CVS Health Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. CVS operates Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other businesses. The interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $72.616B | $65.341B | $141.713B | $132.096B |
| Operating income | $4.326B | $4.680B | $7.903B | $8.138B |
| Net income attributable to CVS | $2.783B | $2.975B | $5.006B | $4.982B |
| Diluted EPS | $2.10 | $2.26 | $3.78 | $3.79 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $8.739B | $10.424B |
- Q2 revenue grew 11.1%; operating income fell 7.6% and CVS-attributable net income fell 6.5%. For the first half, revenue increased 7.3%, operating income decreased 2.9%, and attributable net income increased 0.5%.
- Operating margin was approximately 6.0% in Q2 versus 7.2% in Q2 2020, and 5.6% for the first half versus 6.2%. Interest expense declined 16.9% in Q2 and 13.7% in the first half, mainly reflecting lower debt.
- Adjusted operating income, a non-GAAP measure, was $4.887B for Q2 (down from $5.328B) and $9.092B for the first half (down from $9.441B). It excludes intangible amortization and specified items.
Segment results and operating drivers
- Health Care Benefits: Q2 revenue rose 11.1% to $20.525B, but adjusted operating income fell 53.4% to $1.614B. The medical benefit ratio (MBR) rose to 84.1% from 70.3%; first-half MBR was 83.6% versus 76.4%. Management attributed the comparison largely to recovery in elective and other discretionary care after pandemic-related deferrals in 2020. First-half adjusted operating income fell 31.5% to $3.396B.
- Pharmacy Services: Q2 revenue grew 9.8% to $38.314B and adjusted operating income grew 32.3% to $1.755B. First-half adjusted operating income rose 30.1% to $3.262B. Higher claim volume, specialty pharmacy growth and improved purchasing economics supported results; price compression remained a partial offset.
- Retail/LTC: Q2 revenue increased 14.2% to $24.728B and adjusted operating income increased 93.9% to $2.049B. First-half revenue grew 8.1% and adjusted operating income 16.4% to $3.443B. Vaccinations, testing and prescription volume contributed materially; management said COVID-19 vaccination and testing contributed approximately 20% of first-half segment adjusted operating income. Pharmacy reimbursement pressure continued.
Cash, debt and liquidity
- At June 30, 2021, cash and cash equivalents were $7.119B; current assets were $56.559B and current liabilities $59.311B. Long-term debt was $59.294B and current debt $60M. The filing reports total debt carrying value of approximately $59.354B.
- First-half operating cash flow was $8.739B, down $1.685B year over year. Investing used $2.974B; financing used $6.558B. The latter included $5.423B of long-term debt repayments and $1.306B of dividends paid. Cash, cash equivalents and restricted cash ended at $7.337B.
- CVS reported no commercial paper or backup-credit-facility borrowings at quarter-end and was in compliance with debt covenants. It said operating cash flow, credit facilities and other funding sources should be sufficient for expected needs. Long-term debt ratings were Baa2 at Moody’s and BBB at S&P; S&P changed its outlook to positive in June.
Material changes, outlook and notable items
- Q2 operating income was pressured by higher, more normalized Health Care Benefits utilization compared with unusually low utilization in Q2 2020. Retail/LTC and Pharmacy Services gains partly offset that effect.
- Comparisons also reflect the 2020 health insurer fee (HIF): 2020 operating expenses included estimated HIF costs of $248M for Q2 and $519M for the first half; the fee was repealed for 2021.
- Q2 operating expenses benefited from a $137M antitrust legal settlement gain ($125M Retail/LTC and $12M Pharmacy Services) and a $61M acquisition-related working-capital adjustment recorded as a reduction of Health Care Benefits operating expenses.
- Management expected lower Medicare risk-adjustment revenue and modestly elevated medical costs in Health Care Benefits for the remainder of 2021; Pharmacy Services growth to moderate; and Retail/LTC vaccination activity to slow in the second half. It also anticipated higher Q4 investments in growth, operations and 2022 plan-year readiness, continued cost-saving initiatives, and incremental wage investment. The filing does not provide a clear numerical full-year earnings or revenue guidance value in the text provided.
- COVID-19’s duration, effects on utilization and consumer behavior, and governmental responses remained uncertain; management said impacts could be adverse and material. The LTC goodwill reporting unit had $431M of goodwill and a 12% fair-value cushion at the 2020 annual test; management said a material impairment was reasonably possible in the near term if forecasts were not achieved.
Risks and contingencies
- CVS disclosed ongoing or potential litigation, investigations and audits involving PBM pricing and rebates, usual-and-customary pharmacy pricing, opioids and controlled substances, prescription processing, provider claims, and Medicare/Medicaid risk adjustment and billing. It said outcomes are uncertain and some regulatory refunds, penalties, sanctions or business restrictions could be material. The filing states legal accruals were not material individually or in aggregate and that excess losses generally could not be reasonably estimated.
- Other exposures include guaranty-fund and state risk-pool assessments, 73 legacy store-lease guarantees, and possible future effects of regulatory or legislative changes. No material changes to the risk factors in the 2020 Form 10-K were reported.
- Prior-year health care cost estimates were reduced by $709M during the first half of 2021, primarily due to lower-than-estimated claims costs and faster claim submissions. This favorable development supported current-period results; actual claims experience remains a key estimate.
Important facts for investors to verify
- Whether Health Care Benefits MBR and medical utilization develop as management expected, including Medicare risk-adjustment revenue and COVID-19-related costs.
- How sustainable Pharmacy Services purchasing-economics and specialty-pharmacy gains are amid continued price compression and competition.
- The persistence of Retail/LTC vaccination and testing benefits, pharmacy reimbursement pressure, and the risk of LTC goodwill impairment.
- Operating cash flow conversion, debt repayment progress, liquidity and the effect of working-capital movements and tax payments.
- Developments in PBM, opioid, Medicare/Medicaid and other regulatory matters, including potential financial exposure beyond recorded accruals.