CVS HEALTH CORPORATION The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K (this "10-K"), "Risk Factors" included in Item 1A of this 10-K and the "Cautionary Statement Concerning Forward-Looking Statements" in this 10-K. Overview of BusinessCVS Health Corporation , together with its subsidiaries (collectively, "CVS Health ," the "Company," "we," "our" or "us"), is a diversified health solutions company united around a common purpose of helping people on their path to better health. In an increasingly connected and digital world, we are meeting people wherever they are and changing health care to meet their needs. The Company has more than 9,900 retail locations, nearly 1,200 walk-in medical clinics, a leading pharmacy benefits manager with approximately 110 million plan members with expanding specialty pharmacy solutions and a dedicated senior pharmacy care business serving more than one million patients per year. The Company also serves an estimated 35 million people through traditional, voluntary and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan ("PDP"). The Company believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.
The Company has four reportable segments: Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other, which are described below.
Overview of the Health Care Benefits Segment
The Health Care Benefits segment operates as one of the nation's leading diversified health care benefits providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs, Medicaid health care management services, and health information technology products and services. The Health Care Benefits segment also provided workers' compensation administrative services through itsCoventry Health Care Workers' Compensation business ("Workers' Compensation business") prior to the sale of this business onJuly 31, 2020 . The Health Care Benefits segment's customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers ("providers"), governmental units, government-sponsored plans, labor groups and expatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and dental care costs) as "Insured" and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as "ASC." In addition, effectiveJanuary 2022 , the Company entered the individual public health insurance exchanges ("Public Exchanges") in eight states through which it sells Insured plans directly to individual consumers.
Overview of the Pharmacy Services Segment
The Pharmacy Services segment provides a full range of pharmacy benefit
management ("PBM") solutions, including plan design offerings and
administration, formulary management, retail pharmacy network management
services and mail order pharmacy. In addition, through the Pharmacy Services
segment, the Company provides specialty pharmacy and infusion services, clinical
services, disease management services, medical spend management and pharmacy
and/or other administrative services for providers and federal 340B drug pricing
program covered entities ("Covered Entities"). The Pharmacy Services segment's
clients are primarily employers, insurance companies, unions, government
employee groups, health plans, PDPs, Medicaid managed care plans, plans offered
on Public Exchanges and private health insurance exchanges, other sponsors of
health benefit plans throughout the United States and Covered Entities. The
Pharmacy Services segment operates retail specialty pharmacy stores, specialty
mail order pharmacies, mail order dispensing pharmacies, compounding pharmacies
and branches for infusion and enteral nutrition services.
Overview of the Retail/LTC Segment
The Retail/LTC segment sells prescription drugs and a wide assortment of health
and wellness products and general merchandise, provides health care services
through its MinuteClinic® walk-in medical clinics, provides medical diagnostic
testing, administers vaccinations for illnesses such as influenza, coronavirus
disease 2019 ("COVID-19") and shingles and conducts long-term care pharmacy
("LTC") operations, which distribute prescription drugs and provide related
pharmacy
67
--------------------------------------------------------------------------------
consulting and other ancillary services to long-term care facilities and other
care settings. As of December 31, 2021 , the Retail/LTC segment operated more
than 9,900 retail locations, nearly 1,200 MinuteClinic locations as well as
online retail pharmacy websites, LTC pharmacies and onsite pharmacies. For the
year ended December 31, 2021 , the Company dispensed approximately 26.4% of the
total retail pharmacy prescriptions in the United States .
Overview of the Corporate/Other Segment
The Company presents the remainder of its financial results in the Corporate/Other segment, which primarily consists of:
•Management and administrative expenses to support the Company's overall
operations, which include certain aspects of executive management and the
corporate relations, legal, compliance, human resources, information technology
and finance departments, expenses associated with the Company's investments in
its transformation and enterprise modernization programs and acquisition-related
integration costs; and
•Products for which the Company no longer solicits or accepts new customers such
as large case pensions and long-term care insurance products.
68
--------------------------------------------------------------------------------COVID-19
The COVID-19 pandemic and its emerging new variants continue to impact theU.S. and other countries around the world. Our strong local presence and scale in communities across the country has enabled us to continue to play an indispensable role in the national response to COVID-19, as well as provide seamless support for our customers wherever they need us: in our CVS locations, in their homes, and virtually. The COVID-19 pandemic had a significant impact on the Company's operating results for the years endedDecember 31, 2021 and 2020, primarily in the Company's Health Care Benefits and Retail/LTC segments.
Health Care Benefits Segment
Beginning inmid-March 2020 , the health system experienced a significant reduction in utilization of medical services ("utilization") that is discretionary and the cancellation of elective medical procedures. Utilization remained below historical levels throughApril 2020 , began to recover in May andJune 2020 and reached more normal levels in the third and fourth quarters of 2020, with select geographies impacted by COVID-19 waves. In response to COVID-19, the Company provided expanded benefit coverage to its members, including cost-sharing waivers for COVID-19 related treatments, as well as assistance to members through premium credits, telehealth cost-sharing waivers and other investments. During 2020, COVID-19 also resulted in a shift in the Company's medical membership. The Company experienced declines in Commercial membership due to reductions in workforce at our existing customers, substantially offset by increases in Medicaid membership primarily as a result of the suspension of eligibility redeterminations and increased unemployment. During the year endedDecember 31, 2021 , overall medical costs in the first quarter were generally consistent with historical baseline levels in the aggregate, however the segment experienced increased COVID-19 testing and treatment costs and lower Medicare risk-adjusted revenue. During the second quarter, COVID-19 testing and treatment costs persisted, however at levels significantly lower than those observed during the first quarter. Beginning in the third quarter of 2021, medical costs once again increased primarily driven by the spread of emerging new variants of COVID-19, which resulted in increased testing and treatment costs throughout the remainder of the year.
Retail/LTC Segment
DuringMarch 2020 , the Company experienced increased prescription volume due to the greater use of 90-day prescriptions and early refills of maintenance medications, as well as increased front store volume as consumers prepared for the COVID-19 pandemic. Beginning in the second quarter and continuing throughout the remainder of the year, the Company experienced reduced customer traffic in its retail pharmacies andMinuteClinic locations due to shelter-in-place orders as well as reduced new therapy prescriptions and decreased long-term care prescription volume as a result of the COVID-19 pandemic. In addition, the Company incurred incremental operating expenses associated with the Company's COVID-19 pandemic response efforts and waived fees associated with prescription home delivery and associated front store products. During 2020, the Company also played a key role in supporting the local communities in which it operates through the administration of diagnostic testing at its CVS Pharmacy® locations, as well as in long-term care facilities, at community-based testing sites in underserved areas and through its Return ReadySM solution. The Company also began administering COVID-19 vaccinations in long-term care facilities duringDecember 2020 . During the first quarter of 2021, the Company experienced reduced customer traffic in its retail pharmacies, which reflected the impact of a weak cough, cold and flu season, while it administered the highest quarterly volume of COVID-19 diagnostic tests. The Company began administering COVID-19 vaccines in its retail pharmacies duringFebruary 2021 . During the second quarter, the segment generated earnings from COVID-19 vaccines and saw improved customer traffic as vaccinated customers began more actively shopping in CVS locations. During the third and fourth quarters, emerging new variants drove the continued administration of COVID-19 vaccinations (including boosters) and diagnostic testing, while the segment also generated earnings from the sale of over-the-counter ("OTC") test kits in the front store. During the year endedDecember 31, 2021 , the Company administered more than 32 million COVID-19 tests and more than 59 million COVID-19 vaccines and sold more than 22 million OTC test kits. The COVID-19 pandemic continues to evolve. We believe COVID-19's impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and the severity and duration of the pandemic; the pandemic's impact on theU.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. 69 --------------------------------------------------------------------------------
Results of Operations
The following information summarizes the Company's results of operations for 2021 compared to 2020. For discussion of the Company's results of operations for 2020 compared to 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 16, 2021 .
Summary of Consolidated Financial Results
Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
In millions 2021 2020 2019 $ % $ %
Revenues:
Products $ 203,738 $ 190,688 $ 185,236 $ 13,050 6.8 % $ 5,452 2.9 %
Premiums 76,132 69,364 63,122 6,768 9.8 % 6,242 9.9 %
Services 11,042 7,856 7,407 3,186 40.6 % 449 6.1 %
Net investment income 1,199 798 1,011 401 50.3 % (213) (21.1) %
Total revenues 292,111 268,706 256,776 23,405 8.7 % 11,930 4.6 %
Operating costs:
Cost of products sold 175,803 163,981 158,719 11,822 7.2 % 5,262 3.3 %
Benefit costs 64,260 55,679 52,529 8,581 15.4 % 3,150 6.0 %
Store impairments 1,358 - 231 1,358 100.0 % (231) (100.0) %
Goodwill impairment 431 - - 431 100.0 % - - %
Operating expenses 37,066 35,135 33,310 1,931 5.5 % 1,825 5.5 %
Total operating costs 278,918 254,795 244,789 24,123 9.5 % 10,006 4.1 %
Operating income 13,193 13,911 11,987 (718) (5.2) % 1,924 16.1 %
Interest expense 2,503 2,907 3,035 (404) (13.9) % (128) (4.2) %
Loss on early extinguishment of
debt 452 1,440 79 (988) (68.6) % 1,361 1,722.8 %
Other income (182) (206) (124) 24 11.7 % (82) (66.1) %
Income before income tax
provision 10,420 9,770 8,997 650 6.7 % 773 8.6 %
Income tax provision 2,522 2,569 2,366 (47) (1.8) % 203 8.6 %
Income from continuing operations 7,898 7,201 6,631 697 9.7 % 570 8.6 %
Loss from discontinued
operations, net of tax - (9) - 9 100.0 % (9) (100.0) %
Net income 7,898 7,192 6,631 706 9.8 % 561 8.5 %
Net (income) loss attributable to
noncontrolling interests 12 (13) 3 25 192.3 % (16) (533.3) %
Net income attributable to CVS
Health $ 7,910 $ 7,179 $ 6,634 $ 731 10.2 % $ 545 8.2 %
Commentary - 2021 compared to 2020
Revenues
•Total revenues increased$23.4 billion or 8.7% in 2021 compared to 2020. The increase in total revenues was primarily driven by growth across all segments. •Please see "Segment Analysis" later in this MD&A for additional information about the revenues of the Company's segments. Operating expenses •Operating expenses increased$1.9 billion or 5.5% in 2021 compared to 2020. The increase in operating expenses was primarily due to incremental costs associated with growth in the business, including costs associated with the administration of COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment. The increase in operating expenses was partially offset by the repeal of the non-deductible health insurer fee ("HIF") for 2021 and gains from anti-trust legal settlements of$263 million recorded in 2021. 