CVS Health Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. CVS Health operates Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other businesses. The interim financial statements were reviewed by Ernst & Young, not audited.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $76.826 billion | $69.097 billion | +11.2% |
| Operating income | $3.490 billion | $3.577 billion | -2.4% |
| Net income attributable to CVS Health | $2.312 billion | $2.223 billion | +4.0% |
| Diluted EPS | $1.74 | $1.68 | +$0.06 |
| Operating cash flow | $3.563 billion | $2.892 billion | +$671 million |
| Capital expenditures | $1.051 billion | $829 million | +$222 million |
GAAP operating margin was approximately 4.5%, down from 5.2%; net margin was approximately 3.0%, versus 3.2%. Operating expenses rose 10.7% to $9.876 billion, including the $484 million Florida opioid settlement accrual and costs associated with business growth. Effective tax rate declined to 21.5% from 25.1%, primarily reflecting discrete tax items.
Segments and material changes
- Health Care Benefits: Revenue increased 12.8% to $23.109 billion. Adjusted operating income fell 1.7% to $1.751 billion; medical benefit ratio rose to 83.5% from 83.2%. Medical membership was 24.5 million, up 674,000 from year-end 2021. The Thailand business sale agreement resulted in a $41 million impairment; closing was expected in Q2 2022.
- Pharmacy Services: Revenue grew 8.6% to $39.461 billion; adjusted operating income rose 8.6% to $1.636 billion. Growth reflected higher claims volume, specialty pharmacy and improved purchasing economics, partly offset by client price improvements. Claims processed increased 5.8%; generic dispensing rate eased to 87.7% from 88.1%.
- Retail/LTC: Revenue rose 9.2% to $25.418 billion; adjusted operating income increased 15.1% to $1.605 billion. Prescription and front-store volume, COVID-19 vaccinations, OTC test kits and purchasing economics helped; pharmacy reimbursement pressure and lower diagnostic testing partly offset gains.
- Corporate/Other: GAAP operating loss widened to $790 million from $345 million, mainly due to the Florida settlement accrual. Adjusted operating loss was broadly flat at $305 million.
Consolidated adjusted operating income, a non-GAAP measure, was $4.483 billion versus $4.205 billion. The comparison excludes intangible amortization and specified items; Q1 2022 exclusions included the Florida accrual and Thailand impairment, while Q1 2021 included Aetna integration costs.
Cash, debt and liquidity
- At March 31, 2022, cash and cash equivalents were $8.442 billion, total assets $232.873 billion and total shareholders’ equity $74.140 billion. Current assets were $61.483 billion versus current liabilities of $69.780 billion.
- Current and long-term debt totaled $56.280 billion, compared with $56.176 billion at year-end 2021. Cash-only net debt was approximately $47.8 billion.
- Operating cash flow was $3.563 billion. Investing used $1.993 billion and financing used $2.650 billion; the company repurchased $2.0 billion of shares and paid $722 million in cash dividends. Cash, cash equivalents and restricted cash declined $1.080 billion.
- No commercial paper or backup credit-facility borrowings were outstanding; the company reported compliance with debt covenants. Long-term debt ratings were Baa2 (Moody’s, stable outlook) and BBB (S&P, positive outlook).
- The quarterly dividend declared was $0.55 per share, up from $0.50. The company repurchased 19.1 million shares; $8.0 billion remained under the $10 billion authorization.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management described expected trends: Health Care Benefits membership growth in Medicare and commercial markets, partly offset by Medicaid declines; Pharmacy Services growth in specialty pharmacy and purchasing economics, offset by client pricing and regulatory pressures; and Retail/LTC growth in prescriptions and front-store sales, with reimbursement pressure and higher wage-related costs.
- Management expected COVID-19 vaccinations and testing to continue in 2022 at lower levels than 2021, while noting uncertainty from variants, utilization, consumer behavior and government actions. It expected a net negative COVID-19 impact in Health Care Benefits, but less adverse than in 2021.
- CVS recorded a $484 million liability for a pending Florida opioid settlement, payable over 18 years. Separately, a federal jury had found CVS and other chain pharmacies liable in an opioid case; remedies remained undetermined and CVS planned to appeal. The filing describes additional opioid, PBM, pricing, claims-processing and regulatory matters; outcomes and potential losses beyond recorded accruals generally could not be estimated.
- The company warned that COVID-19, regulatory changes, audits, litigation, pharmacy reimbursement pressure, PBM competition and health-care cost trends could materially affect results. It also anticipated a higher long-duration insurance liability upon adopting new accounting guidance in 2023, with a corresponding accumulated other comprehensive income effect; the full impact remained under evaluation.
- After quarter-end, CVS agreed to sell its PayFlex business on April 2, 2022. Market-risk exposures had not materially changed since year-end; management reported no material change in risk factors.
Important facts for investors to verify
- Whether operating cash flow growth persists and how working-capital movements affect cash conversion.
- Progress in medical costs and the Health Care Benefits medical benefit ratio, membership mix and exchange-market performance.
- Whether Pharmacy Services purchasing gains and specialty growth offset client pricing, rebate-sharing and regulatory pressures.
- Future retail pharmacy reimbursement, wage costs, COVID-related revenue normalization and front-store sales trends.
- Settlement payments, appeals and potential exposures from opioid litigation, PBM matters, CMS audits and other legal or regulatory proceedings.
- Execution and financial effects of the Thailand and PayFlex divestitures, as well as the effect of 2023 insurance-accounting adoption.