CVS Health Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. CVS Health operates Pharmacy Services, Retail/LTC and Health Care Benefits businesses, alongside Corporate/Other. Its unaudited interim financial statements were reviewed by Ernst & Young, not audited.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $66.755 billion | $61.646 billion; up 8.3% |
| Operating income | $3.458 billion | $2.690 billion; up 28.6% |
| Net income attributable to CVS Health | $2.007 billion | $1.421 billion; up 41.2% |
| Diluted EPS | $1.53 | $1.09 |
| Operating margin | 5.2% | 4.4% (calculated from reported figures) |
| Operating cash flow | $3.305 billion | $1.948 billion |
| Cash and cash equivalents | $10.081 billion | $5.683 billion at Dec. 31, 2019 |
| Total debt, carrying value | $71.818 billion | $68.480 billion at Dec. 31, 2019 |
| Current assets / current liabilities | $58.958 billion / $59.560 billion | $50.302 billion / $53.303 billion at Dec. 31, 2019 |
| Quarterly dividend declared per share | $0.50 | $0.50 |
Operating cash flow rose partly because of the timing of payables and higher operating income. Investing cash outflow was $1.597 billion, including $613 million for acquisitions and $742 million for property and equipment. Financing cash inflow was $2.675 billion, including proceeds from the March debt issuance. Dividends paid were $652 million. No shares were repurchased.
Segment results
- Pharmacy Services: Revenue $34.983 billion, up 4.2%; adjusted operating income $1.181 billion, up 24.7%. Claims processed increased 12.4%; growth included greater 90-day prescriptions and early refills.
- Retail/LTC: Revenue $22.749 billion, up 7.7%; adjusted operating income $1.902 billion, up 27.7%. Same-store sales increased 9.0%, including pharmacy sales up 9.3% and front-store sales up 8.0%.
- Health Care Benefits: Revenue $19.198 billion, up 7.4%; adjusted operating income $1.491 billion, down 4.5%. Medical benefit ratio was 82.4%, versus 84.0%.
Consolidated adjusted operating income, a non-GAAP measure, was $4.113 billion versus $3.595 billion. Reported operating income was $3.458 billion; adjustments included $586 million of intangible amortization and $69 million of Aetna integration costs. Q1 2019 also included a $135 million store rationalization charge.
Material changes and management commentary
- Revenue growth reflected core growth across segments and COVID-19-related increases in early refills, 90-day prescriptions and front-store volume. The company also cited an extra calendar day from leap year.
- Reported operating income benefited from higher volume, Pharmacy Services purchasing economics, cost savings and the absence of the prior-year store rationalization charge. COVID-19-related deferral of elective procedures reduced Health Care Benefits costs in the quarter, but was largely offset in that segment by lower investment income and other pressures.
- Net investment income fell to $162 million from $249 million, including COVID-19-related market volatility and net realized capital losses. Unrealized investment losses reduced other comprehensive income by $311 million.
- Operating expenses included $271 million for the estimated 2020 health insurer fee (HIF). Management estimated its full-year HIF share at approximately $1.1 billion; the fee is nondeductible for federal income tax purposes. It was suspended in 2019 and repealed for years after 2020.
Outlook, risks and contingencies
- COVID-19: The company said the effect on results, cash flows and financial condition was uncertain and could be material. It expected pressure from economic contraction, unemployment, lower discretionary drug use and retail traffic, potential membership losses, payment collection delays, increased operating costs and future medical utilization or provider-cost changes. The quarterly earnings pattern could differ from historical trends; no specific EPS or revenue forecast is provided in the filing text.
- Business trends: Pharmacy Services expected benefits from purchasing economics and modernization, partly offset by client losses and price compression. Retail/LTC expected continued reimbursement pressure. The company projected 2021 Medicare Advantage benchmark rates to increase funding by approximately 1.8% versus 2020, excluding HIF effects.
- Liquidity and debt: CVS issued $4.0 billion principal amount of senior notes on March 31, receiving approximately $3.95 billion net, to strengthen liquidity amid uncertainty. Cash and cash equivalents were $10.1 billion; the company reported compliance with debt covenants and no borrowings under its backup revolving facilities. Long-term debt was rated Baa2 by Moody’s and BBB by S&P.
- Goodwill: The 2019 impairment test showed only a 4% fair-value cushion for the Commercial Business reporting unit and 9% for LTC. Management warned that COVID-19 effects or failure to meet forecasts could result in material impairment; LTC goodwill was $431 million at March 31, 2020.
- Legal and regulatory: The company faces numerous opioid, PBM pricing and rebate, prescription-processing, provider-payment, Medicare risk-adjustment and other legal or regulatory matters. Accruals were not material individually or in aggregate, but the company said outcomes could be material and generally could not estimate losses beyond amounts accrued. It had not recorded a receivable for approximately $310 million sought under the ACA risk-corridor program because payment was uncertain.
- Other exposure: CVS guaranteed 77 former-subsidiary store leases, with terms extending through 2030. It also cited credit and market risks in its investment portfolio, operational and cybersecurity risks, and possible insurer guaranty-fund assessments.
Important facts for investors to verify
- How COVID-19 changes medical utilization, claims costs, customer and member retention, pharmacy volumes and cash collection timing in subsequent quarters.
- Whether Q1 operating cash flow gains from payable timing recur, and how the new debt affects interest costs, leverage and debt repayment.
- Whether the Commercial Business and LTC reporting units meet the assumptions supporting goodwill valuations, particularly amid economic and customer stress.
- The financial effects of the 2020 HIF and whether anticipated 2021 Medicare Advantage rate increases offset other cost and utilization pressures.
- Developments in significant litigation, government investigations and CMS audits, including any potential settlements, refunds, penalties or changes in business practices.
- How reported GAAP results compare with adjusted operating income, including the continuing impact of intangible amortization and acquisition-related costs.