70 -------------------------------------------------------------------------------- •Operating expenses as a percentage of total revenues decreased to 12.7% in 2021 compared to 13.1% in 2020. The decrease in operating expenses as a percentage of total revenues was primarily due to the increases in total revenues referred to above. •Please see "Segment Analysis" later in this MD&A for additional information about the operating expenses of the Company's segments. Operating income •Operating income decreased$718 million or 5.2% in 2021 compared to 2020. The decrease in operating income was primarily due to: •A store impairment charge of approximately$1.4 billion recorded in the fourth quarter of 2021 related to planned retail store closures over the next three years; •Decreased operating income in the Health Care Benefits segment, driven by higher COVID-19 related costs in 2021 compared to the prior year, including the impact of the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during 2020, as well as the absence of pre-tax income of$307 million associated with the receipt of amounts owed to the Company under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "ACA") risk corridor program ("ACA risk corridor receipt"); and •A$431 million goodwill impairment charge associated with the LTC business in the Retail/LTC segment recorded during the third quarter of 2021, partially offset by: •Increased prescription and front store volume and the administration of COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment; •Improved purchasing economics and growth in specialty pharmacy in the Pharmacy Services segment; •Gains from anti-trust legal settlements of$263 million recorded in 2021; and •Lower acquisition-related integration costs in 2021 compared to the prior year. •Please see "Segment Analysis" later in this MD&A for additional information about the operating income of the Company's segments. Interest expense •Interest expense decreased$404 million in 2021 compared to 2020, due to lower debt in the year endedDecember 31, 2021 . See "Liquidity and Capital Resources" later in this report for additional information. Loss on early extinguishment of debt •During 2021, the loss on early extinguishment of debt relates to the Company's repayment of approximately$2.3 billion of its outstanding senior notes inDecember 2021 pursuant to its early redemption make-whole provision for such senior notes, which resulted in a loss on early extinguishment of debt of$89 million , and the repayment of approximately$2.0 billion of its outstanding senior notes pursuant to its tender offer for such notes inAugust 2021 , which resulted in a loss on early extinguishment of debt of$363 million . During 2020, the loss on early extinguishment of debt relates to the Company's repayment of$6.0 billion of its outstanding senior notes pursuant to its tender offers for such senior notes inAugust 2020 , which resulted in a loss on early extinguishment of debt of$766 million , and the repayment of$4.5 billion of its outstanding senior notes pursuant to its tender offers for such senior notes inDecember 2020 , which resulted in a loss on early extinguishment of debt of$674 million . See Note 8 ''Borrowings and Credit Agreements'' included in Item 8 of this 10-K for additional information. Income tax provision •The Company's effective income tax rate decreased to 24.2% in 2021 compared to 26.3% in the prior year primarily due to the repeal of the non-deductible HIF for 2021 and the favorable impact of a prior year refund claim approved by the Internal Revenue Service during the fourth quarter of 2021. The decrease was partially offset by the absence of the favorable resolution of certain tax matters in the fourth quarter of 2020. Loss from discontinued operations •In connection with certain business dispositions completed between 1995 and 1997, the Company retained guarantees on store lease obligations for a number of former subsidiaries, including Linens 'n Things and Bob's Stores, each of which subsequently filed for bankruptcy. The Company's loss from discontinued operations in 2020 primarily included lease-related costs required to satisfy these lease guarantees. 71 -------------------------------------------------------------------------------- •See "Discontinued Operations" in Note 1 ''Significant Accounting Policies'' and "Lease Guarantees" in Note 16 ''Commitments and Contingencies'' included in Item 8 of this 10-K for additional information about the Company's discontinued operations and the Company's lease guarantees, respectively. 72 --------------------------------------------------------------------------------
Outlook for 2022
With respect to 2022, the Company believes you should consider the following important information:
•The Health Care Benefits segment is expected to benefit from Medicare and Commercial membership growth, partially offset by membership declines in its Medicaid products. The projected MBR is expected to decrease compared to 2021, reflecting a combination of expected improved pricing and a reduction in COVID-19 related medical costs. While the Company still expects a net negative impact from COVID-19 in 2022 within the Health Care Benefits segment, the expectation is the impact will be less adverse than what was experienced in 2021. •The Pharmacy Services segment is expected to benefit from the Company's ability to drive further improvements in purchasing economics and continued growth in specialty pharmacy, partially offset by continued price compression and state regulation of pharmacy pricing. •The Retail/LTC segment is expected to continue to benefit from increased prescription volume and improved generic drug purchasing, partially offset by continued pharmacy reimbursement pressure and incremental operating expenses associated with the Company's minimum wage investment. The Company expects that COVID-19 vaccinations and diagnostic testing will continue in 2022, albeit at lower levels than those experienced during 2021. The Company expects to see continued strength inFront Store sales, including sales of OTC test kits, in 2022. The extent of COVID-19 vaccinations, diagnostic testing and OTC test kit sales will be dependent upon various factors including vaccine hesitancy, the emergence of new variants, government testing initiatives and the availability and administration of pediatric and booster vaccinations. •The Company is expected to benefit from the continuation of its enterprise-wide cost savings initiatives, which aim to reduce the Company's operating cost structure in a way that improves the consumer experience and is sustainable. Key drivers include: •Investments in digital, technology and analytics capabilities that will streamline processes and improve outcomes, •Implementing workforce and workplace strategies, and •Deploying vendor and procurement strategies. •The Company expects changes to its business environment to continue as elected and other government officials at the national and state levels continue to propose and enact significant modifications to public policy and existing laws and regulations that govern or impact the Company's businesses. •The COVID-19 pandemic continues to impact the economies of theU.S. and other countries around the world. The Company believes COVID-19's impact on its businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and the severity and duration of the pandemic, as well as the pandemic's impact on theU.S. and global economies, global supply chain, consumer behavior, and health care utilization patterns. In addition, as described in the "Government Regulation" section of this Form 10-K, federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 and emerging new variants may not effectively combat the severity and/or duration of the COVID-19 pandemic, and have resulted in a myriad of impacts on the Company's businesses. Those primary drivers are beyond the Company's knowledge and control. As a result, the impact COVID-19 will have on the Company's businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. The Company's current expectations described above are forward-looking statements. Please see "Risk Factors" included in Item 1A of this 10-K and the "Cautionary Statement Concerning Forward-Looking Statements" in this 10-K for information regarding important factors that may cause the Company's actual results to differ from those currently projected and/or otherwise materially affect the Company. 73 --------------------------------------------------------------------------------
Segment Analysis
The following discussion of segment operating results is presented based on the Company's reportable segments in accordance with the accounting guidance for segment reporting and is consistent with the segment disclosure in Note 17 ''Segment Reporting'' included in Item 8 of this 10-K. The Company has three operating segments, Health Care Benefits, Pharmacy Services and Retail/LTC, as well as a Corporate/Other segment. The Company's segments maintain separate financial information, and the Company's chief operating decision maker (the "CODM") evaluates the segments' operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company's segments based on adjusted operating income, which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance. See the reconciliations of operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company's ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.
The following is a reconciliation of financial measures of the Company's segments to the consolidated totals:
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services (1) LTC Other Eliminations (2) Totals
2021
Total revenues $ 82,186 $ 153,022 $ 100,105 $ 721 $ (43,923) $ 292,111
Adjusted operating income
(loss) 5,012 6,859 7,623 (1,471) (711) 17,312
2020
Total revenues 75,467 141,938 91,198 426 (40,323) 268,706
Adjusted operating income
(loss) 6,188 5,688 6,146 (1,306) (708) 16,008
2019
Total revenues 69,604 141,491 86,608 512 (41,439) 256,776
Adjusted operating income
(loss) 5,202 5,129 6,705 (1,000) (697) 15,339
_____________________________________________
(1)Total revenues of the Pharmacy Services segment include approximately$11.6 billion ,$10.9 billion and$11.5 billion of retail co-payments for 2021, 2020 and 2019, respectively. See Note 1 ''Significant Accounting Policies'' included in Item 8 of this 10-K for additional information about retail co-payments. (2)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the Health Care Benefits segment, the Pharmacy Services segment, and/or the Retail/LTC segment. Intersegment adjusted operating income eliminations occur when members of Pharmacy Services Segment clients ("PSS members") enrolled in Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company's retail pharmacies instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail/LTC segments record the adjusted operating income on a stand-alone basis. 74 --------------------------------------------------------------------------------
The following are reconciliations of consolidated operating income (GAAP measure) to consolidated adjusted operating income, as well as reconciliations of segment GAAP operating income to segment adjusted operating income:
Year Ended December 31, 2021
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP measure)
Amortization of intangible assets (1) 1,552 192 512 3 -
2,259
Acquisition-related integration costs (2) - - - 132 - 132 Store impairments (3) - - 1,358 - - 1,358 Goodwill impairment (4) - - 431 - - 431 Acquisition purchase price adjustment outside of measurement period (5) (61) - - - -
(61)
Adjusted operating income (loss)
$ 7,623 $ (1,471) $ (711) $ 17,312 Year Ended December 31, 2020 Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP measure)
Amortization of intangible assets (1) 1,598 234 506 3 -
2,341
Acquisition-related integration costs (2) - - - 332 -
332
Gain on divestiture of subsidiary (6) (269) - - - -
(269)
Receipt of fully reserved ACA risk corridor receivable (7) (307) - - - -
(307)
Adjusted operating income (loss)
$ 6,146 $ (1,306) $ (708) $ 16,008 Year Ended December 31, 2019 Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP measure)
Amortization of intangible assets (1) 1,563 394 476 3 -
2,436
Acquisition-related integration costs (2) - - - 480 - 480 Store impairments (3) - - 231 - - 231 Loss on divestiture of subsidiary (6) - - 205 - -
205
Adjusted operating income (loss)
_____________________________________________
(1)The Company's acquisition activities have resulted in the recognition of
intangible assets as required under the acquisition method of accounting which
consist primarily of trademarks, customer contracts/relationships, covenants not
to compete, technology, provider networks and value of business acquired.
Definite-lived intangible assets are amortized over their estimated useful lives
and are tested for impairment when events indicate that the carrying value may
not be recoverable. The amortization of intangible assets is reflected in the
Company's GAAP consolidated statements of operations in operating expenses
within each segment. Although intangible assets contribute to the Company's
revenue generation, the amortization of intangible assets does not directly
relate to the underwriting of the Company's insurance products, the services
performed for the Company's customers or the sale of the Company's products or
services. Additionally, intangible asset amortization expense typically
fluctuates based on the size and timing of the Company's acquisition activity.
Accordingly, the Company believes excluding the amortization of intangible
assets enhances the Company's and investors' ability to compare the Company's
past financial performance with its current performance and to analyze
underlying business performance and trends. Intangible asset amortization
excluded from the related non-GAAP financial measure represents the entire
amount recorded within the Company's GAAP financial statements, and the revenue
generated by the associated intangible assets has not been excluded from the
related non-GAAP financial measure. Intangible asset amortization is excluded
from the related non-GAAP financial measure because the amortization, unlike the
related revenue, is not affected by operations of any particular period unless
an intangible asset becomes impaired or the estimated useful life of an
intangible asset is revised.
(2)In 2021, 2020 and 2019, acquisition-related integration costs relate to the
Company's acquisition ("Aetna Acquisition") of Aetna Inc. ("Aetna"). The
acquisition-related integration costs are reflected in the Company's GAAP
consolidated statements of operations in operating expenses within the
Corporate/Other segment.
(3)During the year ended December 31, 2021 , the store impairment charge relates
to the write down of operating lease right-of-use assets and property and
equipment in connection with the planned closure of approximately 900 retail
stores between 2022 and 2024. During the year ended December 31, 2019 , the store
impairment charges related to the write down of operating lease right-of-use
assets in connection with the planned closure of 68 underperforming retail
pharmacy stores in 2019 and 2020. The store impairment charges are reflected in
the Company's GAAP consolidated statements of operations within the Retail/LTC
segment.
75
--------------------------------------------------------------------------------
(4)During the year ended December 31, 2021 , the goodwill impairment charge
relates to the LTC reporting unit within the Retail/LTC segment.
(5)In June 2021 , the Company received $61 million related to a purchase price
working capital adjustment for an acquisition completed during the first quarter
of 2020. The resolution of this matter occurred subsequent to the acquisition
accounting measurement period and is reflected in the Company's GAAP
consolidated statement of operations for the year ended December 31, 2021 as a
reduction of operating expenses within the Health Care Benefits segment.
