CVS Health Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. CVS operates Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other. Aetna was acquired on November 28, 2018, so 2019 includes a full year of Aetna results while 2018 includes only results after the acquisition; year-over-year consolidated growth is therefore not directly comparable. Segment reporting was realigned in 2019, with prior segment data retrospectively adjusted.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $256.8 billion | $194.6 billion |
| Operating income | $12.0 billion | $4.0 billion |
| Net income (loss) attributable to CVS Health | $6.634 billion | $(594) million |
| Diluted EPS | $5.08 | $(0.57) |
| Cash provided by operations | $12.848 billion | $8.865 billion |
- Revenue rose 32.0%, primarily reflecting Aetna’s inclusion, alongside Pharmacy Services growth of 5.0% and Retail/LTC growth of 3.1%. Operating margin was approximately 4.7%, versus 2.1% in 2018.
- Net cash used in investing was $3.339 billion, including $2.457 billion of property and equipment purchases. Cash and cash equivalents were $5.683 billion at year-end.
- Year-end total debt principal was $69.246 billion; balance-sheet long-term debt, net of current portion, was $64.699 billion, with $3.781 billion current maturities and no commercial paper outstanding. Interest expense was $3.035 billion, up from $2.619 billion.
- Current assets were $50.302 billion and current liabilities $53.303 billion. Operating lease liabilities totaled $20.522 billion; the company adopted the new lease accounting standard in 2019, materially increasing reported assets and liabilities.
- Annual dividends were $2.00 per share. CVS reported no share repurchases in 2019.
Segment performance
- Pharmacy Services: Revenue $141.5 billion; GAAP operating income $4.735 billion and adjusted operating income $5.129 billion. Claims grew, aided by new business including Anthem’s IngenioRx, while price compression continued.
- Retail/LTC: Revenue $86.6 billion; GAAP operating income $5.793 billion and adjusted operating income $6.705 billion. Adjusted operating income fell 9.4%, primarily from reimbursement pressure and higher operating costs.
- Health Care Benefits: Revenue $69.6 billion; GAAP operating income $3.639 billion and adjusted operating income $5.202 billion. The 2019 medical benefit ratio was 84.2%; 2018 is not comparable because the segment then mainly comprised SilverScript before Aetna’s acquisition.
Material changes and unusual items
- The 2019 increase in operating income was significantly affected by the absence of 2018’s $6.149 billion goodwill impairment charge for the long-term-care reporting unit. 2019 also included $2.436 billion of intangible-asset amortization and $480 million of acquisition-related integration costs.
- Retail/LTC recorded $231 million of store rationalization charges and a $205 million pre-tax loss on the sale of its Brazilian subsidiary, Onofre. CVS closed or planned closures of underperforming stores; it reported 9,941 stores at year-end.
- CVS repaid $4.0 billion of senior notes through tender offers, repaid the remaining $3.0 billion Aetna-related term loan, and issued $3.5 billion of notes. Debt repayments and issuance resulted in a $79 million loss on early extinguishment of debt.
- 2018’s net loss reflected the large, largely nondeductible goodwill impairment; the effective tax rate was 26.3% in 2019 versus 142.4% in 2018.
Fourth-quarter snapshot
Unaudited Q4 2019 revenue was $66.889 billion, operating income $3.037 billion, net income attributable to CVS Health $1.747 billion and diluted EPS $1.33. Q4 2018 reported revenue of $54.424 billion, operating income of $824 million, a net loss attributable to CVS Health of $419 million and diluted EPS of $(0.37). The comparison is affected by Aetna’s partial-year inclusion in 2018 and 2018 impairment charges.
Outlook, risks and contingencies
- Management expected 2020 Pharmacy Services results to benefit from purchasing economics and modernization, partly offset by client losses and price compression; Retail/LTC from prescription growth, partly offset by reimbursement pressure; and Health Care Benefits from government membership growth and integration synergies.
- CVS said it was on track for $800–$900 million of Aetna acquisition synergies in 2020. It expected the 2020 Health Insurer Fee to be $15.5 billion industry-wide and to negatively affect CVS net income because the fee is not tax-deductible; the fee was repealed for years after 2020.
- Key exposures include changing health-care and drug-pricing regulation, Medicare and Medicaid funding and audits, PBM pricing and rebate rules, premium-rate approval and medical-cost estimation, and competitive reimbursement pressure. CMS/OIG risk-adjustment audits and a DOJ investigation into Medicare chart-review processes are ongoing.
- The filing describes opioid-related litigation, PBM-related lawsuits and investigations, and other legal proceedings. The company stated it could not reliably estimate possible losses beyond recorded accruals for many matters and that outcomes could be material.
- Goodwill was $79.749 billion. The 2019 impairment test found no goodwill impairment, but the LTC and Commercial Business reporting units had fair values only about 9% and 4% above carrying values, respectively. Management said a material LTC impairment remained reasonably possible if forecasts were not achieved; LTC goodwill was $431 million.
- Long-term debt was rated Baa2 by Moody’s and BBB by S&P, with Moody’s outlook negative. CVS reported compliance with debt covenants. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much reported growth and earnings improvement reflects Aetna consolidation and the prior-year impairment rather than underlying or organic performance.
- Progress toward the $800–$900 million 2020 synergy target, and the impact of client losses and price compression in Pharmacy Services.
- Retail/LTC reimbursement trends, skilled-nursing occupancy and customer health, and assumptions supporting LTC goodwill valuation.
- Health Care Benefits medical-cost development, claims-reserve estimates, Medicare star ratings and audit or risk-adjustment outcomes.
- Debt reduction, refinancing needs, interest expense, cash generation and the effect of the 2020 Health Insurer Fee.
- Developments in opioid, PBM, controlled-substance and other regulatory matters, including any material changes to estimated contingencies.