuticals and controlled substances. We are required to hold valid DEA and state-level registrations and licenses, meet various security and operating standards and comply with the
Controlled Substances Act and its accompanying regulations governing the sale, marketing, packaging, holding and distribution of controlled substances. The DEA, FDA and state regulatory authorities have broad enforcement powers, including the ability to suspend our registrations and licenses, seize or recall products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. In addition, our business interests outside of the United States are subject to the Foreign Corrupt Practices Act and other applicable domestic and international laws and regulations. We are also subject to the terms of various government agreements and mandates, including those described in the Government Regulation section.
In that regard, our business, financial position and results of operations could be adversely affected by existing and new government legislative, regulatory action and enforcement activity, including, without limitation, any one or more of the following: •

federal and state laws and regulations concerning the submission of claims for reimbursement by Medicare,
Medicaid and other government programs;

•

federal and state laws and regulations governing the purchase, distribution, tracking, management, compounding, dispensing and reimbursement of prescription drugs and related services, whether at retail or mail, and applicable registration or licensing requirements;

•

the effect of the expiration of patents covering brand name drugs and the introduction of generic products;

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•

the frequency and rate of approvals by the FDA of new brand name and generic drugs, or of over-the-counter status for brand name drugs;

•

rules and regulations issued pursuant to HIPAA and the HITECH Act; and other federal and state laws affecting the collection, use, disclosure and transmission of health or other personal information, such as federal laws on information privacy precipitated by concerns about information collection through the Internet, state security breach laws and state laws limiting the use and disclosure of prescriber information;

•

consumer protection laws affecting our health care services, our loyalty programs, the products we sell, the informational calls we make and/or the marketing of our goods and services;

•

federal, state and local environmental, health and safety laws and regulations applicable to our business, including the management of hazardous substances, storage and transportation of hazardous materials, and various recordkeeping disclosure and procedure requirements promulgated by the Occupational Safety and Health
Administration that may apply to our operations;

•

health care reform, managed care reform and plan design legislation;

•

FDA regulation affecting the retail or PBM industry;

•

government regulation of the development, administration, review and updating of formularies and drug lists including requirements and/or limitations around formulary tiering and patient cost sharing;

•

federal and state laws and regulations establishing or changing prompt payment requirements for payments to retail pharmacies;

•

impact of network access legislation or regulations, including “any willing provider” laws, on our ability to manage pharmacy networks;

•

administration of Medicare Part D, including legislative changes and/or CMS rulemaking and interpretation;

•

insurance licensing and other insurance regulatory requirements applicable to offering Medicare Part D programs and services or other health care services;

•

government regulation allowing the importation of prescription drugs from Canada and elsewhere into the United
States; and

•

direct regulation of pharmacies or PBMs by regulatory and quasi-regulatory bodies.

The health of the economy in general and in the markets we serve.
Our business is affected by the economy in general, including changes in consumer purchasing power, preferences and/or spending patterns. Although an economic recovery might be underway, it is possible that a worsening of the economic environment will cause a decline in drug utilization, and dampen demand for pharmacy benefit management services as well as consumer demand for products sold in our retail stores. Further, interest rate fluctuations, changes in capital market conditions and regulatory changes may affect our ability to obtain necessary financing on acceptable terms, our ability to secure suitable store locations under acceptable terms and our ability to execute sale-leaseback transactions under acceptable terms. These circumstances could result in an adverse effect on our business and financial results.
The possibility of PBM client loss and/or the failure to win new PBM business.
Our PBM business generates net revenues primarily by contracting with clients to provide prescription drugs and related health care services to plan members. PBM client contracts often have terms of approximately three years in duration, so approximately one third of a PBM’s client base typically is subject to renewal each year. In some cases, however, PBM clients may negotiate a shorter or longer contract term or may require early or periodic renegotiation of pricing prior to expiration of a contract. In addition, the reputational impact of a service-related incident could negatively affect our ability to grow and retain our client base. Further, the PBM industry has been impacted by consolidation activity that may continue in the future. In the event one or more of our PBM clients is acquired by an entity that is not also our client, we may be unable to retain all or a portion of the acquired business. These circumstances, either individually or in the aggregate, could result in an adverse effect
17

on our business and financial results. Therefore, we continually face challenges in competing for new PBM business and retaining or renewing our existing PBM business. There can be no assurance that we will be able to win new business or secure renewal business on terms as favorable to us as the present terms.
Risks related to the frequency and rate of the introduction of generic drugs and brand name prescription products.
The profitability of our business is dependent upon the utilization of prescription drug products. Utilization trends are affected by, among other factors, the introduction of new and successful prescription pharmaceuticals as well as lower-priced generic alternatives to existing brand name products. Accordingly, our business could be impacted by a slowdown in the introduction of new and successful prescription pharmaceuticals and/or generic alternatives (the sale of which normally yield higher gross profit margins than brand name equivalents).
The failure or disruption of 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.
Many aspects of our operations are dependent on our information systems and the information collected, processed, stored, and handled by these systems. We rely heavily on our computer systems to manage our ordering, pricing, point-of-sale, pharmacy fulfillment, inventory replenishment, claims processing, ExtraCare customer loyalty program, finance, human resource and other processes. Throughout our operations, we receive, retain and transmit certain confidential information, including PII that our customers and clients provide to purchase products or services, enroll in programs or services, register on our websites, interact with our personnel, or otherwise communicate with us. In addition, for these operations, we depend in part on the secure transmission of confidential information over public networks. Our information systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches including credit card information breaches, vandalism, catastrophic events and human error. Although we deploy a layered approach to address information security threats and vulnerabilities, including ones from a cybersecurity standpoint, designed to protect confidential information against data security breaches, a compromise of our information security controls or of those businesses with whom we interact, which results in confidential information being accessed, obtained, damaged, or used by unauthorized or improper persons, could harm our reputation and expose us to regulatory actions and claims from customers and clients, financial institutions, payment card associations and other persons, any of which could adversely affect our business, financial position, and results of operations. Moreover, a data security breach could require that we expend significant resources related to our information systems and infrastructure, and could distract management and other key personnel from performing their primary operational duties.
If our information systems are damaged, fail to work properly or otherwise become unavailable, or if we are unable to successfully complete our planned consolidation of our PBM claims adjudication platforms, we may incur substantial costs to repair or replace them, and may experience reputational damage, loss of critical information, customer disruption and interruptions or delays in our ability to perform essential functions and implement new and innovative services. In addition, compliance with changes in privacy and information security laws and standards may result in considerable expense due to increased investment in technology and the development of new operational processes.
Risks relating to the market availability, suppliers and safety profiles of prescription drugs that we purchase and sell.
We dispense significant volumes of brand-name and generic drugs from our retail and mail-order pharmacies and through our
PBM’s network of retail pharmacies. When increased safety risk profiles or manufacturing or other supply issues of specific drugs or classes of drugs occur, or drugs become subject to greater restrictions as controlled substances, physicians may cease writing prescriptions for these drugs or the utilization of these drugs may be otherwise reduced. For example, on October 6,
2014, the final DEA rule moving hydrocodone combination products from schedule III to schedule II became effective.
Additionally, adverse publicity regarding drugs with higher safety risk profiles may result in reduced consumer demand for such drugs. On occasion, products are withdrawn by their manufacturers or transition to over-the-counter products, which can result in lower prescription utilization. In addition, future FDA rulings could restrict the supply or increase the cost of products sold to our customers. Our volumes, net revenues, profitability and cash flows may decline as a result of such regulatory rulings or market changes.
Regulatory and business changes relating to our participation in Medicare Part D.
Since its inception in 2006, Medicare Part D has resulted in increased utilization and decreased pharmacy gross margin rates due to regulatory and competitive pressures. Further, as a result of ACA and changes to the retiree drug subsidy rules, our PBM clients could decide to discontinue providing prescription drug benefits to their Medicare-eligible members. To the extent this
18

occurs, the adverse effects of increasing customer migration into Medicare Part D may outweigh the benefits we realize from growth of our Medicare Part D business. In addition, if the cost and complexity of Medicare Part D exceed management’s expectations or prevent effective program implementation or administration; if changes to the regulations regarding how drug costs are reported for Medicare Part D are implemented in a manner that impacts the profitability of our Medicare Part D business; if changes to the regulations impact our ability to retain fees from third parties including network pharmacies; if the government alters Medicare program requirements or reduces funding because of the higher-than-anticipated cost to taxpayers of Medicare Part D or for other reasons; if we fail to design and maintain programs that are attractive to Medicare participants; if CMS imposes restrictions on our Medicare Part D business as a result of audits or other regulatory actions; if we fail to successfully implement corrective action or other remedial measures sufficient to prevent or remove any applicable restrictions that may be imposed by CMS; or if we are not successful in retaining enrollees, or winning contract renewals or new contracts under Medicare Part D’s competitive bidding process, our Medicare Part D services and the ability to expand our Medicare
Part D services could be negatively impacted.
Reform of the United States health care system.
Congressional efforts to reform the United States health care system finally came to fruition in 2010 with the passage of ACA, which is resulting in significant structural changes to the health insurance system. See “Business - Government Regulation”.
Although many of the structural changes enacted by ACA were implemented in 2014, some of the applicable regulations and sub-regulatory guidance have not yet been issued and/or finalized. Therefore, there remains considerable uncertainty as to the full impact of ACA on our business. While these reforms may not affect our business directly, they affect the coverage and plan designs that are or will be provided by many of our health plan clients, including plan designs that include limited networks, a requirement to use mail service pharmacies for certain medications or formulary tiering. As a result, they could indirectly impact many of our services and business practices. We cannot predict what effect, if any, all of the ACA changes may have on our retail pharmacy and pharmacy services businesses, and it is possible that other legislative or market-driven changes in the health care system that we cannot anticipate could also occur.
Possible changes in industry pricing benchmarks.
It is possible that the pharmaceutical industry or regulators may evaluate and/or develop an alternative pricing reference to replace Average Wholesale Price (“AWP”), which is the pricing reference used for many of our PBM client contracts, pharmaceutical purchase agreements, retail network contracts, specialty payor agreements and other contracts with third party payors in connection with the reimbursement of drug payments. Future changes to the use of AWP or to other published pricing benchmarks used to establish pharmaceutical pricing, including changes in the basis for calculating reimbursement by federal and state health programs and/or other payors, could impact the reimbursement we receive from Medicare and Medicaid programs, the reimbursement we receive from PBM clients and other payors and/or our ability to negotiate rebates and/or discounts with pharmaceutical manufacturers, wholesalers, PBMs and retail pharmacies. The effect of these possible changes on our business cannot be predicted at this time.
Product liability, product recall or personal injury issues could damage our reputation; failure to maintain adequate liability insurance coverage.
The products that we sell could become subject to contamination, product tampering, mislabeling, recall or other damage. In addition, errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. Product liability or personal injury claims may be asserted against us with respect to any of the products or pharmaceuticals we sell or services we provide. Our business involves the provision of professional services including by pharmacists, nurses and nurse practitioners that exposes us to professional liability claims. Should a product or other liability issue arise, the coverage limits under our insurance programs and the indemnification amounts available to us may not be adequate to protect us against claims. We also may not be able to maintain this insurance on acceptable terms in the future. Damage to our reputation in the event of a product liability or personal injury issue or judgment against us or a product recall could have a significant adverse effect on our business, financial condition and results of operations.
Relationship with our retail customers and the demand for our products and services, including propriety brands.
The success of our business depends in part on customer loyalty, superior customer service and our ability to persuade customers to purchase products in additional categories and our proprietary brands. Failure to timely identify or effectively respond to changing consumer preferences and spending patterns, an inability to expand the products being purchased by our clients and customers, or the failure or inability to obtain or offer particular categories of products could negatively affect our relationship with our clients and customers and the demand for our products and services.
19

We offer our retail customers proprietary brand products that are available exclusively at our retail stores and through our online retail sites. The sale of proprietary products subjects us to unique risks including potential product liability risks and mandatory or voluntary product recalls, our ability to successfully protect our intellectual property rights and the rights of applicable third parties, and other risks generally encountered by entities that source, market and sell private-label products.
Any failure to adequately address some or all of these risks could have an adverse effect on our business, results of operations and financial condition. Additionally, an increase in the sales of our proprietary brands may negatively affect our sales of products owned by our suppliers which, consequently, could adversely impact certain of our supplier relationships. Our ability to locate qualified, economically stable suppliers who satisfy our requirements, and to acquire sufficient products in a timely and effective manner, is critical to ensuring, among other things, that customer confidence is not diminished. Any failure to develop sourcing relationships with a broad and deep supplier base could adversely affect our financial performance and erode customer loyalty.
Finally, customer expectations and new technology advances from our competitors have required that our business evolve so that we are able to interface with our retail customers not only face-to-face in our stores but also online and via mobile and social media. Our customers are using computers, tablets, mobile phones and other electronic devices to shop in our stores and online, as well as to provide public reactions concerning each facet of our operation. If we fail to keep pace with dynamic customer expectations and new technology developments, our ability to compete and maintain customer loyalty could be adversely affected.
Risks related to the seasonality of our business.
Although the majority of our revenues, particularly pharmacy revenues, are generally not seasonal in nature, front store revenues tend to be higher during the December holiday season. Uncharacteristic or extreme weather conditions can adversely impact consumer shopping patterns as well. This could lead to lost sales, as well as increased snow removal and other costs, thereby negatively affecting our short-term results of operations. In addition, both pharmacy and front store revenues are affected by the timing and severity of the cough, cold and flu season, which is susceptible to large fluctuations from year to year. Risks related to litigation and other legal proceedings.
Pharmacy services and retail pharmacy are highly regulated and litigious industries. We are currently subject to various litigation matters, investigations, audits, government inquiries, regulatory and legal proceedings. Litigation, and particularly securities and collective or class action litigation, is often expensive and disruptive. We cannot predict the outcome of such matters, and the costs incurred may be substantial regardless of outcome. Our business, financial condition and results of operations may be adversely affected, or we may be required to materially change our business practices, as a result of such proceedings. We refer you to Item 3, “Legal Proceedings” for additional information.
The foregoing is not a comprehensive listing of all possible risks and there can be no assurance that we have correctly identified and appropriately assessed all factors affecting the business. As such, we refer you to “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” which includes our “Cautionary Statement Concerning ForwardLooking Statements” at the end of such section, of our Annual Report to Stockholders for the year ended December 31, 2014, which section is incorporated by reference herein.
Item 1B. Unresolved Staff Comments
There are no unresolved SEC Staff Comments.

20

Item 2. Properties
We lease most of our stores under long-term leases that vary as to rental amounts, expiration dates, renewal options and other rental provisions. For additional information on the amount of our rental obligations for our leases, we refer you to Note 6
“Leases” in our Annual Report to Stockholders for the year ended December 31, 2014, which section is incorporated by reference herein.
As of December 31, 2014, we owned approximately 5.0% of our 7,822 retail stores. Net selling space for our retail drugstores was approximately 76.7 million square feet as of December 31, 2014. More than one third of our store base was opened or significantly remodeled within the last five years.
We own nine distribution centers located in Alabama, California, Hawaii, New York, Rhode Island, South Carolina, Tennessee and Texas and lease 11 additional distribution facilities located in Arizona, Florida, Indiana, Michigan, New Jersey,
Pennsylvania, Texas, Virginia and Brazil. The 20 distribution centers total approximately 11.2 million square feet as of
December 31, 2014.
As of December 31, 2014, we owned one mail service dispensing pharmacy located in Texas and leased three additional mail order dispensing pharmacies located in Hawaii, Illinois and Pennsylvania. We leased call centers located in Missouri,
Pennsylvania, Tennessee and Texas. As of December 31, 2014, we leased 17 onsite pharmacy stores and 27 specialty pharmacy stores, and operated 11 specialty mail order pharmacies. We leased 86 branches and six centers of excellence for infusion or enteral services.
We own our corporate offices located in Woonsocket, Rhode Island, which totals approximately 1,000,000 square feet. In addition, we lease large corporate offices in Scottsdale, Arizona, Northbrook, Illinois, Monroeville, Pennsylvania, Irving, Texas and Sao Paulo, Brazil.
In connection with certain business dispositions completed between 1991 and 1997, we continue to guarantee lease obligations for approximately 72 former stores. We are indemnified for these guarantee obligations by the respective purchasers. These guarantees generally remain in effect for the initial lease term and any extension thereof pursuant to a renewal option provided for in the lease prior to the time of the disposition. For additional information, we refer you to Note 11 “Commitments and
Contingencies” in our Annual Report to Stockholders for the year ended December 31, 2014, which section is incorporated by reference herein.
Management believes that its owned and leased facilities are suitable and adequate to meet the Company’s anticipated needs. At the end of the existing lease terms, management believes the leases can be renewed or replaced by alternate space.

21

The following is a breakdown by state, District of Columbia, Puerto Rico and Brazil of our retail stores, onsite pharmacy stores, specialty pharmacy stores, specialty mail order pharmacies, mail order dispensing pharmacies and branches and centers of excellence for infusion and enteral services as of December 31, 2014:

Retail Stores

Onsite
Pharmacy
Stores

Specialty
Pharmacy
Stores

Specialty
Mail Order
Pharmacies

Mail Order
Dispensing
Pharmacies

Infusion &
Enteral
Services
Locations

Total

United States:
Alabama
Arkansas
Arizona
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Iowa
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Total United States

158
5
144
862
—
151
15
59
753
315
54
—
18
275
298
39
66
113
22
174
358
246
59
50
87
14
18
85
41
279
17
480
312
6
319
61
—
406
20
63
192
134
617
5
6
279
3
50
47
7,775

—
—
—
—
—
1
—
—
—
2
—
—
1
1
—
—
—
—
—
1
—
1
1
—
1
—
—
—
—
2
—
—
—
—
2
—
—
1
—
—
—
1
1
—
—
—
—
—
1
17

1
—
1
4
1
—
—
1
3
1
1
—
—
—
—
—
—
—
—
—
2
—
—
—
1
—
—
—
—
—
—
1
1
—
—
—
1
1
—
1
1
—
3
—
—
1
1
—
—
27

—
—
—
1
—
—
—
—
1
—
—
—
—
1
—
1
—
—
—
—
1
1
—
—
—
—
—
—
—
1
—
—
1
—
—
—
—
1
1
—
—
1
—
—
—
—
—
—
—
11

—
—
—
—
—
—
—
—
—
—
1
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
1
—
—
—
—
—
—
4

1
1
2
10
2
1
—
—
9
1
—
1
1
2
4
2
—
1
1
1
2
2
3
1
2
—
1
2
—
1
1
7
3
—
4
1
1
3
—
1
2
3
5
1
—
2
3
—
1
92

160
6
147
877
3
153
15
60
766
319
56
1
20
280
302
42
66
114
23
176
363
250
63
51
91
14
19
87
41
283
18
488
317
6
325
62
2
413
21
65
195
139
627
6
6
282
7
50
49
7,926

Brazil
Total

47
7,822

—
17

—
27

—
11

—
4

—
92

47
7,973

22

Item 3. Legal Proceedings
Legal Proceedings
We refer you to the Note 11 - “Commitments and Contingencies - Legal Matters” contained in the “Notes to the Consolidated
Financial Statements” of our Annual Report to Stockholders for the year ended December 31, 2014, which section is incorporated by reference herein.
Item 4. Mine Safety Disclosures
Not applicable.