(6)In 2020, the gain on divestiture of subsidiary represents the pre-tax gain on
the sale of the Workers' Compensation business, which the Company sold on July
31, 2020 for approximately $850 million . The gain on divestiture is reflected as
a reduction of operating expenses in the Company's GAAP consolidated statement
of operations within the Health Care Benefits segment. In 2019, the loss on
divestiture of subsidiary represents the pre-tax loss on the sale of Onofre,
which occurred on July 1, 2019 . The loss on divestiture primarily relates to the
elimination of the cumulative translation adjustment from accumulated other
comprehensive income and is reflected in the Company's GAAP consolidated
statement of operations in operating expenses within the Retail/LTC segment.
(7)In 2020, the Company received $313 million owed to it under the ACA's risk
corridor program that was previously fully reserved for as payment was
uncertain. After considering offsetting items such as the ACA's minimum medical
loss ratio ("MLR") rebate requirements and premium taxes, the Company recognized
pre-tax income of $307 million in the Company's GAAP consolidated statement of
operations within the Health Care Benefits segment.
76
--------------------------------------------------------------------------------Health Care Benefits Segment
The following table summarizes the Health Care Benefits segment's performance
for the respective periods:
Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
In millions, except
percentages and basis points
("bps") 2021 2020 2019 $ % $ %
Revenues:
Premiums $ 76,064 $ 69,301 $ 63,031 $ 6,763 9.8 % $ 6,270 9.9 %
Services 5,536 5,683 5,974 (147) (2.6) % (291) (4.9) %
Net investment income 586 483 599 103 21.3 % (116) (19.4) %
Total revenues 82,186 75,467 69,604 6,719 8.9 % 5,863 8.4 %
Benefit costs 64,662 56,083 53,092 8,579 15.3 % 2,991 5.6 %
MBR (Benefit costs as a % of
premium revenues) 85.0 % 80.9 % 84.2% 410 bps (330) bps
Operating expenses $ 14,003 $ 14,218 $ 12,873 $ (215) (1.5) % $ 1,345 10.4 %
Operating expenses as a % of
total revenues 17.0 % 18.8 % 18.5 %
Operating income$ 3,521 $ 5,166 $ 3,639 $ (1,645) (31.8) %$ 1,527 42.0 % Operating income as a % of total revenues 4.3 % 6.8 % 5.2
%
Adjusted operating income (1)
(1,176) (19.0) % $ 986 19.0 %
Adjusted operating income as
a % of total revenues 6.1 % 8.2 % 7.5 %
Premium revenues (by
business):
Government $ 55,739 $ 48,928 $ 41,818 $ 6,811 13.9 % $ 7,110 17.0 %
Commercial 20,325 20,373 21,213 (48) (0.2) % (840) (4.0) %
_____________________________________________
(1)See "Segment Analysis" above in this MD&A for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Health Care Benefits segment, which represents the Company's principal measure of segment performance.
Commentary - 2021 compared to 2020
Revenues
•Total revenues increased$6.7 billion , or 8.9%, to$82.2 billion in 2021 compared to 2020 primarily driven by growth in the Government Services business, partially offset by the unfavorable impact of the repeal of the HIF for 2021 and the absence of the ACA risk corridor receipt. Medical Benefit Ratio ("MBR") •Medical benefit ratio is calculated as benefit costs divided by premium revenues and represents the percentage of premium revenues spent on medical benefits for the Company's Insured members. Management uses MBR to assess the underlying business performance and underwriting of its insurance products, understand variances between actual results and expected results and identify trends in period-over-period results. MBR provides management and investors with information useful in assessing the operating results of the Company's Insured Health Care Benefits products. •The MBR increased from 80.9% to 85.0% in 2021 compared to the prior year. The increase was primarily driven by higher COVID-19 related costs in 2021 compared to the prior year, including the impact of the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during 2020 and the repeal of the HIF for 2021, partially offset by improved underlying performance in the current year. Operating expenses •Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses. •Operating expenses decreased$215 million , or 1.5%, in 2021 compared to 2020. The decrease in operating expenses was primarily due to the repeal of the HIF for 2021, partially offset by incremental operating expenses to support the growth in the Government Services business described above and the net impact of the sale of the Workers' Compensation business sold onJuly 31, 2020 . 77 -------------------------------------------------------------------------------- Adjusted operating income •Adjusted operating income decreased$1.2 billion , or 19.0%, in 2021 compared to 2020. The decrease in adjusted operating income was primarily driven by higher COVID-19 related costs in 2021 compared to the prior year, including the impact of the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during 2020. The decrease was partially offset by improved performance in the underlying Government Services business and higher favorable development of prior-years' health care cost estimates in 2021 compared to the prior year.
The following table summarizes the Health Care Benefits segment's medical
membership as of
2021 2020
In thousands Insured ASC Total Insured ASC Total
Medical membership:
Commercial 3,258 13,530 16,788 3,258 13,644 16,902
Medicare Advantage 2,971 - 2,971 2,705 - 2,705
Medicare Supplement 1,285 - 1,285 1,082 - 1,082
Medicaid 2,333 471 2,804 2,100 623 2,723
Total medical membership 9,847 14,001 23,848 9,145 14,267 23,412
Supplemental membership
information:
Medicare Prescription Drug Plan (standalone) 5,777 5,490
Medical Membership
•Medical membership represents the number of members covered by the Company's
Insured and ASC medical products and related services at a specified point in
time. Management uses this metric to understand variances between actual medical
membership and expected amounts as well as trends in period-over-period results.
This metric provides management and investors with information useful in
understanding the impact of medical membership on segment total revenues and
operating results.
•Medical membership as of December 31, 2021 of 23.8 million increased 436,000
compared with December 31, 2020 , primarily reflecting increases in Medicare and
Medicaid products, partially offset by declines in Commercial self-insured
membership.
Medicare Update
On January 15, 2021 , the U.S. Centers for Medicare & Medicaid Services ("CMS")
issued its final notice detailing final 2022 Medicare Advantage benchmark
payment rates. Final 2022 Medicare Advantage rates resulted in an increase in
industry benchmark rates of approximately 4.1%.
The ACA ties a portion of each Medicare Advantage plan's reimbursement to the
plan's "star ratings." Plans must have a star rating of four or higher (out of
five) to qualify for bonus payments. CMS released the Company's 2022 star
ratings in October 2021 . The Company's 2022 star ratings will be used to
determine which of the Company's Medicare Advantage plans have ratings of four
stars or higher and qualify for bonus payments in 2023. Based on the Company's
membership at December 31, 2021 , 87% of the Company's Medicare Advantage members
were in plans with 2022 star ratings of at least 4.0 stars, compared to 83% of
the Company's Medicare Advantage members being in plans with 2021 star ratings
of at least 4.0 stars based on the Company's membership at December 31, 2020 .
78
--------------------------------------------------------------------------------Pharmacy Services Segment
The following table summarizes the Pharmacy Services segment's performance for
the respective periods:
Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
In millions, except
percentages 2021 2020 2019 $ % $ %
Revenues:
Products $ 151,851 $ 140,950 $ 140,946 $ 10,901 7.7 % $ 4 - %
Services 1,171 988 545 183 18.5 % 443 81.3 %
Total revenues 153,022 141,938 141,491 11,084 7.8 % 447 0.3 %
Cost of products sold 144,894 135,045 135,245 9,849 7.3 % (200) (0.1) %
Operating expenses 1,461 1,439 1,511 22 1.5 % (72) (4.8) %
Operating expenses as a % of
total revenues 1.0 % 1.0 % 1.1 %
Operating income $ 6,667 $ 5,454 $ 4,735 $ 1,213 22.2 % $ 719 15.2 %
Operating income as a % of
total revenues 4.4 % 3.8 % 3.3 %
Adjusted operating income (1) $ 6,859 $ 5,688 $ 5,129 $ 1,171 20.6 % $ 559 10.9 %
Adjusted operating income as
a % of total revenues 4.5 % 4.0 % 3.6 %
Revenues (by distribution
channel):
Pharmacy network (2) $ 91,715 $ 85,045 $ 88,755 $ 6,670 7.8 % $ (3,710) (4.2) %
Mail choice (3) 60,547 56,071 52,141 4,476 8.0 % 3,930 7.5 %
Other 760 822 595 (62) (7.5) % 227 38.2 %
Pharmacy claims processed:
(4)
Total 2,244.7 2,112.9 2,014.2 131.8 6.2 % 98.7 4.9 %
Pharmacy network (2) 1,914.0 1,790.1 1,704.0 123.9 6.9 % 86.1 5.1 %
Mail choice (3) 330.7 322.8 310.2 7.9 2.4 % 12.6 4.1 %
Generic dispensing rate: (4)
Total 86.8 % 88.2 % 88.2 %
Pharmacy network (2) 87.0 % 88.7 % 88.7 %
Mail choice (3) 85.6 % 85.3 % 85.1 %
_____________________________________________
(1)See "Segment Analysis" above in this MD&A for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Pharmacy Services segment, which represents the Company's principal measure of segment performance. (2)Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company's retail pharmacies and LTC pharmacies, but excluding Maintenance Choice® activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at aCVS Pharmacy retail store for the same price as mail order. (3)Mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as prescriptions filled at the Company's retail pharmacies under the Maintenance Choice program. (4)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.
Commentary - 2021 compared to 2020
Revenues
•Total revenues increased$11.1 billion , or 7.8%, to$153.0 billion in 2021 compared to 2020. The increase was primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued price compression. 79 -------------------------------------------------------------------------------- Operating expenses •Operating expenses in the Pharmacy Services segment include selling, general and administrative expenses; depreciation and amortization expense; and expenses related to specialty retail pharmacies, which include store and administrative payroll, employee benefits and occupancy costs. •Operating expenses as a percentage of total revenues remained consistent at 1.0% in both 2021 and 2020. Adjusted operating income •Adjusted operating income increased$1.2 billion , or 20.6%, in 2021 compared to 2020. The increase in adjusted operating income was primarily driven by improved purchasing economics which reflected increased contributions from the products and services of the Company's group purchasing organization and specialty pharmacy (including pharmacy and/or administrative services for providers and Covered Entities). These increases were partially offset by continued price compression. •As you review the Pharmacy Services segment's performance in this area, you should consider the following important information about the business: •The Company's efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates, fees and/or discounts the Company receives from manufacturers, wholesalers and retail pharmacies continue to have an impact on adjusted operating income. In particular, competitive pressures in the PBM industry have caused the Company and other PBMs to continue to share with clients a larger portion of rebates, fees and/or discounts received from pharmaceutical manufacturers. In addition, marketplace dynamics and regulatory changes have limited the Company's ability to offer plan sponsors pricing that includes retail network "differential" or "spread," and the Company expects these trends to continue. The "differential" or "spread" is any difference between the drug price charged to plan sponsors, including Medicare Part D plan sponsors, by a PBM and the price paid for the drug by the PBM to the dispensing provider. Pharmacy claims processed •Total pharmacy claims processed represents the number of prescription claims processed through our pharmacy benefits manager and dispensed by either our retail network pharmacies or our own mail and specialty pharmacies. Management uses this metric to understand variances between actual claims processed and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of pharmacy claim volume on segment total revenues and operating results. •The Company's pharmacy network claims processed on a 30-day equivalent basis increased 6.9% to 1.9 billion claims in 2021 compared to 1.8 billion claims in 2020. The increase in pharmacy network claims processed was primarily driven by net new business and COVID-19 vaccinations, as well as increased new therapy prescriptions, which were adversely impacted by the COVID-19 pandemic during 2020. •The Company's mail choice claims processed on a 30-day equivalent basis increased 2.4% to 330.7 million claims in 2021 compared to 322.8 million claims in 2020. The increase in mail choice claims was primarily driven by net new business and the continued adoption of Maintenance Choice offerings. •Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 4.2%, on a 30-day equivalent basis, in 2021 compared to the prior year. Generic dispensing rate •Generic dispensing rate is calculated by dividing the Pharmacy Services segment's generic drug prescriptions processed or filled by its total prescriptions processed or filled. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results. •The Pharmacy Services segment's total generic dispensing rate decreased to 86.8% in 2021 compared to 88.2% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in 2021. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate increased to 88.5% in 2021. 80 --------------------------------------------------------------------------------
Retail/LTC Segment
The following table summarizes the Retail/LTC segment's performance for the respective periods:
Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
In millions, except
percentages 2021 2020 2019 $ % $ %
Revenues:
Products $ 95,652 $ 89,944 $ 85,729 $ 5,708 6.3 % $ 4,215 4.9 %
Services 4,436 1,254 879 3,182 253.7 % 375 42.7 %
Net investment income 17 - - 17 100.0 % - - %
Total revenues 100,105 91,198 86,608 8,907 9.8 % 4,590 5.3 %
Cost of products sold 72,832 67,284 62,688 5,548 8.2 % 4,596 7.3 %
Store impairments 1,358 - 231 1,358 100.0 % (231) (100.0) %
Goodwill impairment 431 - - 431 100.0 % - - %
Operating expenses 20,162 18,274 17,896 1,888 10.3 % 378 2.1 %
Operating expenses as a % of
total revenues 20.1 % 20.0 % 20.7 %
Operating income $ 5,322 $ 5,640 $ 5,793 $ (318) (5.6) % $ (153) (2.6) %
Operating income as a % of
total revenues 5.3 % 6.2 % 6.7 %
Adjusted operating income
(1) $ 7,623 $ 6,146 $ 6,705 $ 1,477 24.0 % $ (559) (8.3) %
Adjusted operating income as
a % of total revenues 7.6 % 6.7 % 7.7 %
Revenues (by major
goods/service lines):
Pharmacy $ 76,121 $ 70,176 $ 66,442 $ 5,945 8.5 % $ 3,734 5.6 %
Front Store 21,315 19,655 19,422 1,660 8.4 % 233 1.2 %
Other 2,652 1,367 744 1,285 94.0 % 623 83.7 %
Net investment income 17 - - 17 100.0 % - - %
Prescriptions filled (2) 1,587.6 1,465.2 1,417.2 122.4 8.4 % 48.0 3.4 %
Same store sales increase:
(3)
Total 8.9 % 5.6 % 3.7 %
Pharmacy 9.3 % 7.0 % 4.5 %
Front Store 7.6 % 0.9 % 1.1 %
Prescription volume (2) 9.3 % 4.7 % 7.2 %Generic dispensing rate (2) 85.7 % 88.3 % 88.3
%
_____________________________________________
(1)See "Segment Analysis" above in this MD&A for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Retail/LTC segment, which represents the Company's principal measure of segment performance. (2)Includes an adjustment to convert 90day prescriptions to the equivalent of three 30day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription. (3)Same store sales and prescription volume represent the change in revenues and prescriptions filled in the Company's retail pharmacy stores that have been operating for greater than one year, expressed as a percentage that indicates the increase or decrease relative to the comparable prior period. Same store metrics exclude revenues fromMinuteClinic , revenues and prescriptions from LTC operations and, in 2019, revenues and prescriptions from stores inBrazil . Management uses these metrics to evaluate the performance of existing stores on a comparable basis and to inform future decisions regarding existing stores and new locations. Same-store metrics provide management and investors with information useful in understanding the portion of current revenues and prescriptions resulting from organic growth in existing locations versus the portion resulting from opening new stores.
Commentary - 2021 compared to 2020
Revenues
•Total revenues increased$8.9 billion , or 9.8%, to$100.1 billion in 2021 compared to 2020. The increase was primarily driven by increased prescription and front store volume, the administration of COVID-19 vaccinations and diagnostic testing, as well as brand inflation. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions. COVID-19 vaccinations, diagnostic testing and OTC test kit sales contributed approximately 45% of the increase in the segment's revenues in 2021 compared to the prior year. The prior year reflected 81 -------------------------------------------------------------------------------- the ongoing expansion of the Company's diagnostic testing program which began inApril 2020 , an immaterial impact from COVID-19 vaccinations which began inDecember 2020 and no OTC test kit sales. •Pharmacy same store sales increased 9.3% in 2021 compared to 2020. The increase was driven by the 9.3% increase in pharmacy same store prescription volume on a 30-day equivalent basis and brand inflation. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions. •Front store same store sales increased 7.6% in 2021 compared to 2020. The increase was primarily due to strength in consumer health, including the sale of OTC test kits, as well as increased beauty and personal care sales in 2021. •Other revenues increased 94.0% in 2021 compared to 2020. The increase was primarily due to increased COVID-19 diagnostic testing in 2021. Store impairments •During 2021, the Company recorded a store impairment charge of approximately$1.4 billion related to the write-down of operating lease right-of-use assets and property and equipment in connection with the planned closure of approximately 900 retail stores between 2022 and 2024. See Note 6 ''Leases'' included in Item 8 of this 10-K for additional information.Goodwill impairment •During 2021, the Company recorded a$431 million goodwill impairment charge related to the LTC reporting unit within the Retail/LTC segment. See Note 5 ''Goodwill and Other Intangibles'' included in Item 8 of this 10-K for additional information. Operating expenses •Operating expenses in the Retail/LTC segment include store payroll, store employee benefits, store occupancy costs, selling expenses, advertising expenses, depreciation and amortization expense and certain administrative expenses. •Operating expenses increased$1.9 billion , or 10.3%, in 2021 compared to 2020. The increase was primarily due to incremental costs associated with increased volume including COVID-19 vaccinations and diagnostic testing, as well as increased investments in the segment's capabilities and colleague compensation and benefits. These increases were partially offset by gains from anti-trust legal settlements of$231 million recorded in 2021, the absence of incremental expenses associated with the Company's initial COVID-19 pandemic mitigation efforts incurred in 2020 and the impact of cost savings initiatives in 2021. •Operating expenses as a percentage of total revenues remained relatively consistent at 20.1% and 20.0% in 2021 and 2020, respectively. Adjusted operating income •Adjusted operating income increased$1.5 billion , or 24.0%, in 2021 compared to 2020. The increase in adjusted operating income was primarily driven by the administration of COVID-19 vaccinations and diagnostic testing, the increased prescription and front store volume described above, improved generic drug purchasing and gains from anti-trust legal settlements of$231 million recorded in 2021. These increases were partially offset by continued pharmacy reimbursement pressure and increased investments in the segment's capabilities and colleague compensation and benefits. •As you review the Retail/LTC segment's performance in this area, you should consider the following important information about the business: •The segment's adjusted operating income benefited from the administration of COVID-19 vaccinations, diagnostic testing and OTC test kit sales which contributed approximately 30% of the segment's adjusted operating income in 2021. •The segment's adjusted operating income has been adversely affected by the efforts of managed care organizations, PBMs and governmental and other third-party payors to reduce their prescription drug costs, including the use of restrictive networks, as well as changes in the mix of business within the pharmacy portion of the Retail/LTC segment. If the pharmacy reimbursement pressure accelerates, the segment may not be able to grow revenues, and its adjusted operating income could be adversely affected. •The increased use of generic drugs has positively impacted the segment's adjusted operating income but has resulted in third-party payors augmenting their efforts to reduce reimbursement payments to retail pharmacies for prescriptions. This trend, which the Company expects to continue, reduces the benefit the segment realizes from brand-to-generic drug conversions. Prescriptions filled •Prescriptions filled represents the number of prescriptions dispensed through the Retail/LTC segment's pharmacies. Management uses this metric to understand variances between actual prescriptions dispensed and expected amounts as well 82 -------------------------------------------------------------------------------- as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of prescription volume on segment total revenues and operating results. •Prescriptions filled increased 8.4%, on a 30-day equivalent basis, in 2021 compared to 2020 primarily driven by COVID-19 vaccinations and the continued adoption of patient care programs, as well as increased new therapy prescriptions, which were adversely impacted by the COVID-19 pandemic in 2020. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 4.3%, on a 30-day equivalent basis, in 2021 compared to the prior year. Generic dispensing rate •Generic dispensing rate is calculated by dividing the Retail/LTC segment's generic drug prescriptions filled by its total prescriptions filled. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results. •The Retail/LTC segment's generic dispensing rate decreased to 85.7% in 2021 compared to 88.3% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in 2021. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate increased to 89.0% in 2021. 83
--------------------------------------------------------------------------------
Corporate/Other Segment
The following table summarizes the Corporate/Other segment's performance for the
respective periods:
Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
In millions, except
percentages 2021 2020 2019 $ % $ %
Revenues:
Premiums $ 68 $ 63 $ 91 $ 5 7.9 % $ (28) (30.8) %
Services 57 48 9 9 18.8 % 39 433.3 %
Net investment income 596 315 412 281 89.2 % (97) (23.5) %
Total revenues 721 426 512 295 69.2 % (86) (16.8) %
Cost of products sold 37 - - 37 100.0 % - - %
Benefit costs 212 221 285 (9) (4.1) % (64) (22.5) %
Operating expenses 2,078 1,846 1,710 232 12.6 % 136 8.0 %
Operating loss (1,606) (1,641) (1,483) 35 2.1 % (158) (10.7) %
Adjusted operating loss (1) (1,471) (1,306) (1,000) (165) (12.6) % (306) (30.6) %
_____________________________________________
(1)See "Segment Analysis" above in this MD&A for a reconciliation of Corporate/Other segment operating loss (GAAP measure) to adjusted operating loss, which represents the Company's principal measure of segment performance.
Commentary - 2021 compared to 2020
Revenues
•Revenues primarily relate to products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products. •Total revenues increased$295 million in 2021 compared to 2020. The increase was primarily driven by higher net investment income, primarily driven by private equity investments and increased net realized capital gains in 2021 compared to 2020. Adjusted operating loss •Adjusted operating loss increased$165 million in 2021 compared to 2020. The increase was primarily driven by higher employee benefit costs and incremental operating expenses associated with the Company's investments in transformation, partially offset by the increase in net investment income in 2021 described above. 84 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash Flows
The Company maintains a level of liquidity sufficient to allow it to meet its cash needs in the short-term. Over the long term, the Company manages its cash and capital structure to maximize shareholder return, maintain its financial condition and maintain flexibility for future strategic initiatives. The Company continuously assesses its regulatory capital requirements, working capital needs, debt and leverage levels, debt maturity schedule, capital expenditure requirements, dividend payouts, potential share repurchases and future investments or acquisitions. The Company believes its operating cash flows, commercial paper program, credit facilities, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives. As ofDecember 31, 2021 , the Company had approximately$9.4 billion in cash and cash equivalents, approximately$3.8 billion of which was held by the parent company or nonrestricted subsidiaries.
The net change in cash, cash equivalents and restricted cash for the years ended
Change
Year Ended December 31, 2021 vs. 2020 2020 vs. 2019
In millions 2021 2020 2019 $ % $ %
Net cash provided by operating
activities $ 18,265 $ 15,865 $ 12,848 $ 2,400 15.1 % $ 3,017 23.5 %
Net cash used in investing
activities (5,261) (5,534) (3,339) 273 4.9 % (2,195) (65.7) %
Net cash used in financing
activities (11,356) (7,696) (7,654) (3,660) (47.6) % (42) (0.5) %
Net increase in cash, cash
equivalents and restricted cash $ 1,648 $ 2,635 $ 1,855 $ (987) (37.5) % $ 780 42.0 %
Commentary - 2021 compared to 2020
•Net cash provided by operating activities increased by$2.4 billion in 2021 compared to 2020 due primarily to the timing of payments and higher operating income in the Retail/LTC segment. The increase was partially offset by reduced benefit costs due to the deferral of elective procedures and other discretionary utilization in the Health Care Benefits segment as a result of the COVID-19 pandemic, which favorably impacted operating cash flows in 2020 and did not recur during the current year. •Net cash used in investing activities decreased by$273 million in 2021 compared to 2020 primarily due to increased proceeds from the sale and maturity of investments and a decrease in cash used for acquisitions, partially offset by the absence of$840 million in proceeds from the sale of the Workers' Compensation business in 2020 and increased purchases of investments during 2021 compared to the prior year. In addition, cash used in investing activities reflected the following activity: •Gross capital expenditures remained relatively consistent at approximately$2.5 billion and$2.4 billion in 2021 and 2020, respectively. During 2021, approximately 64% of the Company's total capital expenditures were for technology, digital and other strategic initiatives and 36% were for store, fulfillment and support facilities expansion and improvements. •Net cash used in financing activities increased to$11.4 billion in 2021 compared to$7.7 billion in 2020. The increase in cash used in finance activities primarily related to lower proceeds from the issuance of long-term debt, partially offset by lower repayments of long-term debt during 2021 compared to the prior year.
Included in net cash used in investing activities for the years ended
2021 2020 2019
Total stores (beginning of year) 9,962 9,896 9,921
New and acquired stores (2) 58 156 102
Closed stores (2) (81) (90) (127)
Total stores (end of year) 9,939 9,962 9,896
Relocated stores (2) 17 18 23
_____________________________________________
(1)Includes retail drugstores and pharmacies within retail chains, primarily in Target Corporation ("Target") stores.
85
--------------------------------------------------------------------------------(2)Relocated stores are not included in new and acquired stores or closed stores totals.
Short-term Borrowings Commercial Paper and Back-up Credit FacilitiesThe Company did not have any commercial paper outstanding as ofDecember 31, 2021 or 2020. In connection with its commercial paper program, the Company maintains a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 17, 2023 , a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 16, 2024 , and a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 11, 2026 . The credit facilities allow for borrowings at various rates that are dependent, in part, on the Company's public debt ratings and require the Company to pay a weighted average quarterly facility fee of approximately 0.03%, regardless of usage. As ofDecember 31, 2021 and 2020, there were no borrowings outstanding under any of the Company's back-up credit facilities.Federal Home Loan Bank of Boston ("FHLBB") A subsidiary of the Company is a member of the FHLBB. As a member, the subsidiary has the ability to obtain cash advances, subject to certain minimum collateral requirements. The maximum borrowing capacity available from the FHLBB as ofDecember 31, 2021 was approximately$995 million . At bothDecember 31, 2021 and 2020, there were no outstanding advances from the FHLBB.
Long-term Borrowings
2021 Notes OnAugust 18, 2021 , the Company issued$1.0 billion aggregate principal amount of 2.125% unsecured senior notes dueSeptember 15, 2031 for total proceeds of$987 million , net of discounts, underwriting fees and offering expenses. The net proceeds of this offering were used for the purchase of senior notes in connection with the Company's cash tender offer inAugust 2021 as described below. 2020 Notes OnDecember 16, 2020 , the Company issued$750 million aggregate principal amount of 1.3% unsecured senior notes dueAugust 21, 2027 and$1.25 billion aggregate principal amount of 1.875% unsecured senior notes dueFebruary 28, 2031 for total proceeds of approximately$1.99 billion , net of discounts and underwriting fees. The$750 million aggregate principal amount of 1.3% unsecured senior notes represent a further issuance of the Company's 1.3% unsecured senior notes dueAugust 21, 2027 initially issued in an aggregate principal amount of$1.5 billion onAugust 21, 2020 . OnAugust 21, 2020 , the Company issued$1.5 billion aggregate principal amount of 1.3% unsecured senior notes dueAugust 21, 2027 ,$1.25 billion aggregate principal amount of 1.75% unsecured senior notes dueAugust 21, 2030 and$1.25 billion aggregate principal amount of 2.7% unsecured senior notes dueAugust 21, 2040 (collectively, the "August 2020 Notes") for total proceeds of approximately$3.97 billion , net of discounts and underwriting fees. OnMarch 31, 2020 , the Company issued$750 million aggregate principal amount of 3.625% unsecured senior notes dueApril 1, 2027 ,$1.5 billion aggregate principal amount of 3.75% unsecured senior notes dueApril 1, 2030 ,$1.0 billion aggregate principal amount of 4.125% unsecured senior notes dueApril 1, 2040 and$750 million aggregate principal amount of 4.25% unsecured senior notes dueApril 1, 2050 (collectively, the "March 2020 Notes") for total proceeds of approximately$3.95 billion , net of discounts and underwriting fees.
The net proceeds of these offerings were used for general corporate purposes, which may include working capital, capital expenditures, as well as the repurchase and/or repayment of indebtedness.
DuringMarch 2020 , the Company entered into several interest rate swap transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of theMarch 2020 Notes. In connection with the issuance of theMarch 2020 Notes, the Company terminated all outstanding cash flow hedges. The Company paid a net amount of$7 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of$5 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of theMarch 2020 Notes. See Note 13 ''Other Comprehensive Income'' included in Item 8 of this 10-K for additional information. 86 -------------------------------------------------------------------------------- Early Extinguishments of Debt InDecember 2021 , the Company redeemed for cash the remaining$2.3 billion of its outstanding 3.7% senior notes due 2023. In connection with the early redemption of such senior notes, the Company paid a make-whole premium of$80 million in excess of the aggregate principal amount of the senior notes that were redeemed, wrote-off$8 million of unamortized deferred financing costs and incurred$1 million in fees, for a total loss on early extinguishment of debt of$89 million . InAugust 2021 , the Company purchased approximately$2.0 billion of its outstanding 4.3% senior notes due 2028 through a cash tender offer. In connection with the purchase of such senior notes, the Company paid a premium of$332 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off$26 million of unamortized deferred financing costs and incurred$5 million in fees, for a total loss on early extinguishment of debt of$363 million . InDecember 2020 , the Company purchased$4.5 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following:$113 million of its 4.0% senior notes due 2023,$1.4 billion of its 3.7% senior notes due 2023,$1.0 billion of its 4.1% senior notes due 2025 and$2.0 billion of its 4.3% senior notes due 2028. In connection with the purchase of such senior notes, the Company paid a premium of$619 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off$45 million of unamortized deferred financing costs and incurred$10 million in fees, for a total loss on early extinguishment of debt of$674 million . InAugust 2020 , the Company purchased$6.0 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following:$723 million of its 4.0% senior notes due 2023,$2.3 billion of its 3.7% senior notes due 2023 and$3.0 billion of its 4.1% senior notes due 2025. In connection with the purchase of such senior notes, the Company paid a premium of$706 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off$47 million of unamortized deferred financing costs and incurred$13 million in fees, for a total loss on early extinguishment of debt of$766 million . InAugust 2019 , the Company purchased$4.0 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following:$1.3 billion of its 3.125% senior notes due 2020,$723 million of its floating rate notes due 2020,$328 million of its 4.125% senior notes due 2021,$297 million of 4.125% senior notes due 2021 issued byAetna ,$413 million of 5.45% senior notes due 2021 issued byCoventry Health Care, Inc. , a wholly-owned subsidiary ofAetna , and$962 million of its 3.35% senior notes due 2021. In connection with the purchase of such senior notes, the Company paid a premium of$76 million in excess of the aggregate principal amount of the senior notes that were purchased, incurred$8 million in fees and recognized a net gain of$5 million on the write-off of net unamortized deferred financing premiums, for a net loss on early extinguishment of debt of$79 million .
See Note 8 ''Borrowings and Credit Agreements'' and Note 12 ''Shareholders' Equity'' included in Item 8 of this 10-K for additional information about debt issuances, debt repayments, share repurchases and dividend payments.
Derivative Financial Instruments
The Company uses derivative financial instruments in order to manage interest rate and foreign exchange risk and credit exposure. The Company's use of these derivatives is generally limited to hedging risk and has principally consisted of using interest rate swaps, treasury rate locks, forward contracts, futures contracts, warrants, put options and credit default swaps.
Debt Covenants
The Company's back-up revolving credit facilities, unsecured senior notes and unsecured floating rate notes (see Note 8 ''Borrowings and Credit Agreements'' included in Item 8 of this 10-K) contain customary restrictive financial and operating covenants. These covenants do not include an acceleration of the Company's debt maturities in the event of a downgrade in the Company's credit ratings. The Company does not believe the restrictions contained in these covenants materially affect its financial or operating flexibility. As ofDecember 31, 2021 , the Company was in compliance with all of its debt covenants.
Debt Ratings
As ofDecember 31, 2021 , the Company's long-term debt was rated "Baa2" byMoody's Investors Service, Inc. ("Moody's") and "BBB" byStandard & Poor's Financial Services LLC ("S&P"), and its commercial paper program was rated "P-2" by Moody's and "A-2" by S&P. The outlook on the Company's long-term debt is "Stable" by Moody's and "Positive" by S&P. In assessing the Company's credit strength, the Company believes that both Moody's and S&P considered, among other things, the Company's capital structure and financial policies as well as its consolidated balance sheet, its historical acquisition activity 87 -------------------------------------------------------------------------------- and other financial information. Although the Company currently believes its long-term debt ratings will remain investment grade, it cannot guarantee the future actions of Moody's and/or S&P. The Company's debt ratings have a direct impact on its future borrowing costs, access to capital markets and new store operating lease costs. Share Repurchase Programs
During the years ended
Quarterly Cash Dividend
During 2021, 2020 and 2019, the quarterly cash dividend was$0.50 per share. InDecember 2021 ,CVS Health Corporation's Board of Directors (the "Board") authorized a 10% increase in the quarterly cash dividend to$0.55 per share effective in 2022.CVS Health Corporation has paid cash dividends every quarter since becoming a public company. Future dividends will depend on the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Board. Future Cash Requirements The following table summarizes certain estimated future cash requirements under the Company's various contractual obligations atDecember 31, 2021 , in total and disaggregated into current and long-term obligations. The table below does not include future payments of claims to health care providers or pharmacies because certain terms of these payments are not determinable atDecember 31, 2021 (for example, the timing and volume of future services provided under fee-for-service arrangements and future membership levels for capitated arrangements). In millions Total Current Long-Term Operating lease liabilities (1)$ 26,070 $ 2,685 $ 23,385 Finance lease liabilities (1) 2,068 122 1,946 Contractual lease obligations with Target (2) 2,419 - 2,419 Long-term debt (3) 55,443 4,154 51,289 Interest payments on long-term debt (3) 31,668 2,196 29,472 Other long-term liabilities on the consolidated balance sheets (4) Future policy benefits (5) 5,553 416 5,137 Unpaid claims (5) 1,589 324 1,265 Policyholders' funds (5) (6) 1,761 1,266 495 Total$ 126,571 $ 11,163 $ 115,408
_____________________________________________
(1)Refer to Note 6 ''Leases'' included in Item 8 of this 10-K for additional information regarding the maturity of lease liabilities under operating and finance leases. (2)The Company leases pharmacy and clinic space from Target. See Note 6 ''Leases'' included in Item 8 of this 10-K for additional information regarding the lease arrangements with Target. Amounts related to such operating and finance leases are reflected within the operating lease liabilities and finance lease liabilities in the table above. Pharmacy lease amounts due in excess of the remaining estimated economic life of the buildings are reflected in the table above assuming equivalent stores continue to operate through the term of the arrangements. (3)Refer to Note 8 ''Borrowings and Credit Agreements'' included in Item 8 of this 10-K for additional information regarding the maturities of debt principal. Interest payments on long-term debt are calculated using outstanding balances and interest rates in effect onDecember 31, 2021 . (4)Payments of other long-term liabilities exclude Separate Accounts liabilities of approximately$5.1 billion because these liabilities are supported by assets that are legally segregated and are not subject to claims that arise out of the Company's business. (5)Total payments of future policy benefits, unpaid claims and policyholders' funds include$728 million ,$1.6 billion and$186 million , respectively, of reserves for contracts subject to reinsurance. The Company expects the assuming reinsurance carrier to fund these obligations and has reflected these amounts as reinsurance recoverable assets on the consolidated balance sheets. (6)Customer funds associated with group life and health contracts of approximately$3.0 billion have been excluded from the table above because such funds may be used primarily at the customer's discretion to offset future premiums and/or for refunds, and the timing of the related cash flows cannot be determined. Additionally, net unrealized capital gains on debt securities supporting experience-rated products of$92 million , before tax, have been excluded from the table above.
