CVS Health Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the same periods in 2022 unless noted. Amounts are in U.S. dollars. Financial statements are unaudited and were reviewed by Ernst & Young.
Business context
CVS operates health insurance, pharmacy benefit management and health services, and retail and long-term care pharmacy businesses. In 2023 it realigned reporting into Health Care Benefits, Health Services, Pharmacy & Consumer Wellness, and Corporate/Other. Prior-period segment results were recast. Signify Health and Oak Street Health were acquired in March and May 2023, respectively, to expand value-based care and primary care.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $88.9B | $80.6B | $174.2B | $157.5B |
| Operating income | $3.2B | $4.7B | $6.7B | $8.2B |
| Net income attributable to CVS | $1.9B | $3.0B | $4.0B | $5.4B |
| Diluted EPS | $1.48 | $2.29 | $3.13 | $4.06 |
| Adjusted operating income (non-GAAP) | $4.5B | $5.0B | $8.9B | $9.6B |
Q2 revenue grew 10.3%, while operating income fell 30.7% and attributable net income fell 37.2%. Six-month revenue rose 10.6%, while operating income declined 18.7% and attributable net income declined 25.0%. Calculated GAAP operating margin was approximately 3.6% in Q2 versus 5.8% a year earlier; six-month margin was approximately 3.8% versus 5.2%.
- Revenue drivers: Growth across segments, including higher insurance premiums and pharmacy revenue. Q2 premiums increased 18.1%; products revenue increased 6.6%.
- Health Care Benefits: Q2 adjusted operating income decreased 19.9% to $1.5B; six-month adjusted operating income decreased 11.1% to $3.4B. Medical benefit ratio rose to 86.2% in Q2 from 82.7% and to 85.4% for six months from 83.0%, reflecting higher Medicare Advantage outpatient utilization and lower favorable prior-period claims development.
- Health Services: Adjusted operating income increased 3.5% in Q2 to $1.9B and 8.3% for six months to $3.6B. Improved purchasing economics were partly offset by client pricing pressure and lower COVID-19 testing.
- Pharmacy & Consumer Wellness: Adjusted operating income declined 17.4% in Q2 to $1.4B and 22.4% for six months to $2.5B, mainly from reimbursement pressure and lower COVID-related activity. Higher prescription volume and improved generic purchasing provided offsets.
Cash flow, debt and liquidity
- Six-month operating cash flow was $13.3B, up from $9.0B. Management attributed much of the increase to early receipt of a $5.3B July CMS payment and lower inventory purchases, partly offset by payment timing.
- Investing cash outflow was $18.9B, including $16.5B of net acquisition spending. Financing cash inflow was $6.4B, including approximately $10.9B of long-term debt issuance and $1.0B of commercial paper borrowings.
- Cash and cash equivalents were $13.8B at June 30; the company reported approximately $3.3B held by the parent or nonrestricted subsidiaries. Current assets were $67.8B versus current liabilities of $79.2B.
- Debt carrying value was approximately $63.8B, compared with $52.3B at year-end 2022; this includes $1.0B of commercial paper. The company reported $61.4B of long-term debt on the balance sheet. It was in compliance with debt covenants; Moody’s and S&P long-term ratings were Baa2 and BBB, both with stable outlooks.
- Cash dividends declared were $0.605 per share in Q2, versus $0.55 a year earlier. Six-month share repurchases totaled approximately $2.0B.
Material changes and unusual items
- Acquisitions: Signify Health consideration was $7.4B and Oak Street Health consideration was $9.7B. From acquisition dates through June 30, they contributed $267M and $507M of revenue, respectively; each had no material impact on consolidated operating income in that period. Purchase-price allocations remain preliminary and could change materially.
- A $496M Q2 restructuring charge included $344M of severance and employee-related costs and $152M of asset impairments. The plan is intended to simplify operations and reduce costs and is expected to be substantially complete by year-end 2023.
- A $349M first-quarter write-down related to the Omnicare long-term care business held for sale; the business remained classified as held for sale at June 30. The company recorded $2.5B of related losses in 2022.
- Six-month acquisition-related transaction and integration costs were $200M. Q2 and six-month adjusted operating income exclude these costs, restructuring, amortization, realized investment losses and other specified items; adjusted results are non-GAAP.
- Comparisons also reflect the absence of the prior-year $225M PayFlex divestiture gain and, for the six-month comparison, the absence of a $484M opioid litigation charge recorded in 2022.
Outlook, risks and contingencies
- The filing provides directional expectations rather than a numeric full-year earnings forecast in the supplied text. Management expected higher-than-previously-expected Medicare Advantage medical cost trends for the rest of 2023; Commercial and Medicaid trends were expected to remain consistent with pricing.
- Management expected Health Services to benefit from purchasing economics and pharmacy network volume, partly offset by client price improvements, evolving pharmacy-pricing regulation and restrictions on 340B discounts. Oak Street’s dilutive effect was expected to be partly offset by Signify’s accretive effect for the remainder of 2023.
- Retail pharmacy faced reimbursement pressure, lower COVID vaccination/testing revenue, and potential consumer-spending softness. Management also cited ongoing cost-saving initiatives and continuing changes in health policy and regulation.
- Opioid settlements covering participating states and subdivisions have maximum company payments of approximately $4.3B for remediation plus $625M in fees and costs/additional remediation over 10 years; tribal settlements include up to $113M plus $16M in fees and costs over 10 years. The company had recorded $5.3B of pre-tax opioid charges in 2022. Some private-party and nonparticipating claims remain unresolved, and a $651M judgment against three pharmacy defendants is under appeal; the company said it had not accrued a liability for that judgment.
- Other material exposures include PBM pricing and rebate litigation and investigations, Medicare Advantage risk-adjustment audits that may result in refunds or payment adjustments, prescription-processing and provider-payment matters, and other regulatory proceedings. The company said outcomes and potential losses for many matters cannot be reliably estimated; adverse outcomes could affect results, cash flows or financial condition.
Important facts for investors to verify
- Whether Medicare Advantage medical costs and the medical benefit ratio remain elevated, and how they affect Health Care Benefits profitability.
- Acquisition integration, expected strategic benefits and synergies, financing costs, and final purchase accounting for Signify Health and Oak Street Health.
- Underlying operating cash generation after accounting for the unusually early $5.3B CMS payment and working-capital timing.
- Debt levels, interest expense, future maturities, credit ratings and the company’s capacity to fund dividends, repurchases and strategic investment.
- Progress and proceeds from the Omnicare long-term care business sale, and the ultimate cash and earnings effects of opioid settlements and remaining litigation or regulatory matters.
- Performance excluding one-time and non-GAAP adjustments, including whether pharmacy reimbursement pressure and reduced COVID-related activity continue to weigh on Pharmacy & Consumer Wellness.