CVS Health Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited interim statements; amounts below are in U.S. dollars. CVS operates Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other businesses.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $80.6B | $72.6B | $157.5B | $141.7B |
| Operating income (GAAP) | $4.6B | $4.3B | $8.1B | $7.9B |
| Net income attributable to CVS Health | $3.0B | $2.8B | $5.3B | $5.0B |
| Diluted EPS | $2.23 | $2.10 | $3.97 | $3.78 |
| Adjusted operating income (non-GAAP) | $4.8B | $4.9B | $9.3B | $9.1B |
Q2 revenue rose 11.0% and GAAP operating income rose 5.6% year over year. First-half revenue rose 11.1%, while GAAP operating income increased 2.0%. Adjusted operating income increased 5.7% in Q2 and 2.2% in the first half. Interest expense declined to $583 million in Q2 and $1.2 billion for the first half, primarily reflecting lower debt.
- Health Care Benefits: Q2 revenue was $22.8B and adjusted operating income $1.8B, up 13.4%. Medical benefit ratio (MBR) improved to 82.9% from 84.1%; first-half MBR was 83.2% versus 83.6%. Management attributed performance to membership growth and favorable development of prior-period medical-cost estimates. June medical membership was 24.4 million, up 922,000 year over year.
- Pharmacy Services: Q2 revenue was $42.8B and adjusted operating income $1.9B, up 5.7%. Pharmacy claims processed rose 3.9%; growth and improved purchasing economics were partly offset by client pricing concessions and higher restructuring and integration costs.
- Retail/LTC: Q2 revenue was $26.3B, up 6.3%, but adjusted operating income fell 9.1% to $1.9B. Prescription and front-store volume growth was offset by reimbursement pressure, fewer COVID-19 vaccinations and the absence of a prior-year antitrust settlement gain.
- Corporate/Other: Adjusted operating loss widened to $555 million in Q2 and $860 million for the first half, primarily due to strengthened long-term-care insurance reserves and lower investment income.
Cash flow, balance sheet and capital
- First-half operating cash flow was $9.0B, compared with $8.7B. Investing used $4.1B and financing used $5.1B; cash, cash equivalents and restricted cash decreased $228M over the period.
- At June 30, cash and cash equivalents were $12.1B, including approximately $5.8B held by the parent or nonrestricted subsidiaries. Current assets were $62.1B and current liabilities $68.5B.
- Total debt principal was $55.3B; balance-sheet debt carrying value was $54.8B, including $4.0B current debt. Long-term debt ratings were Baa2 at Moody’s and BBB at S&P. The company reported covenant compliance and no commercial-paper or revolving-credit-facility borrowings.
- First-half share repurchases totaled approximately $2.0B for 19.1 million shares; $8.0B remained under the $10.0B authorization. Dividends declared were $0.55 per share in Q2, versus $0.50 a year earlier.
- Unrealized investment losses reduced first-half other comprehensive income by $2.0B; accumulated other comprehensive income moved from $965M at year-end to a $988M loss at June 30. The filing says unrealized debt-security losses were generally driven by higher interest rates, and CVS did not intend or expect to be required to sell the affected securities before recovery.
Material changes, outlook and risks
- CVS sold PayFlex on June 1 for approximately $775M and recorded a $225M pretax gain. It also sold its Thailand health care business; the first-quarter $41M held-for-sale loss was recorded, while the ultimate sale loss was not material. It sold renewal rights for approximately 200,000 other international medical members and expects migration through October 2023.
- A $484M pretax Florida opioid settlement was recorded in the first quarter, payable over 18 years. It contributed to higher first-half operating expenses. Separately, CVS was found liable with other chain pharmacies in an Ohio opioid trial; the remedy was undetermined and CVS planned to appeal.
- Management expected Medicare and commercial membership growth to support Health Care Benefits, with lower COVID-related medical costs and pricing expected to reduce MBR versus 2021. It expected Pharmacy Services to benefit from purchasing economics and claim volume, partly offset by client price improvements, lower Covered Entity contributions and pricing regulation. Retail/LTC expectations included prescription and front-store growth, partly offset by reimbursement pressure and wage-related costs. CVS assumed the public health emergency would continue through year-end 2022 and expected COVID vaccinations and testing below 2021 levels.
- The filing provides no clear quantified full-year earnings or EPS guidance in the supplied text. Outlook remains subject to COVID-19 developments, health care utilization, government policy, reimbursement and competitive pressures, and regulatory changes.
- Material legal and regulatory exposures include PBM pricing, rebate and opioid matters; usual-and-customary pricing and prescription-processing claims; CMS risk-adjustment audits that could require premium refunds; and provider payment disputes. CVS said it could not reliably estimate losses beyond recorded accruals for many matters and warned outcomes could be material.
- CVS plans to adopt the long-duration insurance accounting standard on January 1, 2023. It anticipated a possible increase in policy-benefit liabilities and a corresponding accumulated-OCI change, but was still evaluating the impact.
Most important facts for investors to verify
- How much of Health Care Benefits’ earnings improvement reflects sustainable underwriting and membership growth versus favorable prior-period claims development and the PayFlex gain.
- Whether Retail/LTC reimbursement pressure and weaker COVID-related activity continue to weigh on segment profitability.
- Developments, potential financial exposure and payment timing for opioid claims, PBM investigations and CMS risk-adjustment audits.
- Cash available for debt reduction and shareholder returns after near-term note redemptions, the Florida settlement and other commitments.
- The eventual financial-statement impact of the 2023 long-duration insurance accounting change and the sensitivity of investment values to interest rates.
Ernst & Young reviewed the interim financial statements and reported no material modifications were identified; this was a review, not an audit.