Restrictions on Certain Payments
In addition to general state law restrictions on payments of dividends and other
distributions to stockholders applicable to all corporations, health maintenance
organizations ("HMOs") and insurance companies are subject to further
regulations that, among other things, may require those companies to maintain
certain levels of equity (referred to as surplus) and restrict the
88
--------------------------------------------------------------------------------
amount of dividends and other distributions that may be paid to their equity
holders. These regulations are not directly applicable to CVS Health Corporation
as a holding company, since CVS Health Corporation is not an HMO or an insurance
company. In addition, in connection with the Aetna Acquisition, the Company made
certain undertakings that require prior regulatory approval of dividends by
certain of its HMOs and insurance companies. The additional regulations and
undertakings applicable to the Company's HMO and insurance company subsidiaries
are not expected to affect the Company's ability to service the Company's debt,
meet other financing obligations or pay dividends, or the ability of any of the
Company's subsidiaries to service their debt or other financing obligations.
Under applicable regulatory requirements and undertakings, at December 31, 2021 ,
the maximum amount of dividends that may be paid by the Company's insurance and
HMO subsidiaries without prior approval by regulatory authorities was $2.9
billion in the aggregate.
The Company maintains capital levels in its operating subsidiaries at or above
targeted and/or required capital levels and dividends amounts in excess of these
levels to meet liquidity requirements, including the payment of interest on debt
and stockholder dividends. In addition, at the Company's discretion, it uses
these funds for other purposes such as funding share and debt repurchase
programs, investments in new businesses and other purposes considered advisable.
At December 31, 2021 and 2020, the Company held investments of $450 million and
$524 million , respectively, that are not accounted for as Separate Accounts
assets but are legally segregated and are not subject to claims that arise out
of the Company's business. See Note 3 ''Investments'' included in Item 8 of this
10-K for additional information on investments related to the 2012 conversion of
an existing group annuity contract from a participating to a non-participating
contract.
Solvency Regulation
The National Association of Insurance Commissioners (the "NAIC") utilizes
risk-based capital ("RBC") standards for insurance companies that are designed
to identify weakly-capitalized companies by comparing each company's adjusted
surplus to its required surplus (the "RBC Ratio"). The RBC Ratio is designed to
reflect the risk profile of insurance companies. Within certain ratio ranges,
regulators have increasing authority to take action as the RBC Ratio decreases.
There are four levels of regulatory action, ranging from requiring an insurer to
submit a comprehensive financial plan for increasing its RBC to the state
insurance commissioner to requiring the state insurance commissioner to place
the insurer under regulatory control. At December 31, 2021 , the RBC Ratio of
each of the Company's primary insurance subsidiaries was above the level that
would require regulatory action. The RBC framework described above for insurers
has been extended by the NAIC to health organizations, including HMOs. Although
not all states had adopted these rules at December 31, 2021 , at that date, each
of the Company's active HMOs had a surplus that exceeded either the applicable
state net worth requirements or, where adopted, the levels that would require
regulatory action under the NAIC's RBC rules. External rating agencies use their
own capital models and/or RBC standards when they determine a company's rating.
89
--------------------------------------------------------------------------------Critical Accounting Policies
The Company prepares the consolidated financial statements in conformity with generally accepted accounting principles, which require management to make certain estimates and apply judgment. Estimates and judgments are based on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. On a regular basis, the Company reviews its accounting policies and how they are applied and disclosed in the consolidated financial statements. While the Company believes the historical experience, current trends and other factors considered by management support the preparation of the consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from estimates, and such differences could be material. Significant accounting policies are discussed in Note 1 ''Significant Accounting Policies'' included in Item 8 of this 10-K. Management believes the following accounting policies include a higher degree of judgment and/or complexity and, thus, are considered to be critical accounting policies. The Company has discussed the development and selection of these critical accounting policies with the Audit Committee of the Board (the "Audit Committee"), and the Audit Committee has reviewed the disclosures relating to them.
Revenue Recognition
Health Care Benefits Segment Health Care Benefits revenue is principally derived from insurance premiums and fees billed to customers. Revenue is recognized based on customer billings, which, in the Company's Commercial business, reflect contracted rates per member and the number of covered members recorded in the Company's records at the time the billings are prepared. Billings are generally sent monthly for coverage during the following month. Revenue related to the Company's Government business is collected monthly from theU.S. federal government and various government agencies based on fixed payment rates and member eligibility. The Company's billings may be subsequently adjusted to reflect enrollment changes due to member terminations or other factors. These adjustments are known as retroactivity adjustments. In each period, the Company estimates the amount of future retroactivity and adjusts the recorded revenue accordingly. As information regarding actual retroactivity amounts becomes known, the Company refines its estimates and records any required adjustments to revenues in the period in which they arise. A significant difference in the actual level of retroactivity compared to estimated levels would have a significant effect on the Company's operating results. Premium Revenue Premiums are recognized as revenue in the month in which the enrollee is entitled to receive health care services. Premiums are reported net of an allowance for estimated terminations and uncollectible amounts. Additionally, premium revenue subject to the MLR rebate requirements of the ACA is recorded net of the estimated minimum MLR rebates for the current calendar year. Premiums related to unexpired contractual coverage periods (unearned premiums) are reported as other insurance liabilities on the consolidated balance sheets and recognized as revenue when earned.
Some of the Company's contracts allow for premiums to be adjusted to reflect actual experience or the relative health status of Insured members. Such adjustments are reasonably estimable at the outset of the contract, and adjustments to those estimates are made based on actual experience of the customer emerging under the contract and the terms of the underlying contract.
Services Revenue
Services revenue relates to contracts that can include various combinations of
services or series of services which generally are capable of being distinct and
accounted for as separate performance obligations. The Health Care Benefits
segment's services revenue primarily consists of ASC fees received in exchange
for performing certain claim processing and member services for ASC members. ASC
fee revenue is recognized over the period the service is provided. Some of the
Company's administrative services contracts include guarantees with respect to
certain functions, such as customer service response time, claim processing
accuracy and claim processing turnaround time, as well as certain guarantees
that a plan sponsor's benefit claim experience will fall within a certain range.
With any of these guarantees, the Company is financially at risk if the
conditions of the arrangements are not met, although the maximum amount at risk
typically is limited to a percentage of the fees otherwise payable to the
Company by the customer involved. Each period the Company estimates its
obligations under the terms of these guarantees and records its estimate as an
offset to services revenues.
90-------------------------------------------------------------------------------- Accounting for Medicare Part D Revenues include insurance premiums earned by the Company's PDPs, which are determined based on the PDP's annual bid and related contractual arrangements with CMS. The insurance premiums include a beneficiary premium, which is the responsibility of the PDP member, and can be subsidized by CMS in the case of low-income members, and a direct premium paid by CMS. Premiums collected in advance are initially recorded within other insurance liabilities and are then recognized ratably as revenue over the period in which members are entitled to receive benefits.
Revenues also include a risk-sharing feature of the Medicare Part D program design referred to as the risk corridor. The Company estimates variable consideration in the form of amounts payable to, or receivable from, CMS under the risk corridor, and adjusts revenue based on calculations of additional subsidies to be received from or owed to CMS at the end of the reporting year.
In addition to Medicare Part D premiums, the Company receives additional payments each month from CMS related to catastrophic reinsurance, low-income cost-sharing subsidies and coverage gap benefits. If the subsidies received differ from the amounts earned from actual prescriptions transferred, the difference is recorded in either accounts receivable, net or accrued expenses.
Pharmacy Services Segment
The Pharmacy Services segment sells prescription drugs directly through its mail
service dispensing pharmacies and indirectly through the Company's retail
pharmacy network. The Company's pharmacy benefit arrangements are accounted for
in a manner consistent with a master supply arrangement as there are no
contractual minimum volumes and each prescription is considered a separate
purchasing decision and distinct performance obligation transferred at a point
in time. PBM services performed in connection with each prescription claim are
considered part of a single performance obligation which culminates in the
dispensing of prescription drugs.
The Company recognizes revenue using the gross method at the contract price
negotiated with its clients when the Company has concluded it controls the
prescription drug before it is transferred to the client plan members. The
Company controls prescriptions dispensed indirectly through its retail pharmacy
network because it has separate contractual arrangements with those pharmacies,
has discretion in setting the price for the transaction and assumes primary
responsibility for fulfilling the promise to provide prescription drugs to its
client plan members while also performing the related PBM services.
Revenues include (i) the portion of the price the client pays directly to the
Company, net of any discounts earned on brand name drugs or other discounts and
refunds paid back to the client (see "Drug Discounts" and "Guarantees" below),
(ii) the price paid to the Company by client plan members for mail order
prescriptions and the price paid to retail network pharmacies by client plan
members for retail prescriptions ("retail co-payments"), and (iii) claims based
administrative fees for retail pharmacy network contracts. Sales taxes are not
included in revenues.
The Company recognizes revenue when control of the prescription drugs is
transferred to customers, in an amount that reflects the consideration the
Company expects to be entitled to receive in exchange for those prescription
drugs. The Company has established the following revenue recognition policies
for the Pharmacy Services segment:
•Revenues generated from prescription drugs sold by mail service dispensing
pharmacies are recognized when the prescription drug is delivered to the client
plan member. At the time of delivery, the Company has performed substantially
all of its performance obligations under its client contracts and does not
experience a significant level of returns or reshipments.
•Revenues generated from prescription drugs sold by third party pharmacies in
the Company's retail pharmacy network and associated administrative fees are
recognized at the Company's point-of-sale, which is when the claim is
adjudicated by the Company's online claims processing system and the Company has
transferred control of the prescription drug and completed all of its
performance obligations.
For contracts under which the Company acts as an agent or does not control the prescription drugs prior to transfer to the client plan member, revenue is recognized using the net method.
Drug Discounts
The Company records revenue net of manufacturers' rebates earned by its clients
based on their plan members' utilization of brand-name formulary drugs. The
Company estimates these rebates at period-end based on actual and estimated
claims data and its estimates of the manufacturers' rebates earned by its
clients. The estimates are based on the best available data at period-end and
recent history for the various factors that can affect the amount of rebates due
to the client. The Company adjusts its rebates
91
--------------------------------------------------------------------------------
payable to clients to the actual amounts paid when these rebates are paid or as
significant events occur. Any cumulative effect of these adjustments is recorded
against revenues at the time it is identified. Adjustments generally result from
contract changes with clients or manufacturers that have retroactive rebate
adjustments, differences between the estimated and actual product mix subject to
rebates, or whether the brand name drug was included in the applicable
formulary. The effect of adjustments between estimated and actual manufacturers'
rebate amounts has not been material to the Company's operating results or
financial condition.