23

Executive Officers of the Registrant
Executive Officers of the Registrant
The following sets forth the name, age and biographical information for each of our executive officers as of February 10,
2015. In each case the officer’s term of office extends to the date of the board of directors meeting following the next annual meeting of stockholders of the Company. Previous positions and responsibilities held by each of the executive officers over the past five years are indicated below:
Lisa G. Bisaccia, age 58, Senior Vice President and Chief Human Resources Officer of CVS Health Corporation since
January 2010; Vice President, Human Resources of CVS Pharmacy, Inc. from September 2004 through December 2009.
Eva C. Boratto, age 48, Senior Vice President - Controller and Chief Accounting Officer of CVS Health Corporation since July 2013; Senior Vice President of PBM Finance from July 2010 through June 2013; Vice President, U.S. Market
Finance Leader of Merck & Co., Inc. from June 2009 through June 2010.
Troyen A. Brennan, M.D., age 60, Executive Vice President and Chief Medical Officer of CVS Health Corporation since
November 2008; Executive Vice President and Chief Medical Officer of Aetna, Inc. from February 2006 through
November 2008.
David M. Denton, age 49, Executive Vice President and Chief Financial Officer of CVS Health Corporation since
January 2010; Senior Vice President and Controller/Chief Accounting Officer of CVS Health Corporation from March 2008 until December 2009; Senior Vice President, Financial Administration of CVS Health Corporation and CVS Pharmacy, Inc. from April 2007 to March 2008. Mr. Denton is also a member of the Board of Directors of Coach, Inc., a leading retailer of premium bags and luxury accessories.
Helena B. Foulkes, age 50, Executive Vice President of CVS Health Corporation and President of CVS/pharmacy since
January 2014; Executive Vice President and Chief Health Care Strategy and Marketing Officer of CVS Health Corporation from March 2011 through December 2013; Executive Vice President and Chief Marketing Officer of CVS Health Corporation from January 2009 through February 2011; Senior Vice President of Health Services of CVS Health Corporation from
May 2008 through January 2009, and of CVS Pharmacy, Inc. from October 2007 through January 2009. Ms. Foulkes is also a member of the Board of Directors of The Home Depot, Inc., a leading home improvement retailer.
Stephen J. Gold, age 55, Senior Vice President and Chief Information Officer of CVS Health Corporation since
July 2012; Senior Vice President and Chief Information Officer of Avaya, Inc. from May 2010 through June 2012; Executive
Vice President, Chief Information Officer and Chief Technology Officer of GSI Commerce, Inc. from February 2005 through
April 2010.
J. David Joyner, age 50, Executive Vice President of CVS Health Corporation since March 2011 and Executive Vice
President of Sales and Account Services, CVS/caremark since March 2004.
Per G.H. Lofberg, age 67, Executive Vice President of CVS Health Corporation; Executive Vice President of CVS
Health Corporation and President of CVS/caremark from January 2010 through August 2012; President and Chief Executive
Officer of Generation Health, Inc., a pharmacogenomics company, from November 2008 through December 2009.
Larry J. Merlo, age 59, President and Chief Executive Officer of CVS Health Corporation since March 2011; President and Chief Operating Officer of CVS Health Corporation from May 2010 through March 2011; President of CVS/pharmacy from January 2007 through August 2011; Executive Vice President of CVS Health Corporation from January 2007 through
May 2010; also a director of CVS Health Corporation since May 2010.
Thomas M. Moriarty, age 51, Executive Vice President and General Counsel of CVS Health Corporation since
October 2012 and Chief Health Strategy Officer since March 2014; General Counsel of Celgene Corporation, a global biopharmaceutical company, from May 2012 through September 2012; General Counsel and Corporate Secretary of Medco
Health Solutions, Inc. (“Medco”), a pharmacy benefit management company, from March 2008 through April 2012; also
President of Global Pharmaceutical Strategies of Medco from March 2011 through April 2012; Senior Vice President,
Pharmaceutical Strategies and Solutions of Medco from September 2007 through March 2011.

24

Jonathan C. Roberts, age 59, Executive Vice President of CVS Health Corporation and President of CVS/caremark since
September 2012; Executive Vice President of CVS Health Corporation and Chief Operating Officer of CVS/caremark from
October 2010 through August 2011; Executive Vice President, Rx Purchasing, Pricing and Network Relations of CVS Health
Corporation from January 2009 through October 2010; Senior Vice President and Chief Information Officer of CVS Health
Corporation from May 2008 until January 2009, and of CVS Pharmacy, Inc. from January 2006 until January 2009.
Andrew J. Sussman, M.D., age 49, Senior Vice President and Associate Chief Medical Officer of CVS Health
Corporation since March 2011 and President of CVS/minuteclinic since September 2009; Executive Vice President and Chief
Operating Officer of the University of Massachusetts Memorial Medical Center, the major teaching affiliate of UMass Medical
School, from May 2004 through August 2009.

25

PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our common stock is listed on the New York Stock Exchange under the symbol “CVS.” The table below sets forth the high and low sale prices of our common stock on the New York Stock Exchange Composite Tape and the quarterly cash dividends declared per share of common stock during the periods indicated.

First Quarter

2014 High
Low
Cash dividends per common share
2013 High
Low
Cash dividends per common share

$
$
$
$
$
$

76.36
64.95
0.275
56.07
49.00
0.225

Second Quarter

$
$
$
$
$
$

79.43
72.37
0.275
60.70
53.94
0.225

Third Quarter

$
$
$
$
$
$

82.57
74.69
0.275
62.36
56.68
0.225

Fourth Quarter

$
$
$
$
$
$

98.62
77.40
0.275
71.99
56.32
0.225

Year

$
$
$
$
$
$

98.62
64.95
1.10
71.99
49.00
0.90

CVS Health has paid cash dividends every quarter since becoming a public company. Future dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Company’s
Board of Directors. As of February 3, 2015, there were 22,830 registered shareholders according to the records maintained by our transfer agent.
On December 15, 2014, the Company’s Board of Directors authorized a new share repurchase program for up to $10.0 billion of outstanding common stock (the “2014 Repurchase Program”). On December 17, 2013, the Company’s Board of Directors authorized a share repurchase program for up to $6.0 billion of outstanding common stock (the “2013 Repurchase Program”).
On September 19, 2012, the Company’s Board of Directors authorized a share repurchase program for up to $6.0 billion of outstanding common stock (the “2012 Repurchase Program”, and together with the 2014 and 2013 Repurchase Programs, the
“Repurchase Programs”). The Repurchase Programs, which were 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 transactions, and/or other derivative transactions. The 2014 and 2013 Repurchase Programs may be modified or terminated by the Board of Directors at any time. The 2012 Repurchase Program is complete, as indicated below.
During the year ended December 31, 2014, the Company repurchased an aggregate of 51.4 million shares of common stock for approximately $4.0 billion under the 2013 and 2012 Repurchase Programs. As of December 31, 2014, there remained an aggregate of approximately $12.7 billion available for future repurchases under the 2014 and 2013 Repurchase Programs. As of
Decemer 31, 2014, the 2012 Repurchase Program was complete.
Pursuant to the authorization under the 2013 Repurchase Programs, effective January 2, 2015, we entered into a $2.0 billion fixed dollar accelerated share repurchase (“ASR”) agreement with J.P. Morgan Chase Bank (“JP Morgan”). Upon payment of the $2.0 billion purchase price on January 5, 2015, we received a number of shares of our common stock equal to 80% of the
$2.0 billion notional amount of the ASR agreement or approximately 16.8 million shares at a price of $94.49 per share. At the conclusion of the ASR program, the Company may receive additional shares equal to the remaining 20% of the $2.0 billion notional amount. The ultimate number of shares the Company may receive will fluctuate based on changes in the daily volumeweighted average price of the Company’s stock over a period beginning on January 2, 2015 and ending on or before April 26,
2015. If the mean daily volume-weighted average price of the Company’s common stock, less a discount (the “forward price”), during the ASR program falls below $94.49 per share, the Company will receive a higher number of shares from JP Morgan. If the forward price rises above $94.49 per share, the Company will either receive fewer shares from JP Morgan or, potentially have an obligation to JP Morgan which, at the Company’s option, could be settled in additional cash or by issuing shares.
Under the terms of the agreement, the maximum number of shares that could be received or delivered is 42.0 million. The initial 16.8 million shares of common stock delivered to the Company by JP Morgan were placed into treasury stock in January
2015.

26

Fiscal Period

October 1, 2014 through October 31, 2014
November 1, 2014 through November 30, 2014
December 1, 2014 through December 31, 2014

Total Number of Shares
Purchased

Average
Price Paid per
Share

7,325,187 $
6,650,000 $
153,295 $
14,128,482

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

81.70
88.37
90.42

Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs

7,325,187 $ 3,293,630,647
6,650,000 $ 2,705,958,545
153,295 $ 12,692,098,316
14,128,482

Item 6. Selected Financial Data
The selected consolidated financial data of CVS Health Corporation as of and for the periods indicated in the five-year period ended December 31, 2014 have been derived from the consolidated financial statements of CVS Health Corporation. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and the audit reports of Ernst & Young LLP, which are incorporated elsewhere herein.

In millions, except per share amounts

Statement of operations data:
Net revenues
Gross profit
Operating expenses
Operating profit
Interest expense, net
Loss on early extinguishment of debt
Income tax provision(1)
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income
Net loss attributable to noncontrolling interest
Net income attributable to CVS Health
Per common share data:
Basic earnings per common share:
Income from continuing operations attributable to
CVS Health
Loss from discontinued operations attributable to
CVS Health
Net income attributable to CVS Health
Diluted earnings per common share:
Income from continuing operations attributable to
CVS Health
Loss from discontinued operations attributable to
CVS Health
Net income attributable to CVS Health
Cash dividends per common share
Balance sheet and other data:
Total assets
Long-term debt
Total shareholders’ equity
Number of stores (at end of year)
(1)

2014

2013

2012

2011

139,367 $
25,367
16,568
8,799
600
521
3,033
4,645

126,761 $
23,783
15,746
8,037
509
—
2,928
4,600

123,120 $
22,488
15,278
7,210
557
348
2,436
3,869

107,080 $
20,562
14,231
6,331
584
—
2,258
3,489

95,766
20,215
14,082
6,133
536
—
2,178
3,419

$

(1)
4,644
—
4,644 $

(8)
4,592
—
4,592 $

(7)
3,862
2
3,864 $

(31)
3,458
4
3,462 $

2
3,421
3
3,424

$

3.98 $

3.78 $

3.05 $

2.61 $

2.50

$
$

— $
3.98 $

(0.01) $
3.77 $

(0.01) $
3.04 $

(0.02) $
2.59 $

—
2.50

$

3.96 $

3.75 $

3.02 $

2.59 $

2.49

$
$
$

— $
3.96 $
1.10 $

(0.01) $
3.74 $
0.90 $

(0.01) $
3.02 $
0.65 $

(0.02) $
2.57 $
0.50 $

—
2.49
0.35

$
$
$

74,252 $
11,695 $
37,963 $
7,866

71,526 $
12,841 $
37,938 $
7,702

66,221 $
9,133 $
37,653 $
7,508

64,852 $
9,208 $
38,014 $
7,388

62,457
8,652
37,662
7,248

$

2010

Income tax provision for the year ended December 31, 2010 includes the effect of the recognition of $47 million of previously unrecognized tax benefits, including interest, relating to the expiration of various statutes of limitation and settlements with tax authorities.

27

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We refer you to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which includes our “Cautionary Statement Concerning Forward-Looking Statements” at the end of such section of our Annual Report to
Stockholders for the year ended December 31, 2014, which section is incorporated by reference herein.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As of December 31, 2014, the Company had no derivative financial instruments or derivative commodity instruments in place and believes that its exposure to market risk associated with other financial instruments, principally interest rate risk inherent in its debt portfolio, is not material.
Item 8. Financial Statements and Supplementary Data
We refer you to the “Consolidated Statements of Income,” “Consolidated Statements of Comprehensive Income,”
“Consolidated Balance Sheets,” “Consolidated Statements of Shareholders’ Equity,” “Consolidated Statements of Cash Flows,”
“Notes to Consolidated Financial Statements,” and “Report of Independent Registered Public Accounting Firm” of our Annual
Report to Stockholders for the fiscal year ended December 31, 2014, which sections are incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures: The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15 (f) and 15d-15(f) under the Securities Exchange Act of 1934) as of December 31, 2014, have concluded that as of such date the Company’s disclosure controls and procedures were adequate and effective at a reasonable assurance level and designed to ensure that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis.
Internal control over financial reporting: We refer you to “Management’s Report on Internal Control Over Financial
Reporting” and “Report of Independent Registered Public Accounting Firm” of our Annual Report to Stockholders for the fiscal year ended December 31, 2014, which are incorporated by reference herein, for management’s report on the Company’s internal control over financial reporting and the Independent Registered Public Accounting Firm’s report with respect to the effectiveness of internal control over financial reporting.
Changes in internal control over financial reporting: There have been no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that occurred during the fourth quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
No events have occurred during the fourth quarter that would require disclosure under this item.

28

PART III
Item 10. Directors, Executive Officers and Corporate Governance
We refer you to our Proxy Statement for the 2015 Annual Meeting of Stockholders under the captions “Committees of the
Board,” “Code of Conduct,” “Director Nominations,” “Audit Committee Report,” “Biographies of our Board Nominees,” and
“Section 16(a) Beneficial Ownership Reporting Compliance,” which sections are incorporated by reference herein.
Biographical information on our executive officers is contained in Part I of this Annual Report on Form 10-K.
Item 11. Executive Compensation
We refer you to our Proxy Statement for the 2015 Annual Meeting of Stockholders under the captions “Executive
Compensation and Related Matters,” including “Compensation Discussion & Analysis” and “Management Planning and
Development Committee Report,” which sections are incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We refer you to our Proxy Statement for the 2015 Annual Meeting of Stockholders under the captions “Share Ownership of
Directors and Certain Executive Officers,” and “Share Ownership of Principal Stockholders” which sections are incorporated by reference herein, for information concerning security ownership of certain beneficial owners and management and related stockholder matters.
The following table summarizes information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of December 31, 2014.

Number of securities to be issued upon exercise of outstanding options, warrants and rights(1)

Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total

Weighted average exercise price of outstanding options, warrants and rights

28,165 $
—
28,165 $

47.87
—
47.87

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) (1)

30,237
—
30,237

(1) Shares in thousands.

Item 13. Certain Relationships and Related Transactions and Director Independence
We refer you to our Proxy Statement for the 2015 Annual Meeting of Stockholders under the caption “Independence
Determinations for Directors” and “Certain Transactions with Directors and Officers,” which sections are incorporated by reference herein.
Item 14. Principal Accountant Fees and Services
We refer you to our Proxy Statement for the 2015 Annual Meeting of Stockholders under the caption “Item 2: Ratification of
Appointment of Independent Registered Public Accounting Firm,” which section is incorporated by reference herein.

29

PART IV
Item 15. Exhibits and Financial Statement Schedules
A. Documents filed as part of this report:
1.

Financial Statements:

The following financial statements are incorporated by reference from our Annual Report to Stockholders for the fiscal year ended December 31, 2014, as provided in Item 8 hereof:
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2.

27
28
29
30
31
32
59

Financial Statement Schedules

All financial statement schedules are omitted because they are not applicable, not required under the instructions, or the information is included in the consolidated financial statements or related notes.
B. Exhibits
Exhibits marked with an asterisk (*) are hereby incorporated by reference to exhibits or appendices previously filed by the
Registrant as indicated in brackets following the description of the exhibit.

Exhibit

Description

2.1*

Agreement and Plan of Merger dated as of November 1, 2006 among, the Registrant, Caremark Rx, Inc. and
Twain MergerSub Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement
No. 333-139470 on Form S-4 filed December 19, 2006).

2.2*

Amendment No. 1 dated as of January 16, 2007 to the Agreement and Plan of Merger dated as of November 1,
2006 among the Registrant, Caremark Rx, Inc. and Twain Merger Sub Corp. (incorporated by reference to
Exhibit 2.2 to the Registrant’s Registration Statement No. 333-139470 on Form S-4/A filed January 16, 2007).

2.3*

Waiver Agreement dated as of January 16, 2007 between the Registrant and Caremark Rx, Inc. with respect to the Agreement and Plan Merger dated as of November 1, 2006 by and between Registrant and Caremark
Rx, Inc (incorporated by reference to Exhibit 2.3 to the Registrant’s Registration Statement No. 333-139470 on
Form S-4/A filed January 16, 2007).

2.4*

Amendment to Waiver Agreement, dated as of February 12, 2007, between Registrant and Caremark Rx, Inc.
(incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated February 13,
2007; Commission File No. 001-01011).

2.5*

Amendment to Waiver Agreement, dated as of March 8, 2007, between Registrant and Caremark Rx, Inc.
(incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated March 8,
2007; Commission File No. 001-01011).

2.6*

Agreement and Plan of Merger dated as of August 12, 2008 among, the Registrant, Longs Drug Stores
Corporation and Blue MergerSub Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current
Report on Form 8-K dated August 13, 2008; Commission File No. 001-01011).

3.1*

Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996; Commission File
No. 001-01011).
30

3.1A*

Certificate of Amendment to the Amended and Restated Certificate of Incorporation, effective May 13, 1998
(incorporated by reference to Exhibit 4.1A to Registrant’s Registration Statement No. 333-52055 on Form S3/A dated May 18, 1998).

3.1B*

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated March 22, 2007; Commission File No. 00101011).

3.1C*

Certificate of Merger dated May 9, 2007 (incorporated by reference to Exhibit 3.1C to Registrant’s Quarterly
Report on Form 10-Q dated November 1, 2007; Commission File No. 001-01011).

3.1D*

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated May 13, 2010; Commission File No. 00101011).

3.1E*

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report On Form 8-K dated May 10, 2012; Commission File No. 00101011).

3.1F*

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated September 3, 2014 (Commission File No.
001-01011)).

3.2*

By-laws of the Registrant, as amended and restated (incorporated by reference to Exhibit 3.2 to the Registrant’s
Current Report on Form 8-K dated September 3, 2014; Commission File No. 001-01011).

4

Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument which defines the rights of holders of longterm debt of the Registrant and its subsidiaries is filed with this report. The Registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

4.1*

Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement of the Registrant on Form 8-B dated November 4, 1996; Commission File No. 001-01011).

10.1*

Stock Purchase Agreement dated as of October 14, 1995 between The TJX Companies, Inc. and Melville
Corporation, as amended November 17, 1995 (incorporated by reference to Exhibits 2.1 and 2.2 to Melville’s
Current Report on Form 8-K dated December 4, 1995; Commission File No. 001-01011).

10.2*

Stock Purchase Agreement dated as of March 25, 1996 between Melville Corporation and Consolidated Stores
Corporation, as amended May 3, 1996 (incorporated by reference to Exhibits 2.1 and 2.2 to Melville’s Current
Report on Form 8-K dated May 5, 1996; Commission File No. 001-01011).

10.3*

Distribution Agreement dated as of September 24, 1996 among Melville Corporation, Footstar, Inc. and
Footstar Center, Inc. (incorporated by reference to Exhibit 99.1 to Melville’s Current Report on Form 8-K dated October 28, 1996; Commission File No. 001-01011).

10.4*

Tax Disaffiliation Agreement dated as of September 24, 1996 among Melville Corporation, Footstar, Inc. and certain subsidiaries named therein (incorporated by reference to Exhibit 99.2 to Melville’s Current Report on
Form 8-K dated October 28, 1996; Commission File No. 001-01011).

10.5*

Stockholder Agreement dated as of December 2, 1996 between the Registrant, Nashua Hollis CVS, Inc. and
Linens ‘n Things, Inc. (incorporated by reference to Exhibit 10(i)(6) to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 001-01011).

10.6*

Tax Disaffiliation Agreement dated as of December 2, 1996 between the Registrant and Linens ‘n Things, Inc. and certain of their respective affiliates (incorporated by reference to Exhibit 10(i)(7) to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 001-01011).

10.7*

Four Year Credit Agreement dated as of May 12, 2011 by and among the Registrant, the lenders party thereto,
Barclays Capital and JP Morgan Chase Bank, N.A., as Co-Syndication Agents, Bank of America, N.A. and
Wells Fargo Bank, N.A., as Co-Documentation Agents, and the Bank of New York Mellon, as Administrative
Agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011; Commission File No. 001-01011).

31

10.8*

Amendment No. 1, dated as of November 22, 2011, to the Credit Agreement dated as of May 12, 2011 by and among the Registrant, the Lenders party thereto, the Co-Syndication Agents and Co-Documentation Agents named therein, and The Bank of New York Mellon, as Administrative Agent (incorporated by reference to
Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011;
Commission File No. 001-01011).

10.9*

Five Year Credit Agreement dated as of February 17, 2012, by and among the Registrant, the lenders party thereto, Barclays Capital and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, Bank of America, N.A. and Wells Fargo Bank, N.A., as Co-Documentation Agents, and The Bank of New York Mellon, as
Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 2012 (Commission File No. 001-01011).

10.10*

Credit Agreement dated as of May 23, 2013, by and among the Registrant, the lenders party thereto, Barclays
Bank PLC and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, Bank of America, N.A. and Wells
Fargo Bank, N.A., as Co-Documentation Agents, and The Bank of New York Mellon, as Administrative Agent.
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2013 (Commission File No. 001-01011).

10.11*

Amendment No. 2, dated as of May 23, 2013, to the Credit Agreement dated as of May 12, 2011, by and among the Registrant, the lenders party thereto, Barclays Capital and JPMorgan Chase Bank, N.A., as CoSyndication Agents, Bank of America, N.A. and Wells Fargo Bank, N.A., as Co-Documentation Agents, and
The Bank of America, N.A. and Wells Fargo Bank, N.A., as Co-Documentation Agents, and The Bank of New
York Mellon, as Administrative Agent, as previously amended by Amendment No. 1, dated as of November 22,
2011 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2013 (Commission File No. 001-01011).

10.12*

Second Amended and Restated Credit Agreement, dated as of July 24, 2014, by and among the Registrant, the lenders party thereto, Barclays Bank PLC and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, Bank of America, N.A. and Wells Fargo Bank, N.A., as Co-Documentation Agents, and The Bank of New York
Mellon, as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2014 (Commission File No. 001-01011).

10.13*

Supplemental Retirement Plan for Select Senior Management of CVS Health Corporation I as amended and restated in December 2008 (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2009; Commission File No. 001-01011).

10.14*

CVS Health Corporation 1996 Directors Stock Plan, as amended and restated November 5, 2002 (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 28, 2002; Commission File No. 001-01011).

10.15*

1997 Incentive Compensation Plan as amended through December 2008 (incorporated by reference to
Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009;
Commission File No. 001-01011).

