CVS Health Corporation — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. CVS Health operates Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other; the 2019 comparison includes Aetna for a full year.
Key financial metrics
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Revenue | $268.7 billion | $256.8 billion | +4.6% |
| Operating income | $13.9 billion | $12.0 billion | +16.1% |
| Operating margin | 5.2% | 4.7% | +0.5 percentage points |
| Net income attributable to CVS Health | $7.18 billion | $6.63 billion | +8.2% |
| Diluted EPS | $5.46 | $5.08 | +7.5% |
| Adjusted operating income | $16.0 billion | $15.3 billion | +4.4% |
| Cash from operations | $15.9 billion | $12.8 billion | +$3.0 billion |
| Capital expenditures | $2.44 billion | $2.46 billion | Roughly flat |
At year-end, cash and cash equivalents were $7.85 billion; total current assets were $56.4 billion and current liabilities $62.0 billion. Long-term debt was $59.2 billion and current debt $5.44 billion; reported debt principal, including finance lease liabilities, totaled $65.3 billion. The company repaid $10.5 billion of notes through 2020 tender offers, while issuing new notes. It reported no commercial paper outstanding and compliance with debt covenants. Quarterly dividends were $0.50 per share; no shares were repurchased.
Material changes and segment results
- Pharmacy Services: Revenue rose 0.3% to $141.9 billion; adjusted operating income increased 10.9% to $5.69 billion, primarily on improved purchasing economics and specialty pharmacy growth, partly offset by price compression. Claims processed rose 4.9%.
- Retail/LTC: Revenue grew 5.3% to $91.2 billion, but adjusted operating income declined 8.3% to $6.15 billion amid reimbursement pressure and COVID-related disruption. Prescription volume increased 3.4%; pharmacy same-store sales rose 7.0%.
- Health Care Benefits: Revenue increased 8.4% to $75.5 billion and adjusted operating income rose 19.0% to $6.19 billion. Medical benefit ratio fell to 80.9% from 84.2%, reflecting deferred elective care and discretionary utilization during the pandemic, as well as other items. Medical membership increased to 23.4 million, with government membership growth partly offsetting Commercial declines.
- Consolidated operating income also benefited from a $307 million pretax ACA risk-corridor recovery and a $269 million gain on the sale of the Workers’ Compensation business. The company recorded $1.44 billion of losses on early debt extinguishment, versus $79 million in 2019.
Outlook, risks and unusual items
Management’s 2021 outlook is qualitative in this filing excerpt; it does not provide clear numeric revenue, earnings or EPS guidance. CVS expects Pharmacy Services growth from specialty pharmacy and purchasing improvements, tempered by price compression. Retail/LTC is expected to benefit from prescription growth, testing, vaccinations and improved generic purchasing, while facing reimbursement pressure and COVID-response costs. Health Care Benefits is expected to benefit from Medicare growth but face Medicaid membership declines, a higher medical benefit ratio, lower Medicare risk-adjustment revenue and pandemic-related costs. Management also expects continued enterprise cost savings and a lower effective tax rate following removal of the health insurer fee.
COVID-19 affected results in opposing ways: deferred care reduced Health Care Benefits claims costs, while lower store and clinic traffic, fewer new prescriptions, added benefit support and response expenses pressured other operations. The company cautions that the pandemic’s duration, utilization recovery, testing and vaccination costs, and resulting medical claims remain uncertain. It deferred approximately $670 million of employer Social Security taxes, with repayment scheduled in 2021 and 2022.
Key risks include healthcare-cost and claims-reserve estimation, regulatory and reimbursement changes, PBM pricing and rebate scrutiny, Medicare risk-adjustment audits and star ratings, competition, cyber and privacy threats, and substantial indebtedness. The Commercial Business and LTC goodwill reporting units had estimated fair-value cushions of approximately 6% and 12%, respectively; management warned that failure to meet LTC forecasts could lead to a material impairment. The filing also describes opioid, PBM, pharmacy-pricing and government-program investigations and litigation; management states that it cannot estimate possible losses beyond recorded accruals for certain matters. The ACA’s constitutionality was awaiting a Supreme Court decision at filing date.
Most important facts for investors to verify
- Whether 2021 medical utilization and claims costs recover as assumed, and how that affects the Health Care Benefits MBR and reserves.
- Whether projected Medicare growth, membership trends and CMS star ratings translate into sustainable earnings and funding.
- Progress on debt reduction, refinancing needs, interest costs and the company’s investment-grade credit ratings.
- Whether Retail/LTC reimbursement pressure and PBM price compression offset prescription, specialty and purchasing growth.
- Developments in litigation, regulatory audits, the Rebate Rule, and potential LTC or Commercial goodwill impairment.