Guarantees
The Company also adjusts revenues for refunds owed to clients resulting from pricing guarantees and performance against defined service and performance metrics. The inputs to these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual pricing and performance refund amounts has not been material to the Company's operating results or financial condition.
Retail/LTC SegmentRetail Pharmacy The Company's retail drugstores recognize revenue at the time the customer takes possession of the merchandise. For pharmacy sales, each prescription claim is its own arrangement with the customer and is a performance obligation, separate and distinct from other prescription claims under other retail network arrangements. Revenues are adjusted for refunds owed to third party payers resulting from pricing guarantees and performance against defined value-based service and performance metrics. The inputs to these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual pricing and performance refund amounts has not been material to the Company's operating results or financial condition. Revenue from Company gift cards purchased by customers is deferred as a contract liability until goods or services are transferred. Any amounts not expected to be redeemed by customers (i.e., breakage) are recognized based on historical redemption patterns.
Customer returns are not material to the Company's operating results or financial condition. Sales taxes are not included in revenues.
Loyalty and Other Programs
The Company's customer loyalty program, ExtraCare®, consists of two components,
ExtraSavingsTM and ExtraBucks® Rewards. ExtraSavings are coupons that are
recorded as a reduction of revenue when redeemed as the Company concluded that
they do not represent a promise to the customer to deliver additional goods or
services at the time of issuance because they are not tied to a specific
transaction or spending level.
ExtraBucks Rewards are accumulated by customers based on their historical
spending levels. Thus, the Company has determined that there is an additional
performance obligation to those customers at the time of the initial
transaction. The Company allocates the transaction price to the initial
transaction and the ExtraBucks Rewards transaction based upon the relative
standalone selling price, which considers historical redemption patterns for the
rewards. Revenue allocated to ExtraBucks Rewards is recognized as those rewards
are redeemed. At the end of each period, unredeemed ExtraBucks Rewards are
reflected as a contract liability.
The Company also offers a subscription-based membership program, CarePass®,
under which members are entitled to a suite of benefits delivered over the
course of the subscription period, as well as a promotional reward that can be
redeemed for future goods and services. Subscriptions are paid for on a monthly
or annual basis at the time of or in advance of the Company delivering the goods
and services. Revenue from these arrangements is recognized as the performance
obligations are satisfied.
Long-term Care
Revenue is recognized when control of the promised goods or services is
transferred to customers in an amount that reflects the consideration the
Company expects to be entitled to receive in exchange for those goods or
services. Each prescription claim represents a separate performance obligation
of the Company, separate and distinct from other prescription claims under
customer arrangements. A significant portion of long-term care revenue from
sales of pharmaceutical and medical products is reimbursed by the federal
Medicare Part D program and, to a lesser extent, state Medicaid programs. The
Company monitors its revenues and receivables from these reimbursement sources,
as well as long-term care facilities and other third party insurance payors, and
reduces revenue at the revenue recognition date to properly account for the
variable consideration due to anticipated differences between billed and
reimbursed amounts. Accordingly, the total revenues and receivables reported in
the Company's consolidated financial statements are recorded at the amount
expected to be ultimately received from these payors.
92
--------------------------------------------------------------------------------
Patient co-payments associated with Medicare Part D, certain state Medicaid
programs, Medicare Part B and certain third party payors typically are not
collected at the time products are delivered or services are rendered, but are
billed to the individuals as part of normal billing procedures and subject to
normal accounts receivable collections procedures.
Walk-In Medical Clinics
For services provided by the Company's walk-in medical clinics, revenue
recognition occurs for completed services provided to patients, with adjustments
taken for third party payor contractual obligations and patient direct bill
historical collection rates.
Impairments of
The Company regularly reviews its debt securities to determine whether a decline in fair value below the cost basis or carrying value has occurred. If a debt security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the amortized cost basis of the security is written down to its fair value and the difference is recognized in net income. If a debt security is in an unrealized loss position and the Company does not have the intent to sell and it is more likely than not that the Company will not have to sell such security before recovery of its amortized cost basis, the Company bifurcates the impairment into credit-related and non-credit related components. The amount of the credit-related component is recorded as an allowance for credit losses and recognized in net income, and the amount of the non-credit related component is included in other comprehensive income. The Company analyzes all facts and circumstances believed to be relevant for each investment when performing this analysis, in accordance with applicable accounting guidance. In evaluating whether a credit related loss exists, the Company considers a variety of factors including: the extent to which the fair value is less than the amortized cost basis; adverse conditions specifically related to the issuer of a security, an industry or geographic area; the payment structure of the security; the failure of the issuer of the security to make scheduled interest or principle payments; and any changes to the rating of the security by a rating agency.
During the years ended
The risks inherent in assessing the impairment of a debt security include the risk that market factors may differ from projections and the risk that facts and circumstances factored into the Company's assessment may change with the passage of time. Unexpected changes to market factors and circumstances that were not present in past reporting periods are among the factors that may result in a current period decision to sell debt securities that were not impaired in prior reporting periods.
Vendor Allowances and Purchase Discounts
Vendor and manufacturer receivables were
Pharmacy Services Segment
The Pharmacy Services segment receives purchase discounts on products purchased.
Contractual arrangements with vendors, including manufacturers, wholesalers and
retail pharmacies, normally provide for the Pharmacy Services segment to receive
purchase discounts from established list prices in one, or a combination, of the
following forms: (i) a direct discount at the time of purchase, (ii) a discount
for the prompt payment of invoices or (iii) when products are purchased
indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy),
a discount (or rebate) paid subsequent to dispensing. These rebates are
recognized when prescriptions are dispensed and are generally calculated and
billed to manufacturers within 30 days of the end of each completed quarter.
Historically, the effect of adjustments resulting from the reconciliation of
rebates recognized to the amounts billed and collected has not been material to
the Company's operating results or financial condition. The Company accounts for
the effect of any such differences as a change in accounting estimate in the
period the reconciliation is completed. The Pharmacy Services segment also
receives additional discounts under its wholesaler contracts if it exceeds
contractually defined purchase volumes. In addition, the Pharmacy Services
segment receives fees from pharmaceutical manufacturers for administrative
services. Purchase discounts and administrative service fees are recorded as a
reduction of cost of products sold.
93
--------------------------------------------------------------------------------
Retail/LTC Segment
Vendor allowances received by the Retail/LTC segment reduce the carrying cost of
inventory and are recognized in cost of products sold when the related inventory
is sold, unless they are specifically identified as a reimbursement of
incremental costs for promotional programs and/or other services provided.
Amounts that are directly linked to advertising commitments are recognized as a
reduction of advertising expense (included in operating expenses) when the
related advertising commitment is satisfied. Any such allowances received in
excess of the actual cost incurred also reduce the carrying cost of inventory.
The total value of any upfront payments received from vendors that are linked to
purchase commitments is initially deferred. The deferred amounts are then
amortized to reduce cost of products sold over the life of the contract based
upon sales volume. The total value of any upfront payments received from vendors
that are not linked to purchase commitments is also initially deferred. The
deferred amounts are then amortized to reduce cost of products sold on a
straight-line basis over the life of the related contract.
The Company establishes a receivable for vendor income that is earned but not
yet received based on historical trends and data. The majority of vendor
receivables are collected within the following fiscal quarter. Historically,
adjustments to the Company's vendor receivables resulting from the
reconciliation of receivables recognized to the amounts collected have not been
material to the Company's operating results or financial condition.
There have not been any material changes in the way the Company accounts for vendor allowances or purchase discounts during the past three years.
Inventory
Inventories are valued at the lower of cost or net realizable value using the weighted average cost method.
The value of ending inventory is reduced for estimated inventory losses that have occurred during the interim period between physical inventory counts. Physical inventory counts are taken on a regular basis in each retail store and LTC pharmacy, and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the consolidated financial statements are properly stated. The Company's accounting for inventory contains uncertainty since management must use judgment to estimate the inventory losses that have occurred during the interim period between physical inventory counts. When estimating these losses, a number of factors are considered which include historical physical inventory results on a location-by-location basis and current physical inventory loss trends. The total reserve for estimated inventory losses covered by this critical accounting policy was$522 million and$369 million as ofDecember 31, 2021 and 2020, respectively. Although management believes there is sufficient current and historical information available to record reasonable estimates for estimated inventory losses, it is possible that actual results could differ. In order to help investors assess the aggregate risk, if any, associated with the inventory-related uncertainties discussed above, a ten percent (10%) pre-tax change in estimated inventory losses, which is a reasonably likely change, would increase or decrease the total reserve for estimated inventory losses by approximately$52 million as ofDecember 31, 2021 .
Although management believes that the estimates discussed above are reasonable and the related calculations conform to generally accepted accounting principles, actual results could differ from such estimates, and such differences could be material.
Right-of-Use Assets and Lease Liabilities
The Company determines if an arrangement contains a lease at the inception of a
contract. Right-of-use assets represent the Company's right to use an underlying
asset for the lease term and lease liabilities represent the Company's
obligation to make lease payments arising from the lease. Right-of-use assets
and lease liabilities are recognized at the commencement date of the lease,
renewal date of the lease or significant remodeling of the lease space based on
the present value of the remaining future minimum lease payments. As the
interest rate implicit in the Company's leases is not readily determinable, the
Company utilizes its incremental borrowing rate, determined by class of
underlying asset, to discount the lease payments. The operating lease
right-of-use assets also include lease payments made before commencement and are
reduced by lease incentives. The Company evaluates the recoverability of its
right-of-use assets as described in "Long-Lived Asset Impairment" below.
The Company's real estate leases typically contain options that permit renewals
for additional periods of up to five years each. For real estate leases, the
options to extend are not considered reasonably certain at lease commencement
because the Company reevaluates each lease on a regular basis to consider the
economic and strategic incentives of exercising the renewal options and
94
--------------------------------------------------------------------------------
regularly opens or closes stores to align with its operating strategy.
Generally, the renewal option periods are not included within the lease term and
the associated payments are not included in the measurement of the right-of-use
asset and lease liability. Similarly, renewal options are not included in the
lease term for non-real estate leases because they are not considered reasonably
certain of being exercised at lease commencement. Leases with an initial term of
12 months or less are not recorded on the balance sheets, and lease expense is
recognized on a straight-line basis over the term of the short-term lease.
For real estate leases, the Company accounts for lease components and nonlease
components as a single lease component. Certain real estate leases require
additional payments based on sales volume, as well as reimbursement for real
estate taxes, common area maintenance and insurance, which are expensed as
incurred as variable lease costs. Other real estate leases contain one fixed
lease payment that includes real estate taxes, common area maintenance and
insurance. These fixed payments are considered part of the lease payment and
included in the right-of-use assets and lease liabilities.