10.16*

Caremark Rx, Inc. 2004 Incentive Stock Plan (incorporated by reference to Exhibit 99.2 of the Registrant’s
Registration Statement No. 333-141481 on Form S-8 filed March 22, 2007; Commission File No. 011-01011).

10.17*

CVS Health Deferred Stock Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009; Commission File No. 011-01011).

10.18

CVS Health Deferred Compensation Plan, as amended and restated as of December 17, 2014.

10.19*

2010 Incentive Compensation Plan, as amended through January 15, 2013 (incorporated by reference to
Exhibit 10.30 to the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2012;
Commission File No. 001-01011).

10.20*

2007 Employee Stock Purchase Plan (incorporated by reference to Exhibit D of the Registrant’s Definitive
Proxy Statement filed April 4, 2007; Commission File No. 001-01011).

10.21

The Registrant’s 2014 Management Incentive Plan.

10.22

The Registrant’s 2014 Executive Incentive Plan.

32

10.23*

The Registrant’s Long-Term Incentive Plan (incorporated by reference to Exhibit 10.21 to the Registrant’s
Annual Report on Form10-K for the fiscal year ended December 31, 2013; Commission file No. 001-01011).

10.24

The Registrant’s Partnership Equity Program amended as of December 2014.

10.25*

The Registrant’s Severance Plan for Non-Store Employees amended as of April 2013 (incorporated by reference to Exhibit 10.23 of the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2013; Commission File No. 001-01011).

10.26

The Registrant’s Performance-Based Restricted Stock Unit Plan amended as of December 2014.

10.27

Form of Enterprise Non-Competition, Non-Disclosure and Developments Agreement between the Registrant and certain of the Registrant’s executive officers (incorporated by reference to Exhibit 10.25 of the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2013; Commission File No. 001-01011).

10.28*

Universal 409A Definition Document dated December 31, 2008 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009; Commission File
No. 001-01011).

10.29

Form of Non-Qualified Stock Option Agreement between the Registrant and selected employees of the
Registrant.

10.30

Form of Restricted Stock Unit Agreement - Annual Grant - between the Registrant and selected employees of the Registrant.

10.31

Form of Performance-Based Restricted Stock Unit Agreement between the Registrant and selected employees of the Registrant.

10.32

Form of Partnership Equity Program Participant Purchased RSUs, Company Matching RSUs and Company
Matching Options Agreement (Pre-Tax).

10.33

Form of Partnership Equity Program Participant Purchased RSUs, Company Matching RSUs and Company
Matching Options Agreement (Post-Tax).

10.34*

Amended and Restated Employment Agreement dated as of December 22, 2008 between the Registrant and the
Registrant’s President and Chief Executive Officer (incorporated by reference to Exhibit 10.38 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008; Commission File
No. 001-01011).

10.35*

Amendment dated December 21, 2012 to the Amended and Restated Employment Agreement dated as of
December 22, 2008 between the Registrant and the Registrant’s President and Chief Executive Officer
(incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012; Commission File No. 001-01011).

10.36

Form of Non-Qualified Stock Option Agreement between the Registrant and the Registrant’s President and
Chief Executive Officer.

10.37

Form of Restricted Stock Unit Agreement between the Registrant and the Registrant’s President and Chief
Executive Officer.

10.38*

Amendment dated January 22, 2015 to Nonqualified Stock Option Agreements between the Registrant and the
Registrant’s President and Chief Executive Officer (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K dated January 20, 2015; Commission File No. 001-01011).

10.39*

Change in Control Agreement dated December 22, 2008 between the Registrant and the Registrant’s Executive
Vice President and Chief Financial Officer (incorporated by reference to Exhibit 10.39 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2010; Commission File No. 001-01011).

10.40*

Amendment dated as of December 31, 2012 to the Change in Control Agreement dated December 22, 2008 between the Registrant and the Registrant’s Executive Vice President and Chief Financial Officer (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2012; Commission File No. 001-01011).
33

10.41*

Change in Control Agreement dated December 22, 2008 between the Registrant and the Registrant’s Executive
Vice President and President of CVS/caremark (incorporated by reference to Exhibit 10.33 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2012; Commission File No. 001-01011).

10.42*

Amendment dated as of December 31, 2012 to the Change in Control Agreement dated December 22, 2008 between the Registrant and the Registrant’s Executive Vice President and President of CVS/caremark; incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (Commission File No. 001-01011).

10.43

Change in Control Agreement dated December 22, 2008 between the Registrant and the Registrant’s Executive
Vice President and President of CVS/pharmacy.

10.44

Amendment dated as of December 31, 2012 to the Change in Control Agreement between the Registrant and the Registrant’s Executive Vice President and President of CVS/pharmacy.

10.45*

Change in Control Agreement dated December 1, 2008 between the Registrant and the Registrant’s Executive
Vice President and Chief Medical Officer (incorporated by reference to Exhibit 10.43 of the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2013; Commission File No. 001-01011).

13

Portions of the 2014 Annual Report to Stockholders of CVS Health Corporation, which are specifically designated in this Form 10-K as being incorporated by reference.

21

Subsidiaries of the Registrant.

23

Consent of Ernst & Young LLP.

31.1

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following materials from the CVS Health Corporation Annual Report on Form 10-K for the year ended
December 31, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated
Statements of Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows and (iv) related notes.

34

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
CVS HEALTH CORPORATION
Date: February 10, 2015

By:

/s/ DAVID M. DENTON
David M. Denton
Executive Vice President and Chief Financial Officer

35

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

/s/ RICHARD M. BRACKEN

Title(s)

Date

Director

February 10, 2015

Director

February 10, 2015

Senior Vice President - Controller and
Chief Accounting Officer
(Principal Accounting Officer)

February 10, 2015

Executive Vice President and Chief
Financial Officer (Principal Financial
Officer)

February 10, 2015

Director

February 10, 2015

Chairman of the Board and Director

February 10, 2015

Director

February 10, 2015

President and Chief Executive Officer
(Principal Executive Officer) and
Director

February 10, 2015

Director

February 10, 2015

Director

February 10, 2015

Director

February 10, 2015

Director

February 10, 2015

Richard M. Bracken
/s/ C. DAVID BROWN II
C. David Brown II
/s/ EVA C. BORATTO
Eva C. Boratto
/s/ DAVID M. DENTON
David M. Denton
/s/ NANCY-ANN M. DEPARLE
Nancy-Ann M. DeParle
/s/ DAVID W. DORMAN
David W. Dorman
/s/ ANNE M. FINUCANE
Anne M. Finucane
/s/ LARRY J. MERLO
Larry J. Merlo
/s/ JEAN-PIERRE MILLON
Jean-Pierre Millon
/s/ RICHARD J. SWIFT
Richard J. Swift
/s/ WILLIAM C. WELDON
William C. Weldon
/s/ TONY L. WHITE
Tony L. White

36

Exhibit 13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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 our 7,800 retail pharmacies, more than 900 walk-in medical clinics, a leading pharmacy benefits manager with more than 65 million plan members, and expanding specialty pharmacy services, we enable people, businesses, and communities to manage health in more 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/caremarkTM, to innovating how care is delivered to our patients with complex conditions through CVS/specialtyTM, or by expanding access to high-quality, low-cost care at CVS/minuteclinicTM.
We currently have three reportable segments: Pharmacy Services, Retail Pharmacy and Corporate.
Overview of Our Pharmacy Services Segment
Our Pharmacy Services business generates revenue from a full range of PBM services, including plan design 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.
Our clients are primarily employers, insurance companies, unions, government employee groups, health plans, Managed
Medicaid plans and 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 pharmaceuticals through our mail order pharmacies, specialty pharmacies and national network of more than 68,000 retail pharmacies, consisting of approximately 41,000 chain pharmacies
(which includes our CVS/pharmacy® stores) and 27,000 independent pharmacies, to eligible members 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 that require complex and expensive drug therapies. Our specialty pharmacy business includes mail order and retail specialty pharmacies that operate under the CVS/caremarkTM, CarePlus
CVS/pharmacy® and Navarro Health Services® 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. In January 2014, we enhanced our offerings of specialty infusion services and began offering enteral nutrition services through Coram LLC and its subsidiaries (collectively, “Coram”), which we acquired on January 16, 2014. We completed the roll out of Specialty ConnectTM in May 2014, which integrates our specialty pharmacy mail and retail capabilities, providing 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 our mail order pharmacy or at 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.
37

We also provide health management programs, which include integrated disease management for 17 conditions, through our
Accordant® 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. We currently provide Medicare
Part D plan benefits to approximately 4.4 million beneficiaries through SilverScript, including our individual and employer group waiver plans.
The Pharmacy Services Segment operates under the CVS/caremarkTM Pharmacy Services, Caremark®, CVS/caremarkTM,
CarePlus CVS/pharmacy®, RxAmerica®, Accordant®, SilverScript®, Coram®, CVS/specialtyTM, NovoLogix® and Navarro® Health
Services names. As of December 31, 2014, the Pharmacy Services Segment operated 27 retail specialty pharmacy stores, 11 specialty mail order pharmacies, four mail order dispensing pharmacies, and 86 branches and six centers of excellence for infusion and enteral services located in 40 states, Puerto Rico and the District of Columbia.
Overview of Our Retail Pharmacy Segment
Our Retail Pharmacy Segment sells prescription drugs and a wide assortment of general merchandise, including over-thecounter drugs, beauty products and cosmetics, personal care products, convenience foods, photo finishing, seasonal merchandise and greeting cards through our CVS/pharmacy®, CVS®, Longs Drugs®, Navarro Discount Pharmacy® and Drogaria
OnofreTM retail stores and online through CVS.com®, Navarro.comTM and Onofre.com.brTM. Our Retail Pharmacy Segment derives the majority of its revenues through the sale of prescription drugs, which are dispensed by our nearly 24,000 retail pharmacists. The role of our retail pharmacists is shifting 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 Pharmacy 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 approximately 70 million active cardholders, making it one of the largest and most successful retail loyalty card programs in the country.
As of December 31, 2014, our Retail Pharmacy Segment included 7,822 retail drugstores (of which 7,765 operated a pharmacy) located in 44 states, the District of Columbia, Puerto Rico and Brazil operating primarily under the CVS/pharmacy®,
CVS®, Longs Drugs®, Navarro Discount Pharmacy® and Drogaria OnofreTM names, 17 onsite pharmacies primarily operating under the CarePlus CVS/pharmacy®, CarPlus® and CVS/pharmacy® names, and 971 retail health care clinics operating under the
MinuteClinic® name (of which 963 were located in CVS/pharmacy stores), and our online retail websites, CVS.com®,
Navarro.comTM and Onofre.com.brTM.
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, corporate information technology and finance departments.

38

Results of Operations
Summary of our Consolidated Financial Results

Year Ended December 31,
2014

In millions, except per common share amounts

Net revenues
Cost of revenues
Gross profit
Operating expenses
Operating profit
Interest expense, net
Loss on early extinguishment of debt
Income before income tax provision
Income tax provision
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Net loss attributable to noncontrolling interest
Net income attributable to CVS Health

$

2013

2012

$

Diluted earnings per common share:
Income from continuing operations attributable to CVS Health
Loss from discontinued operations attributable to CVS Health
Net income attributable to CVS Health

139,367 $
114,000
25,367
16,568
8,799
600
521
7,678
3,033
4,645
(1)
4,644
—
4,644 $

126,761 $
102,978
23,783
15,746
8,037
509
—
7,528
2,928
4,600
(8)
4,592
—
4,592 $

123,120
100,632
22,488
15,278
7,210
557
348
6,305
2,436
3,869
(7)
3,862
2
3,864

$
$
$

3.96 $
— $
3.96 $

3.75 $
(0.01) $
3.74 $

3.02
(0.01)
3.02

Net revenues increased $12.6 billion in 2014 compared to 2013, and increased $3.6 billion in 2013 compared to 2012. As you review our performance in this area, we believe you should consider the following important information:
•

During 2014, net revenues in our Pharmacy Services Segment increased 16.1% and net revenues in our Retail
Pharmacy Segment increased 3.3% compared to the prior year.

•

During 2013, net revenues in our Pharmacy Services Segment increased by 3.8% and net revenues in our Retail
Pharmacy Segment increased 3.1% compared to the prior year.

•

The increase in our generic dispensing rates in both of our operating segments continued to have an adverse effect on net revenue in 2014 as compared to 2013, as well as in 2013 as compared to 2012. In 2014, the Pharmacy Services
Segment had a greater impact from net new business as compared to 2013.

Please see the Segment Analysis later in this document for additional information about our net revenues.
Gross profit increased $1.6 billion, or 6.7% in 2014, to $25.4 billion, as compared to $23.8 billion in 2013. Gross profit increased $1.3 billion, or 5.8% in 2013, to $23.8 billion, as compared to $22.5 billion in 2012. Gross profit as a percentage of net revenues declined to 18.2%, as compared to 18.8% in 2013 and 18.3% in 2012.
•

During 2014, gross profit in our Pharmacy Services Segment and Retail Pharmacy Segment increased by 12.6% and
5.8%, respectively, compared to the prior year. For the year ended December 31, 2014, gross profit as a percent of net revenues in our Pharmacy Services Segment and Retail Pharmacy Segment was 5.4% and 31.4%, respectively.

•

During 2013, gross profit in our Pharmacy Services Segment and Retail Pharmacy Segment increased by 11.3% and
5.3%, respectively, compared to the prior year. For the year ended December 31, 2013, gross profit as a percent of net revenues in our Pharmacy Services Segment and Retail Pharmacy Segment was 5.6% and 30.6%, respectively.

•

The increased weighting toward the Pharmacy Services Segment, which has a lower gross profit than the Retail
Pharmacy Segment, resulted in a decline in consolidated gross profit as a percent of net revenues in 2014 as compared
39

to 2013. In addition, gross profit for 2014, 2013 and 2012 has been negatively impacted by the efforts of managed care organizations, pharmacy benefit managers and governmental and other third-party payors to reduce their prescription drug costs.
•

Our gross profit continued to benefit from the increased utilization of generic drugs (which normally yield a higher gross profit rate than equivalent brand name drugs) in both the Pharmacy Services and Retail Pharmacy segments for
2012 through 2014, 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 $822 million, or 5.2% in the year ended December 31, 2014, as compared to the prior year.
Operating expenses as a percent of net revenues declined to 11.9% in the year ended December 31, 2013 compared to 12.4% in the prior year. The increase in operating expense dollars in the year ended December 31, 2014 was primarily due to incremental store operating costs associated with a higher store count, as well as legal costs and strategic initiatives as compared to the prior year. Additionally, the year ended December 31, 2013 included a $72 million gain on a legal settlement. The improvement in operating expenses as a percent of net revenues in 2014 is primarily due to expense leverage from net revenue growth and disciplined expense control.
Operating expenses increased $468 million in the year ended December 31, 2013 as compared to the prior year. Operating expenses as a percent of net revenues remained flat at 12.4% in the year ended December 31, 2013. The increase in operating expense dollars in the year ended December 31, 2013 was primarily due to incremental store operating costs associated with a higher store count as compared to the prior year, as well as strategic initiatives. The increase was partially offset by a $72 million gain on a legal settlement.
Please see the Segment Analysis later in this document for additional information about operating expenses.
Interest expense, net for the years ended December 31 consisted of the following:

In millions

2014

Interest expense
Interest income
Interest expense, net

$
$

2013

615 $
(15)
600 $

2012

517 $
(8)
509 $

561
(4)
557

Net interest expense increased $91 million during the year ended December 31, 2014, primarily due to the issuance of $4 billion of debt in December 2013 and $1.5 billion of debt in August 2014. During 2013, net interest expense decreased by $48 million, to $509 million compared to 2012, which resulted from lower average interest rates during 2013.
Loss on Early Extinguishment of Debt - During the year ended December 31, 2014, the Company completed a $2.0 billion tender offer and repurchase of certain Senior Notes. The Company paid a premium of $490 million in excess of the debt principal in connection with the repurchase of the Senior Notes, wrote off $26 million of unamortized deferred financing costs and incurred $5 million in fees, for a total loss on early extinguishment of debt of $521 million. During the year ended
December 31, 2012, the Company completed a $1.3 billion tender offer and repurchase of certain Senior Notes and incurred a total loss on the early extinguishment of debt of $348 million. See Note 5 to the consolidated financial statements.
Income tax provision - Our effective income tax rate was 39.5%, 38.9% and 38.6% in 2014, 2013 and 2012, respectively. The effective income tax was higher in 2014 than in 2013 primarily due to certain permanent items in 2014. These same items were the principal factors for the increase in the effective income tax rate in 2013 compared to 2012.
Income from continuing operations increased $45 million or 1.0% to $4.6 billion in 2014. Income from continuing operations increased $731 million or 18.9% to $4.6 billion in 2013 as compared to $3.9 billion in 2012. The 2014 and 2013 increases in income from continuing operations were primarily related to increases in generic dispensing rates and increased prescription volume for both operating segments. In addition, as discussed above, income from continuing operations included a $521 million and $348 million loss on early extinguishment of debt in 2014 and 2012, respectively, which positively impacted the growth rate in 2013 and negatively impacted the growth rate in 2014.

40

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. The Company’s loss from discontinued operations includes lease-related costs required to satisfy its Linens ‘n Things lease guarantees. We incurred a loss from discontinued operations, net of tax, of $1 million, $8 million and
$7 million in 2014, 2013 and 2012, respectively.
See Note 1 “Significant Accounting Policies - Discontinued Operations” to the consolidated financial statements for additional information about discontinued operations and Note 11 “Commitments and Contingencies” for additional information about our lease guarantees.
Net loss attributable to noncontrolling interest of $2 million for the year ended December 31, 2012 represents the minority shareholders’ portion of the net loss of our subsidiary, Generation Health, Inc. (“Generation Health”). We acquired the remaining 40% interest of Generation Health in June 2012 and as a result, there was no longer a noncontrolling interest in
Generation Health for the years ended December 31, 2014 and 2013. For the year ended December 31, 2014, the Company had immaterial noncontrolling interests in two consolidated entities.
Net income attributable to CVS Health increased $52 million or 1.1% to $4.6 billion (or $3.96 per diluted share) in 2014. This compares to $4.6 billion (or $3.74 per diluted share) in 2013 and $3.9 billion (or $3.02 per diluted share) in 2012. As discussed previously, the 2014 increase in net income attributable to CVS Health was primarily related to increased generic drug dispensing and increased prescription volume in both operating segments. The increase in net income attributable to CVS
Health per diluted share was also driven by increased share repurchase activity in 2014 and 2013. The increase in net income attributable to CVS Health and per diluted share in 2014 includes a $521 million loss on early extinguishment of debt, which negatively impacted the net income growth rate in 2014.

41

Segment Analysis
We evaluate the performance of our Pharmacy Services and Retail Pharmacy segments based on net revenues, gross profit and operating profit before the effect of certain intersegment activities and charges. The Company evaluates the performance of its
Corporate Segment based on operating expenses before the effect of discontinued operations and certain intersegment activities and charges. The following is a reconciliation of the Company’s business segments to the consolidated financial statements:

Pharmacy
Services
Segment(1)(2)

In millions

2014:
Net revenues
Gross profit
Operating profit (loss)
2013:
Net revenues
Gross profit
Operating profit (loss)
2012:
Net revenues
Gross profit
Operating profit (loss)

Retail
Pharmacy
Segment(2)

Corporate
Segment

Intersegment
Eliminations(2)

Consolidated
Totals

$

88,440 $
4,771
3,514

67,798 $
21,277
6,762

— $
—
(796)

(16,871) $
(681)
(681)

139,367
25,367
8,799

$

76,208 $
4,237
3,086

65,618 $
20,112
6,268

— $
—
(751)

(15,065) $
(566)
(566)

126,761
23,783
8,037

$

73,444 $
3,808
2,679

63,641 $
19,091
5,636

— $
—
(694)

(13,965) $
(411)
(411)

123,120
22,488
7,210

(1)

Net revenues of the Pharmacy Services Segment include approximately $8.1 billion, $7.9 billion and $8.4 billion of Retail Co-Payments for 2014, 2013 and 2012, respectively. See Note 1 to the consolidated financial statements for additional information about Retail Co-Payments.

(2)

Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services Segment customers use Retail
Pharmacy Segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue on a standalone basis, and (ii) Intersegment revenues, gross profit and operating profit that occur when Pharmacy Services Segment customers, through the Company’s intersegment activities (such as the Maintenance Choice® program), elect to pick-up their maintenance prescriptions at Retail Pharmacy
Segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. The following amounts are eliminated in consolidation in connection with the item
(ii) intersegment activity: net revenues of $4.9 billion, $4.3 billion and $3.4 billion for the years ended December 31, 2014, 2013 and 2012, respectively; and gross profit and operating profit of $681 million, $566 million and $411 million for the years ended December 31, 2014, 2013 and 2012, respectively.

42

Pharmacy Services Segment
The following table summarizes our Pharmacy Services Segment’s performance for the respective periods:

Year Ended December 31,
2014

In millions

Net revenues
Gross profit
Gross profit % of net revenues
Operating expenses
Operating expenses % of net revenues
Operating profit
Operating profit % of net revenues
Net revenues(1) :
Mail choice(2)
Pharmacy network(3)
Other
Pharmacy claims processed(1) :
Total
Mail choice(2)
Pharmacy network(3)
Generic dispensing rate(1) :
Total
Mail choice(2)
Pharmacy network(3)
Mail choice penetration rate

$
$
$
$

$
$
$

2013

88,440
4,771
5.4%
1,257
1.4%
3,514
4.0%

$
$

31,081
57,122
237

$
$
$

932.0
82.4
849.6
82.2%
74.6%
83.0%
21.4%

$
$

2012

76,208
4,237
5.6%
1,151
1.5%
3,086
4.1%
24,791
51,211
206

$
$
$
$

$
$
$

902.1
83.3
818.8
80.5%
72.6%
81.3%
22.6%

73,444
3,808
5.2%
1,129
1.5%
2,679
3.6%
22,843
50,411
190
880.5
81.7
798.8
78.2%
68.9%
79.1%
22.7%

(1)

Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice, which are included within the mail choice category.

(2)

Mail choice is defined as claims filled at a Pharmacy Services mail facility, which includes specialty mail claims, as well as 90-day claims filled at our retail stores under the Maintenance Choice program.

(3)

Pharmacy network is defined as claims filled at retail pharmacies, including our retail drugstores, but excluding Maintenance Choice activity.

Net revenues in our Pharmacy Services Segment increased $12.2 billion, or 16.1%, to approximately $88.4 billion for the year ended December 31, 2014, as compared to the prior year. The increase in net revenues was primarily due to growth in specialty pharmacy, including the acquisition of Coram and the impact of Specialty Connect, and increased pharmacy network volume.
Conversely, the increase in our generic dispensing rate had a negative impact on our revenue in 2014, as it did in 2013.
Net revenues increased $2.8 billion, or 3.8%, to $76.2 billion for the year ended December 31, 2013, as compared to the prior year. The increase in 2013 was primarily due to drug cost inflation in specialty pharmacy. Additionally, the increase in our generic dispensing rate had a negative impact on our revenue in 2013, as it did in 2012.
As you review our Pharmacy Services Segment’s revenue performance, we believe you should also consider the following important information:
•

Our mail choice claims processed decreased 1.1% to 82.4 million claims in the year ended December 31, 2014, compared to 83.3 million claims in the prior year. The decrease in mail choice claims was driven by a decline in traditional mail volumes, which was mostly offset by growth in our Maintenance Choice program and specialty pharmacy. During 2013, our mail choice claims processed increased 1.9% to 83.3 million claims. The increase in mail choice claim volume was primarily due to specialty claim volume and increased claims associated with the continuing client adoption of our
Maintenance Choice offerings.

•

During 2014 and 2013, our average revenue per mail choice claim increased by 26.8% and 6.5%, compared to 2013 and
2012, respectively. This increase in 2014 was primarily due to the acquisition of Coram and drug inflation particularly in
43

specialty pharmacy, partially offset by increases in the percentage of generic prescription drugs dispensed and changes in client pricing. This increase in 2013 was primarily due to drug inflation particularly in specialty pharmacy, partially offset by increases in the percentage of generic prescription drugs dispensed and changes in client pricing.
•

Our mail choice generic dispensing rate was 74.6%, 72.6% and 68.9% in the years ended December 31, 2014, 2013 and
2012, respectively. Our pharmacy network generic dispensing rate increased to 83.0% in the year ended December 31,
2014, compared to 81.3% in the prior year. During 2013, our pharmacy network generic dispensing rate increased to
81.3% compared to our pharmacy network generic dispensing rate of 79.1% in 2012. These continued increases in mail choice and pharmacy network generic dispensing rates were primarily due to the impact of new generic drug introductions, primarily in 2012, and our continuous efforts to encourage plan members to use generic drugs when they are available. 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 generic drug introductions and our success at encouraging plan members to utilize generic drugs when they are available and clinically appropriate.

•

Our pharmacy network claims processed increased 3.8% to 849.6 million claims in the year ended December 31, 2014, compared to 818.8 million claims in the prior year. This increase was primarily due to net new business and growth in
Managed Medicaid, partially offset by a decrease in Medicare Part D claims. Medicare Part D claims were negatively impacted by the CMS sanctions that were in place during 2013. See “Regulatory and business changes relating to our participation in Medicare Part D” in Part I, Item 1A, Risk Factors within our Form 10-K for the year ended December 31,
2014 (“2014 Form 10-K”), for additional information. During 2013, our pharmacy network claims processed increased
2.5% to 818.8 million compared to 798.8 million pharmacy network claims processed in 2012. This increase was primarily due to higher claims activity associated with our Medicare Part D offering.

•

Our average revenue per pharmacy network claim processed increased 7.5% in the year ended December 31, 2014 as compared to the prior year. This increase was primarily due to drug inflation and changes in the drug mix, partially offset by increases in the generic dispensing rate. During 2013, our average revenue per pharmacy network claim processed decreased by 0.9%, compared to 2012. This decrease was primarily due to increases in the generic dispensing rate.

•

We completed the roll out of Specialty ConnectTM in May 2014, which integrates the Company’s specialty pharmacy mail and retail capabilities, providing members with the choice to bring their specialty prescriptions to any CVS/pharmacy® location. Whether submitted through our mail order pharmacy or at 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.

•

The Pharmacy Services Segment recognizes revenues for its pharmacy network transactions based on individual contract terms. Our Pharmacy Services Segment contracts are predominantly accounted for using the gross method. See the
“Revenue Recognition” description under “Critical Accounting Policies” later in this section for further information on our revenue recognition policy.

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 $534 million, or 12.6% to $4.8 billion in the year ended December 31, 2014, as compared to the prior year. Gross profit as a percentage of net revenues decreased to 5.4% for the year ended December 31, 2014, compared to 5.6% in the prior year. The increase in gross profit dollars in the year ended December 31, 2014 was primarily due to volume increases, higher generic dispensing and favorable purchasing economics, partially offset by price compression. The decrease in gross profit as a percentage of net revenues was due to price compression, partially offset by favorable generic dispensing and purchasing economics. In addition, gross profit dollars and margin for the year ended December 31, 2014, were positively impacted by $16 million related to the favorable resolution of previously proposed retroactive reimbursement rate changes in the State of California Medicaid program.
During 2013, gross profit increased $429 million, or 11.3%, to $4.2 billion in the year ended December 31, 2013, as compared to the prior year. Gross profit as a percentage of net revenues was 5.6% for the year ended December 31, 2013, compared to
5.2% in the prior year. The increase in gross profit dollars and gross profit as a percentage of net revenues in the year ended
December 31, 2013 was primarily due to an increase in generic dispensing.

44

As you review our Pharmacy Services Segment’s performance in this area, we believe you should consider the following important information:
•

Our gross profit dollars and gross profit as a percentage of net revenues continued to be impacted by 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. In particular, competitive pressures in the PBM industry have caused us and other PBMs to continue to share a larger portion of rebates and/or discounts received from pharmaceutical manufacturers with clients. In addition, market dynamics and regulatory changes have impacted our ability to offer plan sponsors pricing that includes retail network “differential” or “spread”. 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. The increased use of generic drugs has positively impacted our gross profit margins but has resulted in third party payors augmenting their efforts to reduce reimbursement payments for prescriptions. This trend, which we expect to continue, reduces the benefit we realize from brand to generic product conversions.

•

We review our network contracts on an individual basis to determine if the related revenues should be accounted for using the gross method or net method under the applicable accounting rules. Our Pharmacy Services Segment network contracts are predominantly accounted for using the gross method, which results in higher revenues, higher cost of revenues and lower gross profit rates.

•

Our gross profit as a percentage of revenues benefited from the increase in our total generic dispensing rate, which increased to 82.2% and 80.5% in 2014 and 2013, respectively, compared to our generic dispensing rate of 78.2% in 2012.
These increases were primarily due to new generic drug introductions and our continued efforts to encourage plan members to use generic drugs when they are available. We expect these trends to continue, albeit at a slower pace.

Operating expenses in our Pharmacy Services Segment, which include selling, general and administrative expenses, depreciation and amortization related to selling, general and administrative activities and retail specialty pharmacy store and administrative payroll, employee benefits and occupancy costs, decreased to 1.4% of net revenues in 2014 compared to 1.5% in
2013 and 2012.
As you review our Pharmacy Services Segment’s performance in this area, we believe you should consider the following important information:
•

Operating expenses increased $106 million or 9.2%, to $1.3 billion, in the year ended December 31, 2014, compared to the prior year. The increase in operating expenses is primarily related to increased costs associated with infusion services due to the 2014 acquisition of Coram, as well as an $11 million gain from a legal settlement during the year ended December
31, 2013. The slight decrease in operating expenses as a percentage of net revenues was primarily due to expense leverage from net revenue growth.

•

During 2013, the increase in operating expenses of $22 million or 1.9%, to $1.2 billion compared to 2012, is primarily related to costs associated with the remediation of Medicare Part D sanctions and coverage determination issues discussed below. Operating expenses as a percentage of net revenues remained relatively flat.

Medicare Part D - The Company participates in the Medicare Part D program by (1) providing Medicare Part D-related PBM services to our health plan and other clients that have qualified as Medicare Part D plans, and (2) offering Medicare Part D pharmacy benefits through the Company’s SilverScript prescription drug plan (“PDP”), which offers benefits to individual members and through employer group waiver plans. At the beginning of the 2013 Medicare Part D plan year, the Company implemented an enrollment systems conversion process and other actions to consolidate its Medicare Part D PDPs into the
Company’s SilverScript PDP. These consolidation efforts impacted certain enrollment and coverage determination services the
Company provided to SilverScript enrollees following commencement of the 2013 plan year. Effective January 15, 2013, the
Centers for Medicare and Medicaid Services (“CMS”) imposed intermediate sanctions on the SilverScript PDP, consisting of immediate suspension of further plan enrollment and marketing activities. On December 20, 2013, the Company announced that CMS completed its review of the corrective actions taken to address the enrollment processing and related issues resulting from the Company’s plan consolidation efforts and the sanctions were removed. SilverScript began to enroll new choosers with effective dates starting in February 2014 as they aged into Medicare. The low income subsidy (“LIS”) auto-enrollment and annual reassignment exclusion was lifted on February 21, 2014 and SilverScript began receiving LIS enrollees again with effective dates May 1, 2014 and forward.

45

Retail Pharmacy Segment
The following table summarizes our Retail Pharmacy Segment’s performance for the respective periods:

Year Ended December 31,
2014

In millions

Net revenues
Gross profit
Gross profit % of net revenues
Operating expenses
Operating expenses % of net revenues
Operating profit
Operating profit % of net revenues
Retail prescriptions filled (90 Day = 3 prescriptions) (1)
Net revenue increase (decrease):
Total
Pharmacy
Front Store
Total prescription volume (90 Day = 3 prescriptions) (1)
Same store sales increase (decrease):
Total
Pharmacy
Front Store
Prescription volume (90 Day = 3 prescriptions) (1)
Generic dispensing rates
Pharmacy % of net revenues
Third party % of pharmacy revenue
(1)

$
$
$
$

2013

67,798
$
21,277
$
31.4 %
14,515
$
21.4 %
6,762
$
10.0 %
935.9
3.3 %
5.1 %
(2.5)%
5.2 %
2.1 %
4.8 %
(4.0)%
4.1 %
83.1 %
70.7 %
98.6 %

2012

65,618
$
20,112
$
30.6 %
13,844
$
21.1 %
6,268
$
9.6 %
890.1
3.1
4.1
1.0
5.2

63,641
19,091
30.0%
13,455
21.1%
5,636
8.9%
845.8

%
%
%
%

6.8%
7.6%
5.1%
11.0%

1.7 %
2.6 %
(0.5 )%
4.4 %
81.4 %
69.5 %
97.9 %

5.6%
6.6%
3.4%
10.0%
79.2%
68.8%
97.5%

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.

Net revenues increased approximately $2.2 billion, or 3.3%, to $67.8 billion for the year ended December 31, 2014, as compared to the prior year. This increase was primarily driven by a same store sales increase of 2.1% and net revenues from new and acquired stores, which accounted for approximately 110 basis points of our total net revenue percentage increase during the year. Net revenues increased $2.0 billion, or 3.1% to $65.6 billion for the year ended December 31, 2013, as compared to the prior year. This increase was primarily driven by a same store sales increase of 1.7% and net revenues from new stores, which accounted for approximately 130 basis points of our total net revenue percentage increase during the year.
Additionally, in 2014, 2013 and 2012 we continued to see a positive impact on our net revenues due to the growth of our
Maintenance Choice program.
As you review our Retail Pharmacy Segment’s performance in this area, we believe you should consider the following important information:
•

Front store same store sales declined 4.0% in the year ended December 31, 2014, as compared to the prior year. The decrease is primarily due to the Company’s decision to stop selling tobacco products, softer customer traffic and a less severe flu season than the prior year and extreme weather conditions across much of the United States during the first quarter of 2014. The decrease was partially offset by an increase in basket size. Front store same store sales would have been approximately 350 basis points higher for the year ended December 31, 2014 if tobacco and the estimated associated basket sales were excluded from both the years ended December 31, 2014 and 2013.

•

Pharmacy same store sales rose 4.8% in the year ended December 31, 2014, as compared to the prior year. Pharmacy same store sales were positively impacted by same store script growth of 4.1%, partially offset by the impact of the increase in generic dispensing and reimbursement pressure. Pharmacy same store sales for the year ended December 31, 2014 were negatively impacted by approximately 140 basis points from the implementation of Specialty Connect. Specialty Connect transitioned all specialty prescriptions to the Pharmacy Services Segment, as they are being processed through the
46

Company’s specialty mail order pharmacies. The implementation of Specialty Connect had a greater effect on revenues than on prescription volumes due to the higher dollar value of specialty products. Pharmacy same store sales were also negatively impacted by a lower incidence of flu compared to last year’s strong flu season and extreme weather conditions across much of the United States in the first quarter of 2014, which led to fewer physician visits and prescriptions written.
•

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. Pharmacy same store sales were negatively impacted by approximately 160 and
540 basis points for the years ended December 31, 2014 and 2013, respectively, due to recent generic introductions. The decrease in the impact from 2013 to 2014 was primarily due to a smaller impact from new generic drug introductions. In addition, our pharmacy revenue growth has also been affected by continued reimbursement pressure, the lack of significant new brand name drug introductions, as well as an increase in the number of over-the-counter remedies that were historically only available by prescription.

•

As of December 31, 2014, we operated 7,822 retail stores compared to 7,660 retail stores as of December 31, 2013 and
7,458 retail stores as of December 31, 2012. Total net revenues from new stores contributed approximately 1.1%, 1.0% and
1.1% to our total net revenue percentage increase in 2014, 2013, and 2012, respectively.

•

Pharmacy revenue growth continued to benefit from increased utilization by Medicare Part D beneficiaries, our ability to attract and retain managed care customers and favorable industry trends. These trends include an aging American population; many “baby boomers” are now in their fifties and sixties and are consuming a greater number of prescription drugs, as well as expanded coverage from the Patient Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act (collectively, “ACA”). In addition, the increased use of pharmaceuticals as the first line of defense for individual health care also contributed to the growing demand for pharmacy services. We believe these favorable industry trends will continue.

Gross profit in our Retail Pharmacy 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 increased $1.2 billion, or 5.8%, to $21.3 billion in the year ended December 31, 2014, as compared to the prior year. Gross profit as a percentage of net revenues increased to 31.4% in year ended December 31, 2014, from 30.6% in 2013.
Gross profit increased $1.0 billion, or 5.3%, to $20.1 billion for the year ended December 31, 2013, as compared to the prior year. Gross profit as a percentage of net revenues increased to 30.6% for the year ended December 31, 2013, compared to
30.0% for the prior year.
The increase in gross profit dollars in the year ended December 31, 2014, was primarily driven by increases in the generic dispensing rate, same store sales and new store sales, as well as favorable purchasing economics. The increase in gross profit dollars for the year ended December 31, 2013, was primarily driven by increases in the generic dispensing rate, same store sales and new store sales. The increase in gross profit as a percentage of net revenues in 2014 and 2013 was primarily driven by increased pharmacy margins due to the positive impact of increased generic dispensing rates and increased front store margins, partially offset by continued reimbursement pressure. The increase in gross profit as a percentage of net revenues in 2014 was also driven by the removal of tobacco products from our stores.
As you review our Retail Pharmacy Segment’s performance in this area, we believe you should consider the following important information:
•

Gross profit dollars and margin for the year ended December 31, 2014 were positively impacted by $53 million related to the favorable resolution of previously proposed retroactive reimbursement rate changes in the State of California’s
Medicaid program.

•

Sales to customers covered by third party insurance programs are a large component of our total pharmacy business. On average, our gross profit on third party pharmacy revenues is lower than our gross profit on cash pharmacy revenues. Third party pharmacy revenues were 98.6% of pharmacy revenues in 2014, compared to 97.9% and 97.5% of pharmacy revenues in 2013 and 2012, respectively.

•

Front store revenues as a percentage of total net revenues for the years ended December 31, 2014, 2013 and 2012 were
28.8%, 30.5% and 31.2%, respectively. The decline in front store revenues as a percentage of total net revenues in 2014 was largely due to the removal of tobacco products and the estimated associated basket sales. On average, our gross profit on front store revenues is generally higher than our gross profit on pharmacy revenues. Pharmacy revenues as a percentage of total net revenues increased approximately 120, 60 and 50 basis points in the years ended December 31, 2014, 2013 and
47

2012, respectively. This shift in sales to the pharmacy had a negative effect on our overall gross profit for the years ended
December 31, 2014, 2013 and 2012, respectively. The negative effect was offset by increasing generic drug dispensing rates and increased store brand penetration.
•

During the year ended December 31, 2014, our front store gross profit as a percentage of net revenues increased compared to the prior year. The increase is primarily related to a change in the mix of products sold, including the removal of tobacco products from our stores, and higher store brand sales.

•

Our pharmacy gross profit rates have been adversely affected by the efforts of managed care organizations, pharmacy benefit managers and governmental and other third party payors to reduce their prescription drug costs. In the event this trend continues, we may not be able to sustain our current rate of revenue growth and gross profit dollars could be adversely impacted. The increased use of generic drugs has positively impacted our gross profit margins 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.

•

ACA made several significant changes to Medicaid rebates and to reimbursement. One of these changes was the proposed revision of the definition of Average Manufacturer Price (“AMP”) and the reimbursement formula for multi-source drugs.
Changes in reporting of AMP or other adjustments that may be made regarding the reimbursement of drug payments by
Medicaid and Medicare could impact our pricing to customers and other payors and/or could impact our ability to negotiate discounts or rebates with manufacturers, wholesalers, PBMs or retail and mail pharmacies. See “Efforts to reduce reimbursement levels and alter health care financing practices” in Part I, Item 1A, Risk Factors within our 2014 Form 10K, for additional information.

Operating expenses in our Retail Pharmacy 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 $671 million, or 4.8% to $14.5 billion, or 21.4% as a percentage of net revenues, in the year ended December 31, 2014, as compared to $13.8 billion, or 21.1% as a percentage of net revenues, in the prior year. Operating expenses increased $389 million, or 2.9%, to $13.8 billion, or 21.1% as a percentage of net revenues, in the year ended
December 31, 2013, as compared to $13.5 billion, or 21.1% as a percentage of net revenues, in the prior year. Operating expenses as a percentage of net revenues remained consistent from 2012 through 2013 primarily due to disciplined cost control, despite the negative impact of generics on net revenues. Operating expenses as a percentage of net revenues increased in 2014 primarily due to reimbursement rate pressure, the implementation of Specialty Connect, which reduced net revenues, and higher legal costs. The increase in operating expense dollars in 2014 and 2013 was the result of higher store operating costs associated with our increased store count, as well as higher legal costs. The results for the years ended December 31, 2014 and
2013 include gains from legal settlements of $21 million and $61 million, respectively. Additionally, in September 2014, the
Retail Pharmacy Segment made a charitable contribution of $25 million to the CVS Foundation to fund future charitable giving. The foundation is a non-profit entity that focuses on health, education and community involvement programs.
Corporate Segment
Operating expenses increased $45 million, or 6.0%, to $796 million in the year ended December 31, 2014, as compared to the prior year. Operating expenses increased $57 million, or 8.3%, to $751 million in the year ended December 31, 2013. Operating expenses within the Corporate Segment include executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance related costs. The increase in operating expenses in 2014 and 2013 was primarily due to increased strategic initiatives, benefits costs, facilities management and information technology costs.
Liquidity and Capital Resources
We maintain a level of liquidity sufficient to allow us to cover 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 requirements, dividend payouts, potential share repurchases and future investments or acquisitions. We believe our operating cash flows, commercial paper program, sale-leaseback program, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives.

48

The change in cash and cash equivalents is as follows:
Year Ended December 31,
2014

in millions

Net cash provided by operating activities
$
Net cash used in investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
$

2013

8,137 $
(4,045)
(5,694)
(6)
(1,608) $

2012

5,783 $
(1,835)
(1,237)
3
2,714 $

6,671
(1,849)
(4,860)
—
(38)

Net cash provided by operating activities increased by $2.4 billion in 2014 and decreased by $0.9 billion in 2013. The increase in 2014 was primarily due to increased net income and increased accounts payable due to payables management and timing.
The decrease in 2013 was primarily due to increased accounts receivable due to the timing of payments from CMS in connection with our Medicare Part D operations, partially offset by improved inventory management.
Net cash used in investing activities increased by $2.2 billion in 2014 and remained relatively flat from 2012 to 2013. The increase in 2014 was primarily due to the $2.1 billion in cash consideration paid for the acquisition of Coram in January 2014 and an increase in capital expenditures.
In 2014, gross capital expenditures totaled approximately $2.1 billion, an increase of $152 million compared to the prior year.
During 2014, approximately 42% of our total capital expenditures were for new store construction, 21% were for store, fulfillment and support facilities expansion and improvements and 37% were for technology and other corporate initiatives.
Gross capital expenditures totaled approximately $2.0 billion during 2013 and 2012. During 2013, approximately 45% of our total capital expenditures were for new store construction, 25% were for store, fulfillment and support facilities expansion and improvements and 30% were for technology and other corporate initiatives.
Proceeds from sale-leaseback transactions totaled $515 million in 2014. This compares to $600 million in 2013 and $529 million in 2012. 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:

2014(2)

Total stores (beginning of year)
New and acquired stores(1)
Closed stores(1)
Total stores (end of year)
Relocated stores
(1)
(2)

7,702
187
(23)
7,866
60

2013(2)

7,508
213
(19)
7,702
78

2012(2)

7,388
150
(30)
7,508
90

Relocated stores are not included in new or closed store totals.
Includes retail drugstores, onsite pharmacy stores and specialty pharmacy stores.

Net cash used in financing activities increased by $4.5 billion in 2014 and decreased by $3.6 billion in 2013. The increase in
2014 was primarily due to the repayments of long-term debt and lower borrowings than in 2013. The decrease in 2013 was primarily due to greater net borrowings than in 2012.

49

Share repurchase programs — The following share repurchase programs were authorized by the Company’s Board of
Directors:

Authorization Date

Amount of
Authorization

In billions

December 15, 2014 (“2014 Repurchase Program”)
December 17, 2013 (“2013 Repurchase Program”)
September 19, 2012 (“2012 Repurchase Program”)
August 23, 2011 (“2011 Repurchase Program”)

$
$
$
$

10.0
6.0
6.0
4.0

The Repurchase Programs, which were effective immediately, permit the Company to effect share 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 2014 and 2013 Repurchase Programs may be modified or terminated by the Board of Directors at any time. The 2012 and 2011 Repurchase Programs have been completed, as described below. Pursuant to the authorization under the 2013 Repurchase Programs, effective January 2, 2015, we 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 on
January 5, 2015, we received a number of shares of our common stock equal to 80% of the $2.0 billion notional amount of the
ASR agreement or approximately 16.8 million shares at a price of $94.49 per share.At the conclusion of the ASR program, the
Company may receive additional shares equal to the remaining 20% of the $2.0 billion notional amount. The ultimate number of shares the Company may receive will fluctuate based on changes in the daily volume-weighted average price of the
Company’s stock over a period beginning on January 2, 2015 and ending on or before April 26, 2015. If the mean daily volume-weighted average price of the Company’s common stock, less a discount (the “forward price”), during the ASR program falls below $94.49 per share, the Company will receive a higher number of shares from JP Morgan. If the forward price rises above $94.49 per share, the Company will either receive fewer shares from JP Morgan or, potentially have an obligation to JP Morgan which, at the Company’s option, could be settled in additional cash or by issuing shares. Under the terms of the ASR agreement, the maximum number of shares that could be received or delivered is 42.0 million. The initial
16.8 million shares of common stock delivered to the Company by JP Morgan were placed into treasury stock in January 2015.
Pursuant to the authorization under the 2012 Repurchase Program, effective October 1, 2013, we entered into a $1.7 billion fixed dollar ASR agreement with Barclays Bank PLC (“Barclays”). Upon payment of the $1.7 billion purchase price on
October 1, 2013, we received a number of shares of our common stock equal to 50% of the $1.7 billion notional amount of the
ASR agreement or approximately 14.9 million shares at a price of $56.88 per share. The Company received approximately 11.7 million shares of common stock on December 30, 2013 at an average price of $63.83 per share, representing the remaining
50% of the $1.7 billion notional amount of the ASR agreement and thereby concluding the agreement. The total of 26.6 million shares of common stock delivered to the Company by Barclays over the term of the October 2013 ASR agreement were placed into treasury stock.
Pursuant to the authorizations under the 2011 and 2012 Repurchase Programs, on September 19, 2012, we entered into a $1.2 billion fixed dollar ASR agreement with Barclays. Upon payment of the $1.2 billion purchase price on September 20, 2012, we received a number of shares of our common stock equal to 50% of the $1.2 billion notional amount of the ASR agreement or approximately 12.6 million shares at a price of $47.71 per share. We received approximately 13.0 million shares of common stock on November 16, 2012 at an average price of $46.96 per share, representing the remaining 50% of the $1.2 billion notional amount of the ASR agreement and thereby concluding the agreement, and completing the 2011 Repurchase Program.
The total of 25.6 million shares of common stock delivered to us by Barclays over the term of the September 2012 ASR agreement were placed into treasury stock.
During the year ended December 31, 2014, we repurchased an aggregate of 51.4 million shares of common stock for approximately $4.0 billion under the 2013 and 2012 Repurchase Programs. During the years ended December 31, 2013 and
2012, we repurchased an aggregate of 66.2 million and 95.0 million shares of common stock for approximately $4.0 and $4.3 billion, respectively, under the 2012 and 2011 Repurchase Programs. As of December 31, 2014, there remained an aggregate of approximately $12.7 billion available for future repurchases under the 2014 and 2013 Repurchase Programs, $2.0 billion of which was used for the ASR effective January 2, 2015 described above. As of December 31, 2014, the 2012 and 2011
Repurchase Programs were complete.

50

Short-term borrowings - We had $685 million of commercial paper outstanding at a weighted average interest rate of 0.55% as of December 31, 2014. In connection with our commercial paper program, we maintain a $1.25 billion, five-year unsecured back-up credit facility, which expires on February 17, 2017, a $1.0 billion, five-year unsecured back-up credit facility, which expires on May 23, 2018, and a $1.25 billion, five-year unsecured back-up credit facility, which expires on July 24, 2019. 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 0.03%, regardless of usage. As of
December 31, 2014, there were no borrowings outstanding under the back-up credit facilities.
Long-term borrowings - On August 7, 2014, the Company issued $850 million of 2.25% unsecured senior notes due August
12, 2019 and $650 million of 3.375% unsecured senior notes due August 12, 2024 (collectively, the “2014 Notes”) for total proceeds of approximately $1.5 billion, net of discounts and underwriting fees. The 2014 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 2014 Notes were used for general corporate purposes and to repay certain corporate debt.
On August 7, 2014, the Company announced tender offers for any and all of the 6.25% Senior Notes due 2027, and up to a maximum amount of the 6.125% Senior Notes due 2039, the 5.75% Senior Notes due 2041 and the 5.75% Senior Notes due
2017, for up to an aggregate principal amount of $1.5 billion. On August 21, 2014, the Company increased the aggregate principal amount of the tender offers to $2.0 billion and completed the repurchase for the maximum amount on September 4,
2014. The Company paid a premium of $490 million in excess of the debt principal in connection with the tender offers, wrote off $26 million of unamortized deferred financing costs and incurred $5 million in fees, for a total loss on the early extinguishment of debt of $521 million. The loss was recorded in income from continuing operations in the condensed consolidated statement of income for the year ended December 31, 2014.
During the year ended December 31, 2014, the Company repurchased the remaining $41 million of outstanding Enhanced
Capital Advantage Preferred Securities (“ECAPS”) at par. The fees and write-off of deferred issuance costs associated with the early extinguishment of the ECAPS were immaterial.
On December 2, 2013, the Company issued $750 million of 1.2% unsecured senior notes due December 5, 2016; $1.25 billion of 2.25% unsecured senior notes due December 5, 2018; $1.25 billion of 4% unsecured senior notes due December 5, 2023; and $750 million of 5.3% unsecured senior notes due December 5, 2043 (the “2013 Notes”) for total proceeds of approximately
$4.0 billion, net of discounts and underwriting fees. The 2013 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 2013 Notes were used to repay commercial paper outstanding at the time of issuance and to fund the acquisition of Coram in January 2014. The remainder was used for general corporate purposes.
On November 26, 2012, we issued $1.25 billion of 2.75% unsecured senior notes due December 1, 2022 (the “2012 Notes”) for total proceeds of approximately $1.24 billion, net of discounts and underwriting fees. The 2012 Notes pay interest semiannually and may be redeemed, in whole at any time, or in part from time to time, at our option at a defined redemption price plus accrued and unpaid interest to the redemption date. The net proceeds of the 2012 Notes were used for general corporate purposes and to repay certain corporate debt.
Also on November 26, 2012, we announced tender offers for any and all of the 6.6% Senior Notes due 2019, and up to a maximum amount of the 6.125% Senior Notes due 2016 and 5.75% Senior Notes due 2017, for up to an aggregate principal amount of $1.0 billion. In December 2012, we increased the aggregate principal amount of the tender offers to $1.325 billion and completed the repurchase for the maximum amount. We paid a premium of $332 million in excess of the debt principal in connection with the tender offers, wrote off $13 million of unamortized deferred financing costs and incurred $3 million in fees, for a total loss on the early extinguishment of debt of $348 million. The loss was recorded in income from continuing operations on the consolidated statement of income.
Our backup credit facilities and unsecured senior notes (see Note 5 to the Consolidated Financial Statements) contain customary restrictive financial and operating covenants.
These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe the restrictions contained in these covenants materially affect our financial or operating flexibility. As of December 31, 2014 and 2013, we had no outstanding derivative financial instruments.
51

Debt Ratings - As of December 31, 2014, our long-term debt was rated “Baa1” by Moody’s with a stable outlook and “BBB+” by Standard & Poor’s with a stable outlook, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by
Standard & Poor’s. 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 Dividend Increase - In December 2014, our Board of Directors authorized a 27% increase in our quarterly common stock dividend to $0.35 per share effective in 2015. This increase equates to an annual dividend rate of $1.40 per share. In
December 2013, our Board of Directors authorized a 22% increase in our quarterly common stock dividend to $0.275 per share. This increase equated to an annual dividend rate of $1.10 per share. In December 2012, our Board of directors authorized a 38% increase in our quarterly common stock dividend to $0.225 per share. This increase equated to an annual dividend rate of
$0.90 per share.
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 1991 and 1997, we sold or spun off a number of subsidiaries, including Bob’s Stores, Linens ‘n Things, Marshalls,
Kay-Bee Toys, This End Up and Footstar. 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, 2014, we guaranteed approximately 72 such store leases (excluding the lease guarantees related to Linens
‘n Things), with the maximum remaining lease term extending through 2026. 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 “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, 2014:

Payments Due by Period
Total

In millions

Operating leases
Lease obligations from discontinued operations
Capital lease obligations
Long-term debt

$

Interest payments on long-term debt(1)
Other long-term liabilities reflected in our consolidated balance sheet
$
(1)

2015

2016 to 2017

2018 to 2019

Thereafter

27,282 $
51
810
11,879
5,173

2,279 $
16
47
563
484

4,341 $
24
94
2,276
867

3,868 $
6
96
2,494
689

16,794
5
573
6,546
3,133

652
45,847 $

48
3,437 $

254
7,856 $

100
7,253 $

250
27,301

Interest payments on long-term debt are calculated on outstanding balances and interest rates in effect on December 31, 2014.

52

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 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.
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 CoPayments”) 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 pharmacy 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 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. 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, 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
53

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 have not been material to our results of operations or financial condition.
We participate in the federal government’s Medicare Part D program as a PDP through our SilverScript Insurance Company 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 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.
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.
We assume no risk for these amounts, which represented 6.4%, 7.0% and 7.7% of consolidated net revenues in 2014, 2013 and
2012, 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 reconciliation, (ii) an estimate of amounts payable to CMS under a risksharing 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 Pharmacy Segment
Our Retail Pharmacy Segment recognizes revenue from the sale of front store merchandise at the time the merchandise is purchased by the retail customer and recognizes revenue from the sale of prescription drugs when the prescription is picked up by the customer. Customer returns are not material. Revenue generated from the performance of services in our health care clinics is recognized at the time the services are performed. Sales taxes are not included in revenue.
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 revenues 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.
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 recognized 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 annual purchase
54

volumes. In addition, the Pharmacy Services Segment receives fees from pharmaceutical manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction of “Cost of revenues”.
Retail Pharmacy Segment
Vendor allowances received by the Retail Pharmacy 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 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. We have not made any material changes in the way we account for vendor allowances and purchase discounts during the past three years.
Inventory
All prescription drug inventories in the Retail Pharmacy Segment have been valued at the lower of cost or market using the weighted average cost method. The weighted average cost method is used to determine cost of sales and inventory in our mail service and specialty pharmacies in our Pharmacy Services Segment. Front store inventory in our Retail Pharmacy Segment is stated at the lower of cost or market on a first-in-first-out (“FIFO”) basis using the retail method of accounting to determine cost of sales and inventory, and the cost method of accounting on a FIFO basis to determine front store inventory in our distribution centers. Under the retail method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to the ending retail value of our inventory. Since the retail value of our front store inventory is adjusted on a regular basis to reflect current market conditions, our carrying value should approximate the lower of cost or market. In addition, 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 $189 million as of December 31,
2014. 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
$19 million as of December 31, 2014.
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 techniques and management estimates. Goodwill represents the excess of amounts paid for acquisitions over the fair value of the net identifiable assets acquired.

55

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 conditions, 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.
Goodwill is tested for impairment on a reporting unit basis using a two-step process. The first step of the impairment test is to identify potential impairment 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 the discounted cash flow valuation model and comparable market transaction models. If the fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is not performed. If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that 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 economic and regulatory conditions, our market capitalization, efforts of third party organizations to reduce 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 $28.1 billion and $9.8 billion as of December 31, 2014, respectively. We did not record any impairment losses related to goodwill or other intangible assets during 2014, 2013 or 2012. During the third quarter of 2014, we performed our required annual impairment tests of goodwill and indefinitely-lived trademarks. The results of the impairment tests concluded that there was no impairment of goodwill or trademarks. The goodwill impairment test resulted in the fair value of our Pharmacy Services and Retail Pharmacy reporting units exceeding their carrying values by a significant margin. The carrying value of goodwill as of December 31,
2014, in our Pharmacy Services and Retail Pharmacy reporting units was $21.2 billion and $6.9 billion, respectively.
56

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.
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.
Our total closed store lease liability covered by this critical accounting policy was $268 million as of December 31, 2014. This amount is net of $142 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 $14 million as of December 31, 2014.
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’ compensation 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 $628 million as of December 31, 2014.
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 $63 million as of
December 31, 2014.
We have not made any material changes in the accounting methodology used to establish our self-insurance liability during the past three years.

57

Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. The deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits is 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 or 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. New Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Companies have the option of using either a full retrospective or a modified retrospective approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption and the method of transition.
Proposed Lease Accounting Standard Update
In May 2013, the FASB issued a revised proposed accounting standard update on lease accounting that will require entities to recognize assets and liabilities arising from lease contracts on the balance sheet. The proposed accounting standard update states that lessees and lessors should apply a “right-of-use model” in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. The lease term is defined as the noncancelable term that takes into account renewal options and termination options if it is reasonably certain an entity will exercise or not exercise the option. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. The Company cannot presently determine the potential impact the proposed standard would have on its results of operations. While the Company believes that the proposed standard, as currently drafted, will likely have a material impact on its financial position, it will not have a material impact on its liquidity; however, until the proposed standard is finalized, such evaluation cannot be completed.

58

Cautionary Statement Concerning Forward-Looking Statements
This annual report contains forward-looking statements within the meaning of the federal securities laws. 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; 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 developments, as well as statements expressing optimism or pessimism about future operating results or events, are forward-looking statements within the meaning of the federal securities laws.
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 2014 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 clients 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 client loss and/or the failure to win new PBM 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 expiration 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 in the PBM industry attributable to increased competitive pressures, increased client demand for lower prices, enhanced service offerings and/or higher service levels and market dynamics and regulatory changes that impact our ability to offer plan sponsors pricing that includes the use of retail “differential” or “spread.”

•

Regulatory changes, business changes and compliance requirements and restrictions that may be imposed by Centers for
Medicare and 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 its Medicare Part D business.

•

Risks and uncertainties related to the timing and scope of reimbursement from Medicare, Medicaid and other governmentfunded programs, including the 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.

59

•

Possible changes in industry pricing benchmarks used to establish pricing in many of our PBM client contracts, pharmaceutical purchasing arrangements, retail network contracts, specialty payor agreements and other third party payor contracts.

•

A highly competitive business environment, including the uncertain impact of increased consolidation in the PBM industry, 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 Company’s ability to fully integrate and to realize the planned benefits associated with the acquisition of Coram LLC in accordance with the expected timing.

•

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.

•

Reform of the U.S. health care system, including ongoing implementation 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 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, 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 or retail clinic industries or to the health care industry generally.

•

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. 60

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 appropriate 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 receipt 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, 2014.
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 reasonable assurance that assets are safeguarded and that the financial records are reliable for preparing financial statements as of December 31, 2014.
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 10, 2015

61

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of CVS Health Corporation
We have audited CVS Health Corporation’s internal control over financial reporting as of December 31, 2014, 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). CVS Health Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment 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 CVS Health Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
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.
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.
In our opinion, CVS Health Corporation maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CVS Health Corporation as of December 31, 2014 and 2013, and 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,
2014 of CVS Health Corporation and our report dated February 10, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Boston, Massachusetts
February 10, 2015

62

Consolidated Statements of Income

Year Ended December 31,
2014

In millions, except per share amounts

Net revenues
Cost of revenues

$

126,761 $
102,978
23,783
15,746
8,037
509
—
7,528
2,928
4,600
(8)
4,592
—
4,592 $

123,120
100,632
22,488
15,278
7,210
557
348
6,305
2,436
3,869
(7)
3,862
2
3,864

$
$
$

3.98 $
— $
3.98 $
1,161

3.78 $
(0.01) $
3.77 $
1,217

3.05
(0.01)
3.04
1,271

$
$
$

3.96
—
3.96
1,169
1.10

3.75
(0.01)
3.74
1,226
0.90

3.02
(0.01)
3.02
1,280
0.65

Operating profit
Interest expense, net
Loss on early extinguishment of debt
Income before income tax provision
Income tax provision
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Net loss attributable to noncontrolling interest
$

Basic earnings per share:
Income from continuing operations attributable to CVS Health
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
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.

63

2012

139,367 $
114,000
25,367
16,568
8,799
600
521
7,678
3,033
4,645
(1)
4,644
—
4,644 $

Gross profit
Operating expenses

Net income attributable to CVS Health

2013

$

$
$
$
$

$
$
$
$

Consolidated Statements of Comprehensive Income

Year Ended December 31,
2014

In millions

Net income
Other comprehensive income (loss):
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 loss attributable to noncontrolling interest
Comprehensive income attributable to CVS Health

2013

2012

$

64

4,592 $

3,862

$

See accompanying notes to consolidated financial statements.

4,644 $
(35)
4
(37)
(68)
4,576
—
4,576 $

(30)
3
59
32
4,624
—
4,624 $

—
3
(12)
(9)
3,853
2
3,855

Consolidated Balance Sheets

December 31,
2014

In millions, except per share amounts

Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
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
Commitments and contingencies (Note 11)
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; 1,691 shares issued and 1,140 shares outstanding at December 31, 2014 and 1,680 shares issued and 1,180 shares outstanding at December 31, 2013
Treasury stock, at cost: 550 shares at December 31, 2014 and 500 shares at December 31,
2013
Shares held in trust: 1 share at December 31, 2014 and 2013
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.

