CVS HEALTH Corp quarterly report, Q3 FY2022

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Business context and reporting period

CVS Health Corporation filed this unaudited Form 10-Q for the quarter ended September 30, 2022. The company operates Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other segments, spanning health insurance, pharmacy benefit management, retail pharmacies and clinics, and related services. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.

Financial performance and position

  • Revenue: Third-quarter revenue increased 10.0% to $81.2 billion; nine-month revenue rose 10.7% to $238.6 billion year over year. Growth was reported across the segments.
  • Profit: CVS reported a third-quarter operating loss of $3.9 billion and net loss attributable to CVS Health of $3.4 billion, or $2.60 per diluted share. Nine-month net income was $1.8 billion, or $1.40 per diluted share, down from $6.6 billion, or $4.98, a year earlier. Results included significant opioid litigation and held-for-sale charges.
  • Adjusted operating income: This non-GAAP measure increased 3.9% to $4.2 billion in the quarter and 2.7% to $13.5 billion for nine months. By segment, nine-month adjusted operating income increased in Health Care Benefits ($5.1 billion versus $4.5 billion) and Pharmacy Services ($5.4 billion versus $5.0 billion), and decreased in Retail/LTC ($4.9 billion versus $5.2 billion).
  • Margins and operating indicators: Health Care Benefits’ medical benefit ratio (benefit costs as a share of premiums) improved to 83.5% for the quarter and 83.3% for nine months, from 85.8% and 84.4%, respectively. Retail/LTC adjusted operating income fell 18.9% in the quarter, reflecting lower COVID-19 testing and vaccination activity, reimbursement pressure and investments.
  • Cash flow: Nine-month operating cash flow was $18.1 billion, up from $14.3 billion. Management attributed the increase primarily to payment timing, including early receipt of a $3.2 billion October CMS payment, partly offset by higher inventory purchases. Investing used $4.9 billion and financing used $8.3 billion. Capital expenditures were $2.0 billion.
  • Liquidity and debt: At September 30, cash and cash equivalents were $17.2 billion; current assets were $68.3 billion and current liabilities $72.4 billion. Long-term debt carrying value was approximately $52.2 billion, including $1.4 billion current; the company reported no commercial paper or revolving-credit borrowings outstanding and said it was in compliance with debt covenants. Debt ratings were Baa2 (Moody’s) and BBB (S&P).
  • Capital returns: CVS repurchased approximately 19.1 million shares for $2.0 billion in the first nine months and paid $2.2 billion in dividends. The quarterly dividend declared was $0.55 per share.

Material changes versus the prior comparable period

  • Revenue growth was outweighed in GAAP operating results by a $5.2 billion third-quarter opioid litigation charge and a $2.5 billion write-down of the Omnicare long-term-care business. Together, these drove the quarter from $3.1 billion operating income in 2021 to a $3.9 billion operating loss in 2022.
  • For nine months, operating income fell to $4.1 billion from $11.0 billion, and net income attributable to CVS Health declined to $1.8 billion from $6.6 billion. In addition to the opioid and LTC charges, the prior-year period included a $431 million LTC goodwill impairment that did not recur.
  • Pharmacy Services revenue increased 10.7% in the quarter, supported by claims volume and specialty pharmacy growth; adjusted operating income rose 5.9%. Retail/LTC revenue increased 6.9%, but adjusted operating income declined 18.9%.
  • Health Care Benefits adjusted operating income rose 39.6% in the quarter, supported by favorable medical cost experience and prior-period claims development. Total medical membership was 24.3 million at quarter-end, up 590,000 year over year but down 145,000 from June, including an expected loss of a large Medicaid customer.
  • Cash and cash equivalents rose from $9.4 billion at December 31, 2021, while total debt carrying value decreased from $56.2 billion to $52.2 billion. The company repaid several 2022-maturity notes using cash.

Outlook, risks, contingencies and unusual items

  • Outlook: The filing provides qualitative segment expectations, not a clear numerical full-year earnings or revenue guidance figure. Management expected Health Care Benefits to benefit from Medicare and commercial membership growth, with medical benefit ratio improvement versus 2021; Pharmacy Services to benefit from purchasing economics and network volume, partly offset by client pricing and regulatory pressures; and Retail/LTC to benefit from prescription volume and generic purchasing, partly offset by reimbursement pressure and investment costs. The outlook incorporated extension of the public health emergency into early Q1 2023 and lower COVID-19 vaccination and testing levels than in 2021.
  • Opioid matters: