CVS Health Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the same 2020 periods. Amounts are in billions except per-share data and where noted.
Business context
CVS Health operates Health Care Benefits, Pharmacy Services, Retail/LTC, and Corporate/Other businesses. At quarter-end, it served approximately 110 million pharmacy benefit members and 35 million people through health insurance products, with more than 9,900 retail locations and nearly 1,200 MinuteClinics.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $73.8 | $67.1 | $215.5 | $199.2 |
| Operating income | $3.1 | $3.2 | $11.0 | $11.4 |
| Net income attributable to CVS Health | $1.6 | $1.2 | $6.6 | $6.2 |
| Diluted EPS | $1.20 | $0.93 | $4.98 | $4.72 |
| Adjusted operating income (non-GAAP) | $4.1 | $3.6 | $13.2 | $13.1 |
Q3 revenue rose 10.0%; operating income fell 5.8%, while attributable net income increased 30.6%. Nine-month revenue grew 8.2%, while operating income declined 3.7% and attributable net income grew 6.4%. Results include a $431 million LTC goodwill impairment in 2021; 2020 included a $271 million gain on sale of the Workers’ Compensation business. The company also recorded a $363 million loss on early debt extinguishment in Q3 2021, compared with $766 million in Q3 2020.
- Health Care Benefits: Q3 revenue increased 9.5% to $20.5 billion; adjusted operating income increased 2.4% to $1.1 billion. Medical benefit ratio rose to 85.8% from 84.0%. For nine months, adjusted operating income declined 25.4% to $4.5 billion, and the medical benefit ratio rose to 84.4% from 78.9%, reflecting higher COVID-related costs and a comparison with deferred care in 2020.
- Pharmacy Services: Q3 revenue increased 9.3% to $39.0 billion and adjusted operating income increased 9.5% to $1.8 billion. Nine-month adjusted operating income rose 22.0% to $5.0 billion, supported by purchasing economics and specialty pharmacy growth; price compression remained a partial offset.
- Retail/LTC: Q3 revenue increased 10.0% to $25.0 billion and adjusted operating income increased 22.0% to $1.7 billion. Nine-month adjusted operating income rose 18.2% to $5.2 billion. COVID vaccinations, testing and OTC test kits contributed materially to growth; reimbursement pressure persisted.
Margins and distributions: Consolidated operating expenses were 12.5% of revenue for both Q3 periods and 12.5% for the first nine months of 2021, down 0.4 percentage points year over year. The quarterly dividend remained $0.50 per share; $1.50 per share was declared for the nine-month period.
Cash flow, debt and liquidity
- Operating cash flow was $14.3 billion for the first nine months, up from $12.3 billion. Investing cash outflow was $3.8 billion; financing cash outflow was $8.5 billion. Cash, cash equivalents and restricted cash increased $1.9 billion.
- Cash and cash equivalents were $9.8 billion at September 30, 2021, versus $7.9 billion at December 31, 2020. Current assets were $60.8 billion and current liabilities $64.7 billion.
- Long-term debt was $56.8 billion, down from $59.2 billion at year-end; total debt principal was $59.0 billion. The company issued $1.0 billion of 2.125% notes due 2031 and repurchased approximately $2.0 billion of 4.3% notes due 2028. No commercial paper or revolving-credit borrowings were outstanding; the company reported compliance with debt covenants.
- Capital expenditures were $1.9 billion for the first nine months. Dividends paid were $2.0 billion; no common shares were repurchased.
Outlook, risks and unusual items
- Management expected Q4 Health Care Benefits to face lower Medicare risk-adjustment revenue, elevated medical costs and higher expenses for 2022 plan-year readiness. Pharmacy Services was expected to benefit from purchasing economics and specialty growth, partly offset by price compression. Retail/LTC was expected to benefit from prescription volume and generic purchasing, partly offset by reimbursement pressure; COVID vaccination activity was expected to slow.
- Management cited continuing cost savings and digitalization, alongside expected Q4 investment in compensation and benefits, including a higher minimum wage for store, warehouse and call-center colleagues. The filing provides no specific full-year earnings guidance in the supplied text.
- The $431 million goodwill impairment followed weaker LTC forecasts, including lower facility admissions, customer losses and pandemic-related occupancy declines. No goodwill remained in the LTC reporting unit after the charge. The Commercial Business reporting unit’s goodwill was $26.5 billion, and its fair value exceeded carrying value by approximately 3%, making assumptions and performance worth monitoring.
- COVID-19’s effects on utilization, costs, consumer behavior and operations remained uncertain and could be materially adverse. The company also cited PBM pricing and rebate litigation and investigations, opioid and prescription-processing matters, CMS risk-adjustment audits, and other regulatory proceedings. It stated that outstanding legal accruals were not material individually or in aggregate, but it could not estimate potential losses beyond amounts accrued for many matters.
- CVS planned to enter individual Public Exchanges in eight states in January 2022; it warned that competitive pricing, adverse selection and regulatory changes could impair profitability.
Key facts for investors to verify
- Whether Health Care Benefits medical costs and medical benefit ratios normalize, particularly against the unusually low 2020 utilization comparison.
- Whether LTC operating performance stabilizes after the impairment and whether assumptions underpinning the Commercial Business goodwill valuation remain supportable.
- How much Retail/LTC growth and adjusted earnings depend on COVID vaccinations, testing and OTC test kits, and whether reimbursement pressure offsets volume gains.
- Progress in debt reduction and cash generation, alongside dividend commitments and planned investments.
- Developments in PBM, opioid, CMS risk-adjustment and other legal or regulatory matters, including any financial or operational effects not estimable in this filing.