65

$

$
$

2013

2,481 $
34
9,687
11,930
985
866
25,983
8,843
28,142
9,774
1,510
74,252 $

4,089
88
8,729
11,045
902
472
25,325
8,615
26,542
9,529
1,515
71,526

6,547 $
5,404
5,816
685
575
19,027
11,695
4,036
1,531
—

5,548
4,548
4,768
—
561
15,425
12,841
3,901
1,421
—

—

17

$

—

17

(24,078)
(31)
30,418
31,849
(217)
37,958
5
37,963
74,252 $

(20,169)
(31)
29,777
28,493
(149)
37,938
—
37,938
71,526

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

2014
$

Year Ended December 31,
2013

2012

132,406 $
(105,362)
(15,344)
15
(647)
(2,931)
8,137

114,993 $
(91,178)
(14,295)
8
(534)
(3,211)
5,783

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
Maturity of available-for-sale investments
Proceeds from sale of subsidiary
Net cash used in investing activities

(2,136)
515
11
(2,439)
(157)
161
—
(4,045)

(1,984)
600
54
(415)
(226)
136
—
(1,835)

(2,030)
529
23
(378)
—
—
7
(1,849)

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
Dividends paid
Proceeds from exercise of stock options
Excess tax benefits from stock-based compensation
Repurchase of common stock
Net cash 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 year
Cash and cash equivalents at the end of the year

685
1,483
(3,100)
—
(1,288)
421
106
(4,001)
(5,694)
(6)
(1,608)
4,089
2,481 $

(690)
3,964
—
—
(1,097)
500
62
(3,976)
(1,237)
3
2,714
1,375
4,089 $

(60)
1,239
(1,718)
(26)
(829)
836
28
(4,330)
(4,860)
—
(38)
1,413
1,375

4,644 $

4,592 $

3,862

1,931
165
521
(58)

1,870
141
—
(86)

1,753
132
348
(111)

$

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: Depreciation and amortization
Stock-based compensation
Loss on early extinguishment of debt
Deferred income taxes and 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
Net cash provided by operating activities
$

See accompanying notes to consolidated financial statements.

66

(737)
(770)
(383)
9
1,742
1,060
13
8,137 $

(2,210)
12
105
(135)
1,024
471
(1)
5,783 $

113,205
(90,032)
(13,643)
4
(581)
(2,282)
6,671

(387)
(853)
3
(99)
1,147
766
110
6,671

Consolidated Statements of Shareholders’ Equity

Shares
In millions

Dollars

Year Ended December 31,

Year Ended December 31,

2014

2013

2012

2014

2013

2012

Common stock:
Beginning of year

1,680

Stock options exercised and issuance of stock awards
End of year
Treasury stock:
Beginning of year
Purchase of treasury shares

11

13

1,691

1,680

1,640 $
27

17 $

17 $

—

1,667 $

—

17 $

17 $

16
1
17

(500)

(435)

(51)

(66)

(95)

1

1

1

92

77

47

(1)

—

—

(34)

Employee stock purchase plan issuances
Transfer of shares from shares held in trust
End of year
Shares held in trust:
Beginning of year

1,667

—

—

(550)

(500)

(1)

(1)

Transfer of shares to treasury stock

—

—

End of year

(1)

(1)

(340) $ (20,169) $ (16,270) $ (11,953)
(4,001)

(3,976)

(435) $ (24,078) $ (20,169) $ (16,270)
(2) $
1

(31) $
—

(31) $
—

(1) $

(31) $

(31) $

$

Capital surplus:
Beginning of year

(4,330)

(56)
25
(31)

29,777 $

29,120 $

Stock option activity and stock awards

535

588

955

Excess tax benefit on stock options and stock awards

106

69

28

Transfer of shares held in trust to treasury stock

—

—

9

Purchase of noncontrolling interest in subsidiary

—

—

2

$

30,418 $

29,777 $

29,120

$

28,493 $

24,998 $

22,052

—

—

End of year
Retained earnings:
Beginning of year
Changes in inventory accounting principles
Net income attributable to CVS Health

28,126

(89)

4,644

4,592

(1,288)

(1,097)

$

31,849 $

28,493 $

$

(149) $

(181) $

(172)

(35)

(30)

—

4

3

3

(37)

59

(12)

Common stock dividends
End of year
Accumulated other comprehensive 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

3,864
(829)
24,998

$

(217) $

(149) $

$

37,958 $

37,938 $

37,653

$
$

— $
5
5 $

— $
—
— $

—
—
—

$

Total CVS Health shareholders’ equity
Noncontrolling interest:
Beginning of year

37,963 $

37,938 $

37,653

Business combinations
End of year
Total shareholders’ equity

See accompanying notes to consolidated financial statements.

67

(181)

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 reportable business segments, Pharmacy Services, Retail Pharmacy and Corporate, which are described below.
Pharmacy Services Segment (the “PSS”) - The PSS provides a full range of pharmacy benefit management services including mail order pharmacy services, specialty pharmacy and infusion services, plan design and administration, formulary management and claims processing. The Company’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans 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/caremarkTM, CarePlus
CVS/pharmacy® and Navarro® Health Services names. In January 2014, the Company enhanced its offerings of specialty infusion services and began offering enteral nutrition services through Coram LLC and its subsidiaries (See Note 2, “Coram
Acquisition”).
The PSS also provides health management programs, which include integrated disease management for 17 conditions, through the Company’s Accordant® 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 pharmacy services business operates under the CVS/caremarkTM Pharmacy Services, Caremark®, CVS/caremarkTM,
CarePlus CVS/pharmacy®, RxAmerica®, Accordant®, SilverScript®, NovoLogix®, Coram®, CVS/specialtyTM and Navarro® Health
Services names. As of December 31, 2014, the PSS operated 27 retail specialty pharmacy stores, 11 specialty mail order pharmacies and four mail order dispensing pharmacies, and 86 branches and six centers of excellence for infusion and enteral services located in 40 states, Puerto Rico and the District of Columbia.
Retail Pharmacy Segment (the “RPS”) - The RPS sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards and convenience foods, through the Company’s CVS/pharmacy®, CVS®, Longs Drugs®, Navarro® Discount Pharmacy and Drogaria
OnofreTM retail stores and online through CVS.com®, Navarro.comTM and Onofre.com.brTM.
The RPS 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.
As of December 31, 2014, the retail pharmacy business included 7,822 retail drugstores (of which 7,765 operated a pharmacy) located in 44 states, the District of Columbia, Puerto Rico and Brazil operating primarily under the CVS/pharmacy, CVS,
Longs Drugs, Navarro Discount Pharmacy and Drogaria Onofre names, the online retail websites, CVS.com, Navarro.com and
Onofre.com.br, and 971 retail health care clinics operating under the MinuteClinic name (of which 963 were located in
CVS/pharmacy stores).

68

Notes to Consolidated Financial Statements (continued)

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, corporate information technology and finance departments.
Principles of consolidation - The consolidated financial statements include the accounts of the Company and its majorityowned subsidiaries and variable interest entities for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated.
The Company continually evaluates its investments to determine if they represent variable interests in a variable interest entity
(“VIE”). If the Company determines 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.
Short-term and long-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. The
Company’s long-term investments of $51 million at December 31, 2014, which are classified as noncurrent other assets within the accompanying consolidated balance sheet, consist of certificates of deposit. These investments, which were classified as available-for-sale within Level 1 of the fair value hierarchy, were carried at fair value, which approximated historical cost at
December 31, 2014 and 2013.
Fair value of financial instruments - As of December 31, 2014, the Company’s financial instruments include cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable, contingent consideration liability and short-term debt. Due to the nature of these instruments, the Company’s carrying value approximates fair value. The carrying amount and estimated fair value of total long-term debt was $12.3 billion and $13.3 billion, respectively, as of
December 31, 2014. 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. The Company had outstanding letters of credit, which guaranteed foreign trade purchases, with a fair value of $4 million as of December 31, 2014. There were no outstanding derivative financial instruments as of December 31, 2014 and 2013.

69

Notes to Consolidated Financial Statements (continued)

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 comprehensive income (loss).
For U.S. dollar functional currency locations, foreign currency assets and liabilities are remeasured into U.S. dollars at end-ofperiod exchange rates, except for non-monetary 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 and governmental agencies), clients and members, 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

2014

Beginning balance
Additions charged to bad debt expense
Write-offs charged to allowance
Ending balance

$

$

2013

256 $
185
(185)
256 $

2012

243 $
195
(182)
256 $

189
149
(95)
243

Inventories - All inventories are stated at the lower of cost or market. Prescription drug inventories in the RPS and PSS are accounted for using the weighted average cost method. Front store inventories in the RPS stores are accounted for on a first-in, first-out basis using the retail inventory method. The RPS front store inventories in the distribution centers are accounted for using the cost method on a first-in, first-out basis. 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. 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.
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:

70

Notes to Consolidated Financial Statements (continued)

In millions

2014

Land
Building and improvements
Fixtures and equipment
Leasehold improvements
Software

$

Accumulated depreciation and amortization
Property and equipment, net

$

1,506 $
2,828
8,958
3,626
1,868
18,786
(9,943)
8,843 $

2013

1,460
2,694
8,419
3,320
1,515
17,408
(8,793)
8,615

The gross amount of property and equipment under capital leases was $268 million and $260 million as of December 31, 2014 and 2013, respectively. Accumulated amortization of property and equipment under capital lease was $86 million and $74 million as of December 31, 2014 and 2013, respectively. Amortization of property and equipment under capital lease is included within depreciation expense. Depreciation expense totaled $1.4 billion in 2014 and 2013, and $1.3 billion in 2012.
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 for additional information 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 10 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 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 - In June 2012, the Company acquired the remaining 40% interest in Generation Health from minority shareholders and employee option holders for $26 million and $5 million, respectively, for a total of $31 million.
The following is a reconciliation of the changes in the redeemable noncontrolling interest for the year ended December 31,
2012:
In millions

Balance, December 31, 2011
Net loss attributable to noncontrolling interest
Purchase of noncontrolling interest
Reclassification to capital surplus in connection with purchase of noncontrolling interest
Balance, December 31, 2012

$

$

30
(2)
(26)
(2)
—

Revenue Recognition
Pharmacy Services Segment
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
71

Notes to Consolidated Financial Statements (continued)

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 associated 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, 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.
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 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
(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 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).

72

Notes to Consolidated Financial Statements (continued)

Retail Pharmacy Segment
The RPS recognizes 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 RPS’ health care clinics is recognized at the time the services are performed. Sales taxes are not included in revenue.
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 revenues 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 12 for additional information about the revenues of the Company’s business segments.

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 volumerelated or other discounts.
Retail Pharmacy Segment - The RPS’ 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 12 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 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 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 Pharmacy Segment - Vendor allowances received by the RPS 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
73

Notes to Consolidated Financial Statements (continued)

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 $207 million and $246 million in 2014 and 2013, respectively.
Advertising costs - Advertising costs are expensed when the related advertising takes place. Advertising costs, net of vendor funding (included in operating expenses), were $212 million, $177 million and $221 million in 2014, 2013 and 2012, respectively. Interest expense, net - Interest expense, net of capitalized interest, was $615 million, $517 million and $561 million, and interest income was $15 million, $8 million and $4 million in 2014, 2013 and 2012, respectively. Capitalized interest totaled
$19 million, $25 million and $29 million in 2014, 2013 and 2012, respectively.
Shares held in trust - The Company maintains grantor trusts, which held approximately 1 million shares of its common stock at December 31, 2014 and 2013, 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, losses on derivatives from cash flow hedges executed in previous years associated with the issuance of long-term debt, and foreign currency translation adjustments.
The amount included in accumulated other comprehensive loss related to the Company’s pension and postretirement plans was
$234 million pre-tax ($143 million after-tax) as of December 31, 2014 and $172 million pre-tax ($106 million after-tax) as of
December 31, 2013. The net impact on cash flow hedges totaled $16 million pre-tax ($9 million after-tax) and $22 million pretax ($13 million after-tax) as of December 31, 2014 and 2013, respectively. Cumulative foreign currency translation adjustments at December 31, 2014 and 2013 were $65 million and $30 million, respectively.
Changes in accumulated other comprehensive income (loss) by component are shown below:

74

Notes to Consolidated Financial Statements (continued)

Foreign
Currency

In millions

Balance, December 31, 2013
Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (2)
Net other comprehensive income (loss)
Balance, December 31, 2014

$

Year Ended December 31, 2014(1)
Pension and
Losses on
Other
Cash Flow
Postretirement
Hedges
Benefits

(30) $

(13) $

(35)
—
(35)
(65) $

$

—
4
4
(9) $

(106) $

Total

(149)
(35)

—
(37)
(37)
(143) $

(33)
(68)
(217)

Year Ended December 31, 2013(1)
Losses on
Cash Flow
Hedges

Foreign
Currency

Balance, December 31, 2012
Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (2)
Net other comprehensive income (loss)
Balance, December 31, 2013
(1)
(2)

$

—

$

(30)
—
(30)
(30) $

$

Pension and
Other
Postretirement
Benefits

(16) $
—
3
3
(13) $

(165) $
—
59
59
(106) $

Total

(181)
(30)
62
32
(149)

All amounts are net of tax.
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 operating expenses on the consolidated statement of income.

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 July 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 Pharmacy Segment. Revenues associated with Red Oak expenses reimbursed by Cardinal for the year ended December
31, 2014 and amounts due to Cardinal from Red Oak at December 31, 2014 were immaterial.
Cardinal is required to pay the Company 39 quarterly payments of $25.6 million which commenced in October 2014 and, if certain milestones are achieved, it will pay additional predetermined quarterly amounts to the Company beginning in the third quarter of 2015. The payments will reduce the Company’s carrying cost of inventory and will be recognized in cost of revenues when the related inventory is sold.
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 Pharmacy segments utilize this clinical health information network in providing services to its client plan members and retail customers. The Company expensed fees
75

Notes to Consolidated Financial Statements (continued)

of approximately $50 million, $48 million and $32 million in the years ended December 31, 2014, 2013 and 2012, respectively, for the use of this network.
The Company’s investment in and equity in earnings in SureScripts for all periods presented is immaterial.
In September 2014, the Company made a charitable contribution of $25 million to the CVS Foundation (formerly CVS
Caremark Charitable Trust, Inc.) (the “Foundation”) to fund future giving. The 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 consolidated statement of income for the year ended December 31, 2014.
Income taxes - The Company provides for income taxes currently payable, as well as for those deferred because of timing differences between reported income and expenses for financial statement purposes versus income tax return purposes. Income tax credits are recorded as a reduction of income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax return purposes. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled. The effect of a change in income tax rates is recognized as income or expense in the period of the change. 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. The Company’s loss from discontinued operations includes lease-related costs which the Company believes it will likely be required to satisfy pursuant to its Linens ‘n Things lease guarantees.
Below is a summary of the results of discontinued operations for the years ended December 31:

In millions

Loss on disposal
Income tax benefit
Loss from discontinued operations, net of tax

2014

$
$

2013

(1) $
—
(1) $

2012

(12) $
4
(8) $

(12)
5
(7)

Earnings per common share - Earnings per share is computed using the two-class method. Options to purchase 2.1 million,
6.2 million and 5.9 million shares of common stock were outstanding as of December 31, 2014, 2013 and 2012, 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 Pronouncement - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Companies have the option of using either a full retrospective or a modified retrospective approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption and the method of transition.
2

Coram Acquisition

On January 16, 2014, the Company acquired 100% of the voting interests of Coram LLC and its subsidiaries (collectively,
“Coram”), the specialty infusion services and enteral nutrition business unit of Apria Healthcare Group Inc. (“Apria”), for cash consideration of approximately $2.1 billion, plus contingent consideration of approximately $0.1 billion. The purchase price was also subject to a working capital adjustment, which resulted in the Company receiving $9 million from Apria. Coram is one of the nation’s largest providers of comprehensive infusion services, caring for approximately 240,000 patients annually.
Coram has approximately 4,600 employees, including approximately 600 nurses and 250 dietitians, operating primarily through
84 branch locations and six centers of excellence for patient intake.

76

Notes to Consolidated Financial Statements (continued)

The contingent consideration is based on the Company’s future realization of Coram’s tax net operating loss carryforwards
(“NOLs”) as of the date of the acquisition. The Company will pay the seller the first $60 million in tax savings realized from the future utilization of the Coram NOLs, plus 50% of any additional future tax savings from the remaining NOLs. The fair value of the contingent consideration liability associated with the future realization of the Coram NOLs was determined using
Level 3 inputs based on the present value of contingent payments expected to be made based on the Company’s estimate of the amount and timing of Coram NOLs that will ultimately be realized. The change in fair value of the contingent consideration liability recognized in earnings for the year ended December 31, 2014 was immaterial.
The following is a summary of the fair values of the assets acquired and liabilities assumed:
In millions

Accounts receivable
Inventory
Other assets
Property and equipment
Intangible assets
Goodwill
Current liabilities
Deferred tax liabilities, net
Other noncurrent liabilities
Noncontrolling interest
Total consideration

$

215
77
10
49
537
1,566
(128)
(97)
(91)
(2)
2,136

$

The goodwill represents future economic benefits expected to arise from the Company’s expanded presence in the specialty pharmaceuticals market, the assembled workforce acquired, and the expected synergies from combining operations with
Coram. The goodwill is nondeductible for income tax purposes.
Coram’s results of operations are included in the Company’s PSS beginning on January 16, 2014. Pro forma information for this acquisition is not presented as Coram’s results are immaterial to the Company’s consolidated financial statements. During the year ended December 31, 2014, acquisition costs of $15 million were expensed as incurred within operating expenses.

77

Notes to Consolidated Financial Statements (continued)

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 first compares the fair value of its two reporting units, the
PSS and RPS, to their respective carrying amounts. The Company estimates the fair value of its reporting units using a combination of a future discounted cash flow valuation model and a comparable market transaction model. If the estimated fair value of the reporting unit is less than its carrying amount, an impairment loss calculation is prepared. The impairment loss calculation compares the implied fair value of a reporting unit’s goodwill with the carrying amount of its goodwill. If the carrying amount of the goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to the excess. During the third quarter of 2014, the Company performed its required annual goodwill impairment tests. The Company concluded there were no goodwill impairments as of the testing date.
Below is a summary of the changes in the carrying amount of goodwill by segment for the years ended December 31, 2014 and
2013:

Pharmacy
Services

In millions

Balance, December 31, 2012
Acquisitions
Foreign currency translation adjustments
Other (1)
Balance, December 31, 2013
Acquisitions
Foreign currency translation adjustments
Other (1)
Balance, December 31, 2014

$

$

19,646 $
13
—
(1)
19,658
1,578
—
(2)
21,234 $

Retail
Pharmacy

6,749 $
160
(25)
—
6,884
38
(14)
—
6,908 $

Total

26,395
173
(25)
(1)
26,542
1,616
(14)
(2)
28,142

(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 2014, the Company performed its annual impairment test of the indefinitely-lived trademark and concluded there was no impairment as of the testing date. The carrying amount of its indefinitely-lived trademark was $6.4 billion as of December 31, 2014 and 2013.
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 13.6 years. The weighted average useful lives of the Company’s customer contracts and relationships and covenants not to compete are 13.2 years. The weighted average lives of the Company’s favorable leases and other intangible assets are 16.3 years. Amortization expense for intangible assets totaled $518 million, $494 million and $486 million in 2014, 2013 and 2012, respectively. The anticipated annual amortization expense for these intangible assets for the next five years is as follows:
In millions

2015
2016
2017
2018
2019

$
$
$
$
$

486
456
433
415
383

78

Notes to Consolidated Financial Statements (continued)

The following table is a summary of the Company’s intangible assets as of December 31:
2014
Gross
Carrying
Amount

In millions

Trademark (indefinitely-lived)
Customer contracts and relationships and covenants not to compete
Favorable leases and other

2013

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

6,398 $

— $

6,398 $

6,398 $

— $

6,398

$
4

$

6,521
880
13,799 $

(3,549)
(476)
(4,025) $

2,972
404
9,774 $

5,840
800
13,038 $

(3,083)
(426)
(3,509) $

2,757
374
9,529

Share Repurchase Programs

The following share repurchase programs were authorized by the Company’s Board of Directors:
Authorization Date

Amount of
Authorization

In billions

December 15, 2014 (“2014 Repurchase Program”)
December 17, 2013 (“2013 Repurchase Program”)
September 19, 2012 (“2012 Repurchase Program”)
August 23, 2011 (“2011 Repurchase Program”)

$
$
$
$

10.0
6.0
6.0
4.0

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 2014 and 2013 Repurchase Programs may be modified or terminated by the Board of Directors at any time. The 2012 and 2011 Repurchase Programs have been completed, as described below. Pursuant to the authorization under the 2013 Repurchase Programs, effective January 2, 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 on January 5, 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 at a price of $94.49 per share. At the conclusion of the ASR program, the Company may receive additional shares equal to the remaining 20% of the $2.0 billion notional amount.
The ultimate number of shares the Company may receive will fluctuate based on changes in the daily volume-weighted average price of the Company’s stock over a period beginning on January 2, 2015 and ending on or before April 26, 2015. If the mean daily volume-weighted average price of the Company’s common stock, less a discount (the “forward price”), during the ASR program falls below $94.49 per share, the Company will receive a higher number of shares from JP Morgan. If the forward price rises above $94.49 per share, the Company will either receive fewer shares from JP Morgan or, potentially have an obligation to JP Morgan which, at the Company’s option, could be settled in additional cash or by issuing shares. Under the terms of the ASR agreement, the maximum number of shares that could be received or delivered is 42.0 million. The initial
16.8 million shares of common stock delivered to the Company by JP Morgan were placed into treasury stock in January 2015.
Pursuant to the authorization under the 2012 Repurchase Program, effective October 1, 2013, the Company entered into a $1.7 billion fixed dollar ASR agreement with Barclays Bank PLC (“Barclays”). Upon payment of the $1.7 billion purchase price on
October 1, 2013, the Company received a number of shares of its common stock equal to 50% of the $1.7 billion notional amount of the ASR agreement or approximately 14.9 million shares at a price of $56.88 per share. The Company received approximately 11.7 million shares of common stock on December 30, 2013 at an average price of $63.83 per share, representing the remaining 50% of the $1.7 billion notional amount of the ASR agreement and thereby concluding the agreement. The total of 26.6 million shares of common stock delivered to the Company by Barclays over the term of the
October 2013 ASR agreement were placed into treasury stock.
Pursuant to the authorizations under the 2011 and 2012 Repurchase Programs, on September 19, 2012, the Company entered into a $1.2 billion fixed dollar ASR agreement with Barclays. Upon payment of the $1.2 billion purchase price on
September 20, 2012, the Company received a number of shares of its common stock equal to 50% of the $1.2 billion notional
79