Long-Lived Asset Impairment
Recoverability of Definite-Lived Assets The Company evaluates the recoverability of long-lived assets, excluding goodwill and indefinite-lived intangible assets, which are tested for impairment using separate tests described below, whenever events or changes in circumstances indicate that the carrying value of such an asset may not be recoverable. The Company groups and evaluates these long-lived assets for impairment at the lowest level at which individual cash flows can be identified. If indicators of impairment are present, the Company first compares the carrying amount of the asset group to the estimated future cash flows associated with the asset group (undiscounted). If the estimated future cash flows used in this analysis are less than the carrying amount of the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset group's estimated future cash flows (discounted). If required, an impairment loss is recorded for the portion of the asset group's carrying value that exceeds the asset group's estimated future cash flows (discounted). The long-lived asset impairment loss calculation contains uncertainty since management must use judgment to estimate each asset group's future sales, profitability and cash flows. When preparing these estimates, the Company considers historical results and current operating trends and consolidated sales, profitability and cash flow results and forecasts. These estimates can be affected by a number of factors including general economic and regulatory conditions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns. During the fourth quarter of 2021, the Company completed a strategic review of its retail business and announced the creation of new formats for its stores to continue to drive higher engagement with customers. As part of this review, the Company evaluated changes in population, consumer buying patterns and future health needs to ensure it has the right kinds of stores in the right locations for consumers and for the business. In connection with this initiative, onNovember 17, 2021 , the Board of Directors ofCVS Health Corporation (the "Board") authorized the closing of approximately 900 stores over the next three years. The Company expects to close approximately 300 stores each year between 2022 and 2024. As a result, management determined that there were indicators of impairment with respect to the impacted stores' asset groups, including the associated operating lease right-of-use assets and property and equipment. A long-lived asset impairment test was performed during the fourth quarter of 2021 and the results of the impairment test indicated that the fair value of certain retail store asset groups were lower than their respective carrying values. Accordingly, in the three months endedDecember 31, 2021 , the Company recorded a store impairment charge of approximately$1.4 billion , consisting of a write down of approximately$1.1 billion related to operating lease right-of-use assets and$261 million related to property and equipment, within the Retail/LTC segment. There were no material impairment charges recognized on long-lived assets in the year endedDecember 31, 2020 . During the year endedDecember 31, 2019 , the Company recorded store impairment charges of$231 million , primarily related to operating lease right-of-use asset impairment charges. Recoverability ofGoodwill Goodwill represents the excess of amounts paid for acquisitions over the fair value of the net identifiable assets acquired.Goodwill is subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that the carrying value may not be recoverable.Goodwill is tested for impairment on a reporting unit basis. The impairment test is performed by comparing the reporting unit's fair value with its net book value (or carrying amount), including goodwill. The fair value of the reporting units is estimated using a combination of a discounted cash flow method and a market multiple method. If the net book value (carrying amount) of the reporting unit exceeds its fair value, the reporting unit's goodwill is considered to be impaired, and an impairment is recognized in an amount equal to the excess. 95 -------------------------------------------------------------------------------- The determination of the fair value of the reporting units requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount rates; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, income taxes, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, the Company considers each reporting unit's historical results and current operating trends; consolidated revenues, profitability and cash flow results and forecasts; and industry trends. The Company's estimates can be affected by a number of factors, including general economic and regulatory conditions; the risk-free interest rate environment; the Company's market capitalization; efforts of customers and payers to reduce costs, including their prescription drug costs, and/or increase member co-payments; the continued efforts of competitors to gain market share, consumer spending patterns and the Company's ability to achieve its revenue growth projections and execute on its cost reduction initiatives. 2021 Goodwill Impairment Test During the third quarter of 2021, the Company performed its required annual impairment tests of goodwill. The results of the impairment tests indicated an impairment of the goodwill associated with the LTC reporting unit, as the reporting unit's carrying value exceeded its fair value as of the testing date. The results of the impairment tests of the remaining reporting units indicated that there was no impairment of goodwill as of the testing date. The fair values of the reporting units with goodwill exceeded their carrying values by significant margins, with the exception of the Commercial Business reporting unit, which exceeded its carrying value by approximately 3%. As discussed in Note 5 ''Goodwill and Other Intangibles'' included in Item 8 of this 10-K, during 2021, the LTC reporting unit has continued to face challenges that have impacted the Company's ability to grow the LTC reporting unit's business at the rate estimated when its 2020 goodwill impairment test was performed. These challenges include lower net facility admissions, net long-term care facility customer losses and the prolonged adverse impact of the COVID-19 pandemic and the emerging new variants, which resulted in more significant declines in occupancy rates experienced by the Company's long-term care facility customers than previously anticipated. During the third quarter of 2021, LTC management updated their 2021 annual forecast and submitted their long-term plan which showed deterioration in the financial results for the remainder of 2021 and beyond. The Company utilized these updated projections in performing its annual impairment test, which indicated that the fair value of the LTC reporting unit was lower than its carrying value, resulting in a$431 million goodwill impairment charge in the third quarter of 2021. The fair value of the LTC reporting unit was determined using a combination of a discounted cash flow method and a market multiple method. Subsequent to the impairment charge recorded in the third quarter of 2021, there is no remaining goodwill balance in the LTC reporting unit. The Company has experienced declines in its Commercial Insured medical membership subsequent to the closing date of theAetna Acquisition and may continue to do so for a number of reasons, including as a result of the competitive Commercial business environment. In addition, COVID-19 and the emerging new variants have had and may continue to have an adverse impact on medical membership in the Commercial business due to reductions in workforce at existing customers (including due to business failures) as well as reduced willingness to change benefit providers by prospective customers. The Company's fair value estimate is sensitive to significant assumptions including changes in medical membership, revenue growth rate, operating income and the discount rate. Although the Company believes the financial projections used to determine the fair value of the Commercial Business reporting unit in the third quarter of 2021 were reasonable and achievable, the challenges described above may affect the Company's ability to increase medical membership or operating income in the Commercial Business reporting unit at the rate estimated when such goodwill impairment test was performed and may continue to do so. As ofDecember 31, 2021 , the goodwill balance in the Commercial Business reporting unit was$26.5 billion . 2020 Goodwill Impairment Test During the third quarter of 2020, the Company performed its required annual impairment test of goodwill. The results of this impairment test indicated that there was no impairment of goodwill as of the testing date. The goodwill impairment test resulted in the fair values of all of the Company's reporting units exceeding their carrying values by significant margins, with the exception of the Commercial Business and LTC reporting units, which exceeded their carrying values by approximately 6% and 12%, respectively. 2019 Goodwill Impairment Test During the third quarter of 2019, the Company performed its required annual impairment test of goodwill. The results of this impairment test indicated that there was no impairment of goodwill as of the testing date. The goodwill impairment test resulted in the fair values of all of the Company's reporting units exceeding their carrying values by significant margins, with the exception of the Commercial Business and LTC reporting units, which exceeded their carrying values by approximately 4% and 9%, respectively. 96 -------------------------------------------------------------------------------- Recoverability of Indefinite-Lived Intangible Assets Indefinite-lived intangible assets are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that their carrying value may not be recoverable. Indefinite-lived intangible assets are tested by comparing the estimated fair value of the asset to its carrying value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized, and the asset is written down to its estimated fair value. The indefinite-lived intangible asset impairment loss calculation contains uncertainty since management must use judgment to estimate fair value based on the assumption that, in lieu of ownership of an intangible asset, the Company would be willing to pay a royalty in order to utilize the benefits of the asset. Fair value is estimated by discounting the hypothetical royalty payments to their present value over the estimated economic life of the asset. These estimates can be affected by a number of factors including general economic conditions, availability of market information and the profitability of the Company. There were no impairment losses recognized on indefinite-lived intangible assets in any of the years endedDecember 31, 2021 , 2020 or 2019.
Health Care Costs Payable
AtDecember 31, 2021 and 2020, 75% and 77% respectively, of health care costs payable are estimates of the ultimate cost of (i) services rendered to the Company's Insured members but not yet reported to the Company and (ii) claims which have been reported to the Company but not yet paid (collectively, "IBNR"). Health care costs payable also include an estimate of the cost of services that will continue to be rendered after the financial statement date if the Company is obligated to pay for such services in accordance with contractual or regulatory requirements. The remainder of health care costs payable is primarily comprised of pharmacy and capitation payables, other amounts due to providers pursuant to risk sharing agreements and accruals for state assessments. The Company develops its estimate of IBNR using actuarial principles and assumptions that consider numerous factors. See Note 1 ''Significant Accounting Policies'' included in Item 8 of this 10-K for additional information on the Company's reserving methodology. During 2021 and 2020, the Company observed an increase in completion factors relative to those assumed at the prior year end. After considering the claims paid in 2021 and 2020 with dates of service prior to the fourth quarter of the previous year, the Company observed assumed incurred claim weighted average completion factors that were 21 and 4 basis points higher, respectively, than previously estimated, resulting in a decrease of$207 million and$35 million in 2021 and 2020, respectively, in health care costs payable that related to the prior year. The Company has considered the pattern of changes in its completion factors when determining the completion factors used in its estimates of IBNR as ofDecember 31, 2021 . However, based on historical claim experience, it is reasonably possible that the Company's estimated weighted average completion factors may vary by plus or minus 13 basis points from the Company's assumed rates, which could impact health care costs payable by approximately plus or minus$186 million pretax. Also during 2021 and 2020, the Company observed that health care costs for claims with claim incurred dates of three months or less before the financial statement date were lower than previously estimated. Specifically, after considering the claims paid in 2021 and 2020 with claim incurred dates for the fourth quarter of the previous year, the Company observed health care costs that were 5.0% and 4.0% lower, respectively, for each fourth quarter than previously estimated, resulting in a reduction of$581 million and$394 million in 2021 and 2020, respectively, in health care costs payable that related to prior year. Management considers historical health care cost trend rates together with its knowledge of recent events that may impact current trends when developing estimates of current health care cost trend rates. When establishing reserves as ofDecember 31, 2021 , the Company increased its assumed health care cost trend rates for the most recent three months by 1.8% from health care cost trend rates recently observed. Health care cost trend rates during the past two years have been impacted by utilization changes driven by the COVID-19 pandemic. The impact has not been uniform, with products and select geographies experiencing utilization impacts due to COVID-19 waves. Based on historical claim experience, it is reasonably possible that the Company's estimated health care cost trend rates may vary by plus or minus 3.5% from the assumed rates, which could impact health care costs payable by plus or minus$450 million pretax.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are established for any temporary
differences between financial and tax reporting bases and are adjusted as needed
to reflect changes in the enacted tax rates expected to be in effect when the
temporary differences reverse. Such adjustments are recorded in the period
97
--------------------------------------------------------------------------------
in which changes in tax laws are enacted, regardless of when they are effective.
Deferred tax assets are reduced, if necessary, by a valuation allowance to the
extent future realization of those losses, deductions or other tax benefits is
sufficiently uncertain.
Significant judgment is required in determining the provision for income taxes
and the related taxes payable and deferred tax assets and liabilities since, in
the ordinary course of business, there are transactions and calculations where
the ultimate tax outcome is uncertain. Additionally, the Company's tax returns
are subject to audit by various domestic and foreign tax authorities that could
result in material adjustments based on differing interpretations of the tax
laws. Although management believes that its estimates are reasonable and are
based on the best available information at the time the provision is prepared,
actual results could differ from these estimates resulting in a final tax
outcome that may be materially different from that which is reflected in the
consolidated financial statements.
The tax benefit from an uncertain tax position is recognized only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the consolidated financial statements from such positions
are then measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon settlement with the related tax authority.
Interest and/or penalties related to uncertain tax positions are recognized in
the income tax provision. Significant judgment is required in determining
uncertain tax positions. The Company has established accruals for uncertain tax
positions using its judgment and adjusts these accruals, as warranted, due to
changing facts and circumstances.
New Accounting Pronouncements
See Note 1 ''Significant Accounting Policies'' included in Item 8 of this 10-K for a description of new accounting pronouncements applicable to the Company.
98--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
