CVS Health Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparable period is Q1 2020. Financial statements are unaudited and were reviewed by Ernst & Young. CVS operates Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other businesses.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $69.1 billion | $66.8 billion; up 3.5% |
| Operating income | $3.58 billion | $3.46 billion; up 3.4% |
| Net income attributable to CVS Health | $2.22 billion; diluted EPS $1.68 | $2.01 billion; diluted EPS $1.53 |
| Operating cash flow | $2.89 billion | $3.31 billion; down 12.5% |
| Cash, cash equivalents and restricted cash | $5.91 billion at quarter-end | $8.13 billion at December 31, 2020 |
| Debt | $252 million short-term debt; $61.69 billion carrying value of long-term debt, including current portion | Long-term debt carrying value was $64.65 billion at December 31, 2020 |
| Current assets / current liabilities | $55.72 billion / $60.10 billion | $56.37 billion / $62.02 billion at December 31, 2020 |
| Quarterly dividend declared | $0.50 per share | $0.50 per share |
Interest expense declined 10.4% to $657 million. The effective tax rate was 25.1%, versus 27.6%, primarily reflecting repeal of the health insurer fee (HIF). Net cash used in investing was $1.87 billion; net cash used in financing was $3.24 billion, including $3.05 billion of long-term debt repayments and $656 million of dividends paid. The company reported no share repurchases during the quarter.
Material changes and segment performance
- Health Care Benefits: Revenue rose 6.7% to $20.48 billion; adjusted operating income increased 19.5% to $1.78 billion. Medical benefit ratio increased to 83.2% from 82.4%. Membership was 23.6 million, up about 214,000 from year-end 2020.
- Pharmacy Services: Revenue increased 3.8% to $36.32 billion; adjusted operating income rose 27.6% to $1.51 billion, driven mainly by improved purchasing economics and specialty pharmacy growth. Claims processed declined 1.0% and generic dispensing rate fell to 88.1% from 89.0%.
- Retail/LTC: Revenue increased 2.3% to $23.27 billion, but adjusted operating income fell 26.7% to $1.39 billion. COVID-19 testing and vaccination revenue partly offset higher related costs, reimbursement pressure and weaker front-store sales. Front-store same-store sales declined 11.4%.
- Corporate/Other: Adjusted operating loss widened to $303 million from $285 million, primarily reflecting transformation-related expenses.
Consolidated revenue growth reflected increases across all segments. Q1 2020 included an estimated $271 million HIF expense; no HIF expense was recorded in Q1 2021 following its repeal for years after 2020. Adjusted operating income, a non-GAAP measure, was $4.21 billion versus $4.11 billion; it excludes $587 million of intangible amortization and $41 million of Aetna integration costs in Q1 2021.
Outlook, commentary and risks
- Management expects 2021 Health Care Benefits results to benefit from Medicare membership growth, with higher medical benefit ratio pressure from more normal utilization, lower Medicare risk-adjustment revenue, business mix and HIF repeal. COVID-19 testing, treatment, vaccination costs and related regulatory changes are also expected to weigh on earnings.
- Pharmacy Services is expected to benefit from specialty growth and purchasing economics, partly offset by price compression. Retail/LTC is expected to benefit from prescription volume, testing, vaccinations and generic purchasing, partly offset by reimbursement pressure.
- CVS expects ongoing cost savings from digitalization, technology improvements, real-estate reductions and productivity initiatives. The filing provides no consolidated numerical earnings guidance in the supplied text.
- The company says the pandemic’s duration, economic effects, healthcare utilization and government responses remain uncertain and could have a material adverse impact. It identifies a reasonably possible near-term material goodwill impairment for the LTC reporting unit if forecasts are not achieved; LTC goodwill was $431 million at quarter-end.
- Disclosed legal and regulatory matters include PBM pricing and rebate claims and investigations, opioid-related litigation and investigations, prescription-processing matters, provider payment disputes, and CMS risk-adjustment audits. The company says it cannot estimate possible losses beyond accrued amounts for certain matters; regulatory refunds, fines or sanctions could materially affect results.
- CVS guaranteed 74 former-subsidiary store leases, with remaining terms extending through 2030. The company was in compliance with debt covenants and reported stable outlooks from Moody’s and S&P. It intends to replace a $1 billion revolving facility expiring in May 2021 and a $1 billion facility expiring in 2022 with a new $2 billion five-year facility.
Important facts for investors to verify
- Whether operating cash generation and the lower quarter-end cash balance reflect timing effects or persist, and how debt repayment affects liquidity.
- Whether Pharmacy Services’ profit growth can continue amid price compression, client competition and changes to rebate sharing.
- Whether Retail/LTC margins recover as COVID-related activity changes, given reimbursement pressure and weaker front-store sales.
- Medical cost trends, Medicare risk-adjustment revenue and the resulting medical benefit ratio as utilization normalizes.
- Progress and assumptions supporting the LTC reporting unit’s forecasts and goodwill valuation.
- Developments in CMS audits, PBM and opioid proceedings, and other legal matters that could affect cash flows or results.