Notes to Consolidated Financial Statements (continued)

amount of the ASR agreement or approximately 12.6 million shares at a price of $47.71 per share. The Company received approximately 13.0 million shares of common stock on November 16, 2012 at an average price of $46.96 per share, representing the remaining 50% of the $1.2 billion notional amount of the ASR agreement and thereby concluding the agreement. The total of 25.6 million shares of common stock delivered to the Company by Barclays over the term of the
September 2012 ASR agreement were placed into treasury stock.
Each of the ASR transactions described above were accounted for as an initial treasury stock transaction and a forward contract. The forward contract was classified as an equity instrument. The initial repurchase of the shares and delivery of the remainder of the shares to conclude each 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, 2014, the Company repurchased an aggregate of 51.4 million shares of common stock for approximately $4.0 billion under the 2013 and 2012 Repurchase Programs. As of December 31, 2014, there remained an aggregate of approximately $12.7 billion available for future repurchases under the 2014 and 2013 Repurchase Programs, $2.0 billion of which was used for the ASR effective January 2, 2015 described above. As of December 31, 2014, the 2012
Repurchase Program was complete.
During the year ended December 31, 2013, the Company repurchased an aggregate of 66.2 million shares of common stock for approximately $4.0 billion under the 2012 Repurchase Program, which includes shares received from the October 2013 ASR agreement described above. As of December 31, 2013, there remained an aggregate of approximately $6.7 billion available for future repurchases under the 2013 and 2012 Repurchase Programs.
During the year ended December 31, 2012, the Company repurchased an aggregate of 95.0 million shares of common stock for approximately $4.3 billion under the 2012 and 2011 Repurchase Programs, which includes shares received from the September
2012 ASR agreement described above. As of December 31, 2012, the 2011 Repurchase program was complete.
5

Borrowing and Credit Agreements

80

Notes to Consolidated Financial Statements (continued)

The following table is a summary of the Company’s borrowings as of December 31:
In millions

2014

Commercial paper
4.875% senior notes due 2014
3.25% senior notes due 2015
6.125% senior notes due 2016
1.2% senior notes due 2016
5.75% senior notes due 2017
2.25% senior notes due 2018
6.6% senior notes due 2019
2.25% senior notes due 2019
4.75% senior notes due 2020
4.125% senior notes due 2021
2.75% senior notes due 2022
4.0% senior notes due 2023
3.375% senior notes due 2024
6.25% senior notes due 2027
6.125% senior notes due 2039
5.75% senior notes due 2041
5.3% senior notes due 2043
Capital lease obligations
Other

$

Less:
Short-term debt (commercial paper)
Current portion of long-term debt
Long-term debt

$

2013

685 $
—
550
421
750
1,080
1,250
394
850
450
550
1,250
1,250
650
453
734
493
750
391
4
12,955

—
550
550
421
750
1,310
1,250
394
—
450
550
1,250
1,250
—
1,000
1,500
950
750
390
87
13,402

(685)
(575)
11,695 $

—
(561)
12,841

The Company had $685 million of commercial paper outstanding at a weighted average interest rate of 0.55% as of
December 31, 2014. In connection with its commercial paper program, the Company maintains a $1.25 billion, five-year unsecured back-up credit facility, which expires on February 17, 2017, a $1.0 billion, five-year unsecured back-up credit facility, which expires on May 23, 2018, and a $1.25 billion, five-year unsecured back-up credit facility, which expires on
July 24, 2019. 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 0.03%, regardless of usage. As of December 31, 2014, there were no borrowings outstanding under the back-up credit facilities. The weighted average interest rate for short-term debt outstanding during the year ended December 31, 2014 and 2013 was 0.36% and 0.27%, respectively. On August 7, 2014, the Company issued $850 million of 2.25% unsecured senior notes due August 12, 2019 and $650 million of 3.375% unsecured senior notes due August 12, 2024 (collectively, the “2014 Notes”) for total proceeds of approximately
$1.5 billion, net of discounts and underwriting fees. The 2014 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 2014 Notes were used for general corporate purposes and to repay certain corporate debt.
On August 7, 2014, the Company announced tender offers for any and all of the 6.25% Senior Notes due 2027, and up to a maximum amount of the 6.125% Senior Notes due 2039, the 5.75% Senior Notes due 2041 and the 5.75% Senior Notes due
2017, for up to an aggregate principal amount of $1.5 billion. On August 21, 2014, the Company increased the aggregate principal amount of the tender offers to $2.0 billion and completed the repurchase for the maximum amount on September 4,
2014. The Company paid a premium of $490 million in excess of the debt principal in connection with the tender offers, wrote off $26 million of unamortized deferred financing costs and incurred $5 million in fees, for a total loss on the early

81

Notes to Consolidated Financial Statements (continued)

extinguishment of debt of $521 million. The loss was recorded in income from continuing operations on the consolidated statement of income for the year ended December 31, 2014.
During the year ended December 31, 2014, the Company repurchased the remaining $41 million of outstanding Enhanced
Capital Advantage Preferred Securities (“ECAPS”) at par. The fees and write-off of deferred issuance costs associated with the early extinguishment of the ECAPS were immaterial.
On December 2, 2013, the Company issued $750 million of 1.2% unsecured senior notes due December 5, 2016; $1.25 billion of 2.25% unsecured senior notes due December 5, 2018; $1.25 billion of 4.0% unsecured senior notes due December 5, 2023; and $750 million of 5.3% unsecured senior notes due December 5, 2043 (the “2013 Notes”) for total proceeds of approximately
$4.0 billion, net of discounts and underwriting fees. The 2013 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 2013 Notes were used to repay commercial paper outstanding at the time of issuance and to fund the acquisition of Coram LLC in January 2014. The remainder was used for general corporate purposes. On November 26, 2012, the Company issued $1.25 billion of 2.75% unsecured senior notes due December 1, 2022 (the “2012
Notes”) for total proceeds of approximately $1.24 billion, net of discounts and underwriting fees. The 2012 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 2012 Notes were used for general corporate purposes and to repay certain corporate debt.
On November 26, 2012, the Company announced tender offers for any and all of the 6.6% Senior Notes due 2019, and up to a maximum amount of the 6.125% Senior Notes due 2016 and 5.75% Senior Notes due 2017, for up to an aggregate principal amount of $1.0 billion. In December 2012, the Company increased the aggregate principal amount of the tender offers to
$1.325 billion and completed the repurchase for the maximum amount. The Company paid a premium of $332 million in excess of the debt principal in connection with the tender offers, wrote off $13 million of unamortized deferred financing costs and incurred $3 million in fees, for a total loss on the early extinguishment of debt of $348 million. The loss was recorded in income from continuing operations on the consolidated statement of income for the year ended December 31, 2012.
The credit facilities, 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.
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2014 are $575 million in
2015, $1.2 million in 2016, $1.1 billion in 2017, $1.3 billion in 2018 and $1.3 billion in 2019.
6

Leases

The Company leases most of its retail and mail order locations, ten of its distribution centers and certain corporate offices under non-cancelable 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. Minimum rent 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

2014

Minimum rentals
Contingent rentals

$

Less: sublease income
$

2,320 $
36
2,356
(21)
2,335 $

2013

2,210 $
41
2,251
(21)
2,230 $

2012

2,165
48
2,213
(20)
2,193

The following table is a summary of the future minimum lease payments under capital and operating leases as of December 31,
2014:
82

Notes to Consolidated Financial Statements (continued)

Capital
Leases

In millions

2015
2016
2017
2018
2019
Thereafter
Total future lease payments
Less: imputed interest
Present value of capital lease obligations
(1)

$

$

47 $
47
47
48
48
573
810 $
(419)
391

Operating
Leases(1)

2,279
2,220
2,121
2,007
1,861
16,794
27,282

Future operating lease payments have not been reduced by minimum sublease rentals of $203 million due in the future under noncancelable subleases.

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 $515 million in 2014, $600 million in 2013 and $529 million in 2012.
7

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.
As of December 31, 2014 and 2013, amounts due from CMS included in accounts receivable were $1.8 billion and $2.4 billion, respectively. 8

Pension Plans and Other Postretirement Benefits

Defined Contribution Plans
The Company sponsors 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 restriction 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
83

Notes to Consolidated Financial Statements (continued)

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 $238 million, $235 million and $199 million in 2014, 2013 and 2012, respectively.
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, 2014 and 2013, the Company’s other postretirement benefits have an accumulated postretirement benefit obligation of $31 million and $27 million, respectively. Net periodic benefit costs related to these other postretirement benefits were $1 million in 2014, $11 million in 2013, and $1 million in 2012. The net periodic benefit costs for
2013 include a settlement loss of $8 million.
Pursuant to various labor 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, $55 million and $50 million in 2014, 2013 and 2012, respectively.
Pension Plans
During the years ended December 31, 2014, 2013 and 2012, the Company sponsored nine defined benefit pension plans. Four 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. Most of the plans were frozen in prior periods.
As of December 31, 2014, the Company’s pension plans had a projected benefit obligation of $796 million and plan assets of
$635 million. As of December 31, 2013, the Company’s pension plans had a projected benefit obligation of $694 million and plan assets of $568 million. Actual return on plan assets was $75 million and $49 million in 2014 and 2013, respectively. Net periodic pension costs related to these pension plans were $21 million, $19 million and $31 million in 2014, 2013 and 2012, respectively. The net periodic pension costs for 2012 include a curtailment loss of $2 million.
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. The discount rate for the plans was 4.0% in 2014 and 4.75% in 2013. 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. The expected long-term rate of return for the plans ranged from 5.75% to 7.25% in 2014 and was 7.25% for all plans in 2013 and 2012.
Historically, the Company used an investment strategy which emphasized equities in order to produce higher expected returns, and in the long run, lower expected expense and cash contribution requirements. The qualified pension plan asset allocation targets were 50% equity and 50% fixed income for 2012. Beginning in 2013, the Company changed its investment strategy to be liability management driven. The qualified pension plan asset allocation targets in 2014 and 2013 were revised to hold more fixed income investments based on the change in the investment strategy. Investment allocations for the four qualified defined benefit plans range from 70% to 85% in fixed income and 15% to 30% in equities as of December 31, 2014.
As of December 31, 2014, the Company’s qualified defined benefit pension plan assets consisted of 18% equity, 81% fixed income and 1% money market securities of which 14% were classified as Level 1 and 86% as Level 2 in the fair value hierarchy. The Company’s qualified defined benefit pension plan assets as of December 31, 2013 consisted of 23% equity, 76% fixed income and 1% money market securities of which 17% were classified as Level 1 and 83% as Level 2 in the fair value hierarchy. The Company contributed $42 million, $33 million and $36 million to the pension plans during 2014, 2013 and 2012, respectively. The Company plans to make approximately $36 million in contributions to the pension plans during 2015.
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-employer pension plans in the following aspects: (i) assets contributed to the multiemployer plan by one employer
84

Notes to Consolidated Financial Statements (continued)

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 $14 million, $13 million and $12 million in 2014, 2013 and 2012, respectively. 9 Stock Incentive Plans
Stock-based compensation expense 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 three to five years) using the straight-line method. Compensation expense related to stock options, which includes the Employee Stock Purchase Plan (the “ESPP”) totaled $103 million, $100 million and $102 million for 2014, 2013 and 2012, respectively. The recognized tax benefit was $33 million, $32 million and $33 million for 2014, 2013 and 2012, respectively. Compensation expense related to restricted stock awards totaled
$62 million, $41 million and $30 million for 2014, 2013 and 2012, respectively.
The ESPP provides for the purchase of up to 15 million shares of common stock. In March 2013, the Board of Directors approved an amendment to the ESPP to provide an additional 15 million shares of common stock for issuance. Under the ESPP, eligible employees may purchase common stock at the end of each six month offering period at a purchase price equal to 85% of the lower of the fair market value on the first day or the last day of the offering period. During 2014, approximately 2 million shares of common stock were purchased under the provisions of the ESPP at an average price of $54.12 per share. As of
December 31, 2014, approximately 15 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:
2014

Dividend yield(1)
Expected volatility(2)
Risk-free interest rate(3)
Expected life (in years)(4)
Weighted-average grant date fair value
(1)
(2)
(3)
(4)

$

0.75%
14.87%
0.08%
0.5
13.74 $

2013

0.86%
16.94%
0.10%
0.5
10.08 $

2012

0.73%
22.88%
0.10%
0.5
9.22

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.
The expected volatility is based on the historical volatility of the Company’s daily stock market prices over the previous six month period.
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., 6 months). 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 performance 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
85

Notes to Consolidated Financial Statements (continued)

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. In November 2012, the Company’s Board of Directors approved an amendment to the ICP to eliminate the share recycling provision of the ICP. As of December 31, 2014, there were approximately 30 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. The Company granted 2,708,000, 1,715,000 and 1,811,000 restricted stock units with a weighted average fair value of $73.60, $54.30 and $44.80 in 2014, 2013 and 2012, respectively. As of
December 31, 2014, there was $190 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 2.7 years. The total fair value of restricted shares vested during 2014, 2013 and 2012 was $57 million, $41 million and $81 million, respectively.
The following table is a summary of the restricted stock unit and restricted share award activity for the year ended
December 31, 2014.

Units in thousands

Weighted Average
Grant Date
Fair Value

Units

Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year

3,021
2,708
(803)
(249)
4,677

$
$
$
$
$

38.56
73.60
73.11
57.58
51.90

All grants under the ICP are awarded at fair market 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.
Excess tax benefits of $106 million, $62 million and $28 million were included in financing activities in the accompanying consolidated statements of cash flow during 2014, 2013 and 2012, respectively. Cash received from stock options exercised, which includes the ESPP, totaled $421 million, $500 million and $836 million during 2014, 2013 and 2012, respectively. The total intrinsic value of stock options exercised was $372 million, $282 million and $321 million in 2014, 2013 and 2012, respectively. The total fair value of stock options vested during 2014, 2013 and 2012 was $292 million, $329 million and $386 million, respectively.

The fair value of each stock option is estimated using the Black-Scholes option pricing model based on the following assumptions at the time of grant:

2014

Dividend yield(1)
Expected volatility(2)
Risk-free interest rate(3)
Expected life (in years)(4)
Weighted-average grant date fair value
(1)
(2)
(3)
(4)

$

1.47%
19.92%
1.35%
4.0
11.04 $

2013

1.65%
30.96%
0.73%
4.7
12.50 $

2012

1.44%
32.49%
0.84%
4.7
11.12

The dividend yield is based on annual dividends paid and the fair market value of the Company’s stock at the grant date.
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.
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.
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. 86

Notes to Consolidated Financial Statements (continued)

As of December 31, 2014, unrecognized compensation expense related to unvested options totaled $121 million, which the
Company expects to be recognized over a weighted-average period of 1.7 years. After considering anticipated forfeitures, the
Company expects approximately 16 million of the unvested stock options to vest over the requisite service period.
The following table is a summary of the Company’s stock option activity for the year ended December 31, 2014:

Shares in thousands

Outstanding at December 31, 2013
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2014
Exercisable at December 31, 2014
Vested at December 31, 2014 and expected to vest in the future
10

Weighted Average
Exercise Price

Shares

34,738
4,525
(9,563)
(1,202)
(332)
28,166
11,634

Weighted Average
Remaining
Contractual
Term

Aggregate Intrinsic
Value

$
$
$
$
$
$
$

41.40
74.96
37.30
50.15
36.93
47.87
37.86

4.15 $ 1,364,408,886
2.82 $
679,995,090

27,394 $

47.51

4.11 $ 1,336,774,863

Income Taxes

The income tax provision for continuing operations consisted of the following for the years ended December 31:

In millions

2014

Current:
Federal
State

$

Deferred:
Federal
State
Total

$

2013

2012

2,581 $
495
3,076

2,623 $
437
3,060

2,226
410
2,636

(43)
—
(43)
3,033 $

(115)
(17)
(132)
2,928 $

(182)
(18)
(200)
2,436

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:

2014

Statutory income tax rate
State income taxes, net of federal tax benefit
Other
Effective income tax rate

2013

35.0%
4.3
0.2
39.5%

87

2012

35.0%
4.0
(0.1)
38.9%

35.0%
3.9
(0.3)
38.6%

Notes to Consolidated Financial Statements (continued)

The following table is a summary of the significant components of the Company’s deferred tax assets and liabilities as of
December 31:

In millions

2014

Deferred tax assets:
Lease and rents
Employee benefits
Allowance for doubtful accounts
Retirement benefits
Net operating losses
Depreciation
Deferred income
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Inventories
Depreciation and amortization
Total deferred tax liabilities
Net deferred tax liabilities

$

$

2013

396 $
311
164
80
74
—
261
297
(5)
1,578

344
213
172
79
10
192
220
378
(3)
1,605

(18)
(4,572)
(4,590)
(3,012) $

(69)
(4,512)
(4,581)
(2,976)

Net deferred tax assets (liabilities) are presented on the consolidated balance sheets as follows:

In millions

2014

Deferred tax assets—current
Deferred tax assets—noncurrent (included in other assets)
Deferred tax liabilities—noncurrent
Net deferred tax liabilities

$

$

2013

985 $
39
(4,036)
(3,012) $

902
23
(3,901)
(2,976)

The Company believes that it is more likely than not the deferred tax assets will be realized during future periods.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

In millions

2014

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

$

$

2013

117 $
32
70
(15)
(15)
(1)
188 $

2012

80 $
19
37
(1)
(17)
(1)
117 $

38
15
42
(2)
(12)
(1)
80

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 Internal Revenue Service (“IRS”) is currently examining the Company’s 2012, 2013 and 2014 consolidated U.S. federal income tax returns under its Compliance Assurance Process (“CAP”) program. The CAP program is a voluntary program under which participating taxpayers work collaboratively with the IRS to identify and resolve potential tax issues through open, cooperative and transparent interaction prior to the filing of their federal income tax return.

88

Notes to Consolidated Financial Statements (continued)

The Company and its subsidiaries are also currently under income tax examinations by a number of state and local tax authorities. As of December 31, 2014, 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 2009. The Company and its subsidiaries anticipate that a number of state and local income tax examinations will be concluded and statutes of limitation for open years will expire over the next twelve months, which may result in the utilization or reduction of the
Company’s reserve for uncertain tax positions of up to approximately $11 million. In addition, it is reasonably possible that the
Company’s unrecognized tax benefits could significantly 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.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. The
Company recognized interest of approximately $6 million during the year ended December 31, 2014, and $4 million during each of the years ended December 31, 2013 and 2012. The Company had approximately $11 million and $10 million accrued for interest and penalties as of December 31, 2014 and 2013.
There are no material uncertain tax positions as of December 31, 2014 the ultimate deductibility of which is highly certain but for which there is uncertainty about the timing. If there were, any such items would impact deferred tax accounting only, not the annual effective income tax rate, and would accelerate the payment of cash to the taxing authority to a period earlier than expected. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is approximately
$170 million, after considering the federal benefit of state income taxes.
11

Commitments and Contingencies

Lease Guarantees
Between 1991 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores, Linens ‘n Things,
Marshalls, Kay-Bee Toys, Wilsons, This End Up and Footstar. 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 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, 2014, the Company guaranteed approximately 72 such store leases (excluding the lease guarantees related to Linens ‘n Things, which are discussed in Note 1), with the maximum remaining lease term extending through 2026.
Management believes the ultimate disposition of any of the remaining guarantees will not have a material adverse effect on the
Company’s consolidated financial condition, results of operations or future cash flows.
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.
The Company’s contingencies are subject to significant uncertainties, including, among other factors: (i) the procedural status of pending matters; (ii) whether class action status is sought and certified; (iii) whether asserted claims or allegations will survive dispositive motion practice; (iv) the extent of potential damages, fines or penalties, which are often unspecified or indeterminate; (v) the impact of discovery on the legal process; (vi) whether novel or unsettled legal theories are at issue;
(vii) the settlement posture of the parties, and/or (viii) in the case of certain government agency investigations, whether a sealed

89

Notes to Consolidated Financial Statements (continued)

qui tam lawsuit (“whistleblower” action) has been filed and whether the government agency makes a decision to intervene in the lawsuit following investigation.
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.
•

In December 2007, the Company received a document subpoena from the Office of Inspector General (“OIG”) within the U.S. Department of Health and Human Services, requesting information relating to the processing of Medicaid and certain other government agency claims on behalf of its clients (which allegedly resulted in underpayments from our pharmacy benefit management clients to the applicable government agencies) on one of the Company’s adjudication platforms. In September 2014, the Company settled the OIG’s claims, as well as related claims by the Department of
Justice and private plaintiffs, without any admission of liability. The Company is in discussions with the OIG concerning other claim processing issues.

•

Caremark (the term “Caremark” being used herein to generally refer to any one or more PBM subsidiaries of the
Company, as applicable) was named in a putative class action lawsuit filed in October 2003 in Alabama state court by
John Lauriello, purportedly on behalf of participants in the 1999 settlement of various securities class action and derivative lawsuits against Caremark and others. Other defendants include insurance companies that provided coverage to Caremark with respect to the settled lawsuits. The Lauriello lawsuit seeks approximately $3.2 billion in compensatory damages plus other non-specified damages based on allegations that the amount of insurance coverage available for the settled lawsuits was misrepresented and suppressed. A similar lawsuit was filed in November 2003 by
Frank McArthur, also in Alabama state court, naming as defendants, among others, Caremark and several insurance companies involved in the 1999 settlement. This lawsuit was stayed as a later-filed class action, but McArthur was subsequently allowed to intervene in the Lauriello action. Following the close of class discovery, the trial court entered an Order on August 15, 2012 that granted the plaintiffs’ motion to certify a class pursuant to Alabama Rule of Civil
Procedures 23(b)(3) but denied their request that the class also be certified pursuant to Rule 23(b)(1). In addition, the
August 15, 2012 Order appointed class representatives and class counsel. On September 12, 2014, the Alabama
Supreme Court affirmed the trial court’s August 15, 2012 Order. The Defendants timely filed an Application for
Rehearing asking the Alabama Supreme Court to clarify or modify its September 12, 2014 decision. The proceedings in the trial court remain stayed pending resolution of the rehearing application.

•

Various lawsuits have been filed alleging that Caremark has violated applicable antitrust laws in establishing and maintaining retail pharmacy networks for client health plans. In August 2003, Bellevue Drug Co., Robert
Schreiber, Inc. d/b/a Burns Pharmacy and Rehn-Huerbinger Drug Co. d/b/a Parkway Drugs #4, together with
Pharmacy Freedom Fund and the National Community Pharmacists Association filed a putative class action against
Caremark in Pennsylvania federal court, seeking treble damages and injunctive relief. This case was initially sent to arbitration based on the contract terms between the pharmacies and Caremark. In October 2003, two independent pharmacies, North Jackson Pharmacy, Inc. and C&C, Inc. d/b/a Big C Discount Drugs, Inc., filed a putative class action complaint in Alabama federal court against Caremark and two PBM competitors, seeking treble damages and injunctive relief. The North Jackson Pharmacy case against two of the Caremark entities named as defendants was transferred to Illinois federal court, and the case against a separate Caremark entity was sent to arbitration based on contract terms between the pharmacies and Caremark. The Bellevue arbitration was then stayed by the parties pending developments in the North Jackson Pharmacy court case.
In August 2006, the Bellevue case and the North Jackson Pharmacy case were both transferred to Pennsylvania federal court by the Judicial Panel on Multidistrict Litigation for coordinated and consolidated proceedings with other cases before the panel, including cases against other PBMs. Motions for class certification in the coordinated cases within the multidistrict litigation, including the North Jackson Pharmacy case, remain pending, and the court has permitted certain additional class discovery and briefing. The consolidated action is now known as the In Re Pharmacy Benefit
Managers Antitrust Litigation.

•

In November 2009, a securities class action lawsuit was filed in the United States District Court for the District of
Rhode Island by Richard Medoff, purportedly on behalf of purchasers of CVS Health Corporation stock between
May 5, 2009 and November 4, 2009. The lawsuit names the Company and certain officers as defendants and includes allegations of securities fraud relating to public disclosures made by the Company concerning the PBM business and allegations of insider trading. In addition, a shareholder derivative lawsuit was filed by Mark Wuotila in
90

Notes to Consolidated Financial Statements (continued)

December 2009 in the same court against the directors and certain officers of the Company. This lawsuit, which has remained stayed pending developments in the related securities class action, includes allegations of, among other things, securities fraud, insider trading and breach of fiduciary duties and further alleges that the Company was damaged by the purchase of stock at allegedly inflated prices under its share repurchase program. In January 2011, both lawsuits were transferred to the United States District Court for the District of New Hampshire.
•

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. •

In March 2010, the Company received a subpoena from the OIG 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. The subpoena relates to an investigation of possible false or otherwise improper claims for payment under the Medicare and Medicaid programs. The Company has provided documents and other information in response to this request for information.

•

In January 2012, the United States District Court for the Eastern District of Pennsylvania 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 prescription benefit audit and recovery services. The complaint seeks monetary damages and alleges that 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. The case is proceeding. •

In November 2014, the U.S. District Court in the District of Massachusetts unsealed a qui tam lawsuit brought against the Company by a pharmacy auditor and a CVS pharmacist. The lawsuit, which was initially filed under seal in 2011, alleges that the Company violated the federal False Claims Act, as well as the false claims acts of several states, by overcharging state and federal governments in connection with prescription drugs available through the Company’s
Health Savings Pass program, a membership-based program that allows enrolled customers special pricing for typical
90-day supplies of various generic prescription drugs. The federal government, which issued a January 2012 OIG subpoena concerning the Health Savings Pass program, has declined to intervene in the case. The Company is now responding to the declined qui tam complaint. Separately, the Attorney General of the State of Texas has issued civil investigative demands and other requests in February 2012 and May 2014, and has continued its investigation concerning the Health Savings Pass program and claims for reimbursement from the Texas Medicaid program.

•

On October 12, 2012, the Drug Enforcement Agency (“DEA”) Administrator published its Final Decision and Order revoking the DEA license registrations for dispensing controlled substances at two of our retail pharmacy stores in
Sanford, Florida. The license revocations for the two stores formally became effective on November 13, 2012. The
Company has entered into discussions with the U.S. Attorney’s Office for the Middle District of Florida concerning civil penalties for violations of the Controlled Substances Act arising from the circumstances underlying the action taken against the two Sanford, Florida stores. The Company is also undergoing several audits by the DEA and is in discussions with the DEA and the U.S. Attorney’s Office in several locations. Whether agreements can be reached and on what terms is uncertain.

•

In November 2012, the Company received a subpoena from the OIG requesting information concerning automatic refill programs used by pharmacies to refill prescriptions for customers. The Company has been cooperating and providing documents and other information in response to this request for information.

•

In January 2014, the U.S. District Court in the Southern District of New York unsealed a qui tam action in which the
Company is a defendant. The suit originally was filed under seal in 2011 by relator David Kester, a former employee of Novartis Pharmaceuticals Corp. (“Novartis”). The suit alleges that Novartis, the Company, and other specialty pharmacies violated the federal False Claims Act, as well as the false claims acts of several states, by using pharmacists, nurses and other staff to recommend and increase the sales and market share for certain Novartis
91

Notes to Consolidated Financial Statements (continued)

specialty drugs in exchange for patient referrals, rebates and discounts provided by Novartis. The federal government has intervened in the case as to some allegations against Novartis but has declined to intervene as to any of the allegations against the Company. The relator has continued to litigate the declined action against the Company and other specialty pharmacies.
•

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 certain pharmaceutical manufacturers in connection with certain drugs utilized under Part D of the Medicare Program. The
Company has been cooperating with the government and collecting documents in response to the subpoena.

The Company is also a party to other legal proceedings, government investigations, inquiries and audits 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, retail 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, retail 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, retail pharmacy or retail clinic industry or the health care industry generally.
12

Segment Reporting

The Company currently has three reportable segments: Pharmacy Services, Retail Pharmacy and Corporate.
The Company evaluates its Pharmacy Services and Retail Pharmacy segment performance based on net revenue, gross profit and operating profit before the effect of certain intersegment activities and charges. The Company evaluates the performance of its Corporate Segment based on operating expenses before the effect of discontinued operations and certain intersegment activities and charges. See Note 1 for a description of the Pharmacy Services, Retail Pharmacy and Corporate segments and related significant accounting policies.

92

Notes to Consolidated Financial Statements (continued)

The following table is a reconciliation of the Company’s business segments to the consolidated financial statements:
In millions

2014:
Net revenues
Gross profit
Operating profit
Depreciation and amortization
Total assets
Goodwill
Additions to property and equipment
2013:
Net revenues
Gross profit
Operating profit
Depreciation and amortization
Total assets
Goodwill
Additions to property and equipment
2012:
Net revenues
Gross profit
Operating profit
Depreciation and amortization
Total assets
Goodwill
Additions to property and equipment
(1)
(2)

Pharmacy Services
Segment(1)(2)

Retail Pharmacy
Segment(2)

Corporate
Segment

Intersegment
Eliminations(2)

Consolidated
Totals

$

88,440 $
4,771
3,514
630
42,302
21,234
308

67,798 $
21,277
6,762
1,205
30,979
6,908
1,745

— $
—
(796)
96
2,530
—
83

(16,871) $
(681)
(681)
—
(1,559)
—
—

139,367
25,367
8,799
1,931
74,252
28,142
2,136

$

76,208 $
4,237
3,086
560
38,343
19,658
313

65,618 $
20,112
6,268
1,217
30,191
6,884
1,610

— $
—
(751)
93
4,420
—
61

(15,065) $
(566)
(566)
—
(1,428)
—
—

126,761
23,783
8,037
1,870
71,526
26,542
1,984

$

73,444 $
3,808
2,679
517
36,057
19,646
422

63,641 $
19,091
5,636
1,153
29,492
6,749
1,555

— $
—
(694)
83
1,408
—
53

(13,965) $
(411)
(411)
—
(736)
—
—

123,120
22,488
7,210
1,753
66,221
26,395
2,030

Net revenues of the Pharmacy Services Segment include approximately $8.1 billion, $7.9 billion and $8.4 billion of Retail co-payments for the years ended December 31, 2014, 2013 and 2012, respectively.
Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services Segment clients use Retail
Pharmacy Segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue on a standalone basis and (ii) Intersegment revenues, gross profit and operating profit that occur when Pharmacy Services Segment clients, through the
Company’s intersegment activities (such as the Maintenance Choice® program), elect to pick up their maintenance prescriptions at Retail Pharmacy
Segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. The following amounts are eliminated in consolidation in connection with the item
(ii) intersegment activity: net revenues of $4.9 billion, $4.3 billion and $3.4 billion for the years ended December 31, 2014, 2013 and 2012, respectively; and gross profit and operating profit of $681 million, $566 million and $411 million for the years ended December 31, 2014, 2013 and 2012, respectively.

93

Notes to Consolidated Financial Statements (continued)

13

Earnings Per Share

The following is a reconciliation of basic and diluted earnings per share from continuing operations for the respective years:

In millions, except per share amounts

2014

Numerator for earnings per share calculation:
Income from continuing operations attributable to common stockholders(1)
Denominator for earnings per share calculation:
Weighted average shares, basic
Effect of dilutive securities

$

Earnings per share from continuing operations:
Basic
Diluted

14

2012

4,626 $

4,600 $

3,871

1,161
8
1,169

Weighted average shares, diluted

(1)

2013

1,217
9
1,226

1,271
9
1,280

$
$

3.98 $
3.96 $

3.78 $
3.75 $

3.05
3.02

Comprised of income from continuing operations less amounts allocable to participating securities of $19 million for the year ended December 31, 2014.

Quarterly Financial Information (Unaudited)

First
Quarter

In millions, except per share amounts

2014:
Net revenues
Gross profit
Operating profit
Income from continuing operations
Loss from discontinued operations, net of tax
Net income attributable to CVS Health

Second
Quarter

Fourth
Quarter

Third
Quarter

Year

$ 32,689 $ 34,602 $ 35,021 $ 37,055 $ 139,367
5,942
6,324
6,468
6,633
25,367
2,024
2,208
2,246
2,321
8,799
1,129
1,246
948
1,322
4,645
(1)
(1)
—
—
—
1,129
1,246
948
1,321
4,644

Basic earnings per share:
Income from continuing operations attributable to CVS Health
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
Loss from discontinued operations attributable to CVS Health
Net income attributable to CVS Health
Dividends per share

$
$
$

0.96 $
— $
0.96 $

94

0.95
—
0.95
0.275

$
$

Stock price: (New York Stock Exchange)
High
Low

$
$
$
$

$
$
$
$

76.36 $
64.95 $

1.07 $
— $
1.07 $
1.06
—
1.06
0.275

$
$
$
$

79.43 $
72.37 $

0.82 $
— $
0.82 $
0.81
—
0.81
0.275

$
$
$
$

82.57 $
74.69 $

1.15 $
— $
1.15 $
1.14
—
1.14
0.275

3.98
—
3.98

$
$
$
$

3.96
—
3.96
1.10

98.62 $
77.40 $

98.62
64.95

Notes to Consolidated Financial Statements (continued)

First
Quarter

In millions, except per share amounts

2013:
Net revenues
Gross profit
Operating profit
Income from continuing operations
Loss from discontinued operations, net of tax
Net income attributable to CVS Health

Second
Quarter

Third
Quarter

Fourth
Quarter

Year

$ 30,751 $ 31,248 $ 31,932 $ 32,830 $ 126,761
5,577
5,841
6,027
6,338
23,783
1,694
1,972
2,154
2,217
8,037
954
1,125
1,255
1,266
4,600
—
(1)
(6)
(1)
(8)
954
1,124
1,249
1,265
4,592

Basic earnings per share:
Income from continuing operations attributable to CVS Health
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
Loss from discontinued operations attributable to CVS Health
Net income attributable to CVS Health
Dividends per share

$
$
$

0.77 $
— $
0.77 $

95

0.77
—
0.77
0.225

$
$

Stock price: (New York Stock Exchange)
High
Low

$
$
$
$

$
$
$
$

56.07 $
49.00 $

0.92 $
— $
0.92 $
0.91
—
0.91
0.225

$
$
$
$

60.70 $
53.94 $

1.03 $
— $
1.03 $
1.02
—
1.02
0.225

$
$
$
$

62.36 $
56.68 $

1.06 $
— $
1.06 $
1.05
—
1.05
0.225

$
$
$
$

71.99 $
56.32 $

3.78
(0.01)
3.77
3.75
(0.01)
3.74
0.90
71.99
49.00

Five-Year Financial Summary

In millions, except per share amounts

Statement of operations data:
Net revenues
Gross profit
Operating expenses
Operating profit
Interest expense, net
Loss on early extinguishment of debt
Income tax provision(1)
Income from continuing operations
Income (loss) from discontinued operations, net of tax Net income
Net loss attributable to noncontrolling interest
Net income attributable to CVS Health
Per common share data:
Basic earnings per common share:
Income from continuing operations attributable to
CVS Health
Loss from discontinued operations attributable to
CVS Health
Net income attributable to CVS Health
Diluted earnings per common share:
Income from continuing operations attributable to
CVS Health
Loss from discontinued operations attributable to
CVS Health
Net income attributable to CVS Health
Cash dividends per common share
Balance sheet and other data:
Total assets
Long-term debt
Total shareholders’ equity
Number of stores (at end of year)
(1)

2014

2013

2012

2011

139,367 $
25,367
16,568
8,799
600
521
3,033
4,645

126,761 $
23,783
15,746
8,037
509
—
2,928
4,600

123,120 $
22,488
15,278
7,210
557
348
2,436
3,869

107,080 $
20,562
14,231
6,331
584
—
2,258
3,489

95,766
20,215
14,082
6,133
536
—
2,178
3,419

$

(1)
4,644
—
4,644 $

(8)
4,592
—
4,592 $

(7)
3,862
2
3,864 $

(31)
3,458
4
3,462 $

2
3,421
3
3,424

$

3.98 $

3.78 $

3.05 $

2.61 $

2.50

$
$

— $
3.98 $

(0.01) $
3.77 $

(0.01) $
3.04 $

(0.02) $
2.59 $

—
2.50

$

3.96 $

3.75 $

3.02 $

2.59 $

2.49

$
$
$

— $
3.96 $
1.10 $

(0.01) $
3.74 $
0.90 $

(0.01) $
3.02 $
0.65 $

(0.02) $
2.57 $
0.50 $

—
2.49
0.35

$
$
$

74,252 $
11,695 $
37,963 $
7,866

71,526 $
12,841 $
37,938 $
7,702

66,221 $
9,133 $
37,653 $
7,508

64,852 $
9,208 $
38,014 $
7,388

62,457
8,652
37,662
7,248

$

2010

Income tax provision for the year ended December 31, 2010 includes the effect of the recognition of $47 million of previously unrecognized tax benefits, including interest, relating to the expiration of various statutes of limitation and settlements with tax authorities.

96

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of CVS Health Corporation
We have audited the accompanying consolidated balance sheets of CVS Health Corporation as of December 31, 2014 and 2013, and 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, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
CVS Health Corporation at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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), CVS
Health Corporation’s internal control over financial reporting as of December 31, 2014, 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 10, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Boston, Massachusetts
February 10, 2015

97

Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
As of December 31, 2014, CVS Health Corporation had the following significant subsidiaries:
Caremark, L.L.C. (a California limited liability company)
CaremarkPCS Health, L.L.C. (a Delaware limited liability company)
Caremark PhC, L.L.C. (a Delaware limited liability company)
Caremark Rx, L.L.C. (a Delaware limited liability company)(1)
CVS Albany, L.L.C. (a New York limited liability company)
CVS Caremark Part D Services, L.L.C. (a Delaware limited liability company)
CVS Pharmacy, Inc. (a Rhode Island corporation)(2)
Drogaria Onofre Ltda. (a Brazil limited liability company)
Garfield Beach CVS, L.L.C. (a California limited liability company)
Holiday CVS, L.L.C. (a Florida limited liability company)
Longs Drug Stores California, L.L.C. (a California limited liability company)
MemberHealth LLC (a Delaware limited liability company)
Pennsylvania CVS Pharmacy, L.L.C. (a Pennsylvania limited liability company)
RxAmerica, LLC (a Delaware limited liability company)
SilverScript Insurance Company (a Tennessee corporation)
(1)

Caremark Rx, L.L.C., the parent of the Registrant's pharmacy services subsidiaries, is the immediate or indirect parent of several mail order, specialty mail and retail specialty pharmacy subsidiaries, all of which operate in the United States and its territories.

(2)

CVS Pharmacy, Inc. is the immediate or indirect parent of approximately 45 entities that operate drugstores, all of which drugstores are in the United
States and its territories.

98

Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1)
(2)

Registration Statements (Form S-3ASR Nos. 333-187440 and 333-200217) of CVS Health Corporation, and
Registration Statements (Form S-8 Nos. 333-49407, 333-34927, 333-28043, 333-91253, 333-63664, 333-139470, 333141481 and 333-167746) of CVS Health Corporation;

of our reports dated February 10, 2015, with respect to the consolidated financial statements of CVS Health Corporation and the effectiveness of internal control over financial reporting of CVS Health Corporation, incorporated by reference in this Annual
Report (Form 10-K) of CVS Health Corporation for the year ended December 31, 2014, and to the reference to our firm under the heading "Selected Financial Data," included therein.

/s/ Ernst & Young LLP
Boston, Massachusetts
February 10, 2015

99

Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Larry J. Merlo, President and Chief Executive Officer of CVS Health Corporation, certify that:
1.

I have reviewed this annual report on Form 10-K of CVS Health Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

5.

Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 10, 2015

By:

/S/

LARRY J. MERLO

Larry J. Merlo
President and
Chief Executive Officer

100

Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David M. Denton, Executive Vice President and Chief Financial Officer of CVS Health Corporation, certify that:
1.

I have reviewed this annual report on Form 10-K of CVS Health Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

5.

Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 10, 2015

By:

/S/

DAVID M. DENTON
David M. Denton

Executive Vice President and Chief Financial Officer

101

Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is being submitted in connection with the Annual Report of CVS Health Corporation
(the “Company”) on Form 10-K for the period ended December 31, 2014 (the “Report”), for the purpose of complying with
Rule 13(a)-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter
63 of Title 18 of the United States Code.
I, Larry J. Merlo, President and Chief Executive Officer of the Company, certify that, to the best of my knowledge:
(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/S/

February 10, 2015

LARRY J. MERLO
Larry J. Merlo

President and
Chief Executive Officer

102

Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is being submitted in connection with the Annual Report of CVS Health Corporation
(the “Company”) on Form 10-K for the period ended December 31, 2014 (the “Report”), for the purpose of complying with
Rule 13(a)-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter
63 of Title 18 of the United States Code.
I, David M. Denton, Executive Vice President and Chief Financial Officer of the Company, certify that, to the best of my knowledge: (1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/S/

February 10, 2015

DAVID M. DENTON
David M. Denton

Executive Vice President and Chief Financial Officer

103