CVS Health Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparative results are for FY2020 unless noted. CVS Health operates Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other segments. Its integrated model combines health insurance, pharmacy benefit management, retail pharmacies and clinics. The filing is an annual report, not a standalone fourth-quarter report.
Financial performance and condition
| Metric | FY2021 | Comparison |
|---|---|---|
| Total revenue | $292.1 billion | Up 8.7% from $268.7 billion |
| Operating income (GAAP) | $13.2 billion | Down 5.2% from $13.9 billion |
| Adjusted operating income (non-GAAP) | $17.3 billion | Up from $16.0 billion |
| Net income attributable to CVS Health | $7.91 billion | Up 10.2% from $7.18 billion |
| Diluted EPS | $5.95 | Versus $5.46 in FY2020 |
| Net cash from operating activities | $18.3 billion | Up 15.1% from $15.9 billion |
| Cash and cash equivalents at year-end | $9.4 billion | Versus $7.9 billion |
| Long-term debt, carrying value | $56.2 billion | Versus $64.6 billion |
Operating income was 4.5% of revenue, compared with 5.2% in FY2020, calculated from reported figures. The decline reflected a $1.36 billion retail store impairment charge and a $431 million LTC goodwill impairment, as well as weaker Health Care Benefits results. Adjusted operating income is a company-defined non-GAAP measure and excludes specified items, including intangible amortization and impairments.
Health Care Benefits’ medical benefit ratio (benefit costs as a percentage of premium revenue) rose to 85.0% from 80.9%; segment adjusted operating income fell 19.0% to $5.0 billion. Pharmacy Services adjusted operating income increased 20.6% to $6.9 billion, supported by improved purchasing economics and specialty pharmacy growth. Retail/LTC adjusted operating income rose 24.0% to $7.6 billion, while GAAP operating income declined 5.6% to $5.3 billion after impairments.
Investing cash outflow was $5.3 billion and financing cash outflow was $11.4 billion. Capital expenditures were $2.5 billion. The company reported $56.7 billion of debt principal, including finance leases; $4.2 billion of debt principal was scheduled for 2022. It had no commercial paper or backup credit facility borrowings outstanding at year-end, and reported compliance with debt covenants. Current assets were $60.0 billion and current liabilities $67.8 billion. Operating lease liabilities totaled $19.8 billion.
Material changes versus FY2020
- Revenue increased across segments, with government health benefits, prescription volume, specialty pharmacy and COVID-19 services contributing to growth.
- GAAP operating income declined despite higher revenue. FY2021 included $1.36 billion of store impairments tied to planned closures and a $431 million goodwill impairment in LTC. FY2020, by contrast, included a $307 million pretax ACA risk-corridor benefit and a $269 million gain on sale of the workers’ compensation business.
- Health Care Benefits costs rose as care utilization and COVID-19 testing and treatment costs increased relative to FY2020, when deferred elective and discretionary care had reduced costs.
- Operating cash flow increased by $2.4 billion, partly due to payment timing and stronger Retail/LTC operating results.
- Debt principal declined following approximately $2.3 billion of senior-note redemptions and a $2.0 billion tender offer, though these transactions contributed to a $452 million loss on early extinguishment of debt.
Outlook, risks and unusual items
- 2022 outlook: Management expected Health Care Benefits to benefit from Medicare and Commercial membership growth, partly offset by Medicaid membership declines; a lower MBR was expected, reflecting pricing and lower projected COVID-19 costs. Pharmacy Services was expected to benefit from purchasing economics and specialty growth, offset by price compression and regulation. Retail/LTC was expected to see continued prescription growth, but lower COVID-19 vaccination and testing activity than in 2021, reimbursement pressure and higher wage costs.
- The filing provides directional 2022 expectations but no specific consolidated revenue, earnings or EPS guidance in the supplied text. COVID-19’s duration, variants, utilization and policy responses were described as uncertain and potentially materially adverse.
- CVS announced plans to close approximately 900 stores between 2022 and 2024 and develop new store formats. It recorded the related $1.36 billion impairment in FY2021. The LTC goodwill impairment followed lower facility admissions, customer losses and reduced occupancy at customers’ facilities.
- COVID-19 activity was significant: the company administered more than 59 million vaccines, conducted more than 32 million tests and sold more than 22 million OTC test kits in 2021. These activities contributed materially to Retail/LTC performance; management said vaccinations, testing and test-kit sales contributed approximately 30% of that segment’s adjusted operating income.
- Material exposures include uncertain medical-cost forecasts and reserves, Medicare risk-adjustment audits and DOJ inquiries into patient-chart review, extensive PBM and pharmacy regulation, reimbursement and drug-pricing pressure, cybersecurity and privacy risks, and litigation. CVS was among chain pharmacies found liable by a federal jury in an opioid case in November 2021; the remedy had not been determined, and CVS planned to appeal. The company stated it could not estimate potential losses beyond recorded accruals for certain proceedings.
- The Board authorized a 10% dividend increase, to $0.55 per quarter beginning in 2022. A $10 billion repurchase authorization was approved in December 2021; a $1.5 billion accelerated share repurchase began in January 2022.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified valuation of health care costs payable and the Commercial Business goodwill impairment test as critical audit matters.
Important facts for investors to verify
- Whether the 2022 MBR and segment outlook materialized, particularly given COVID-19 utilization uncertainty and medical-cost reserve sensitivity.
- Actual store closures, their cash and earnings effects, and whether the new retail formats improve returns after the impairment charge.
- Whether LTC occupancy, admissions and customer retention recover, and whether further impairment or restructuring is needed.
- Outcomes and financial exposure from opioid litigation, DOJ/CMS risk-adjustment reviews, PBM investigations and other regulatory proceedings.
- Debt reduction, 2022 maturities, capital allocation and the completed outcome of the $1.5 billion accelerated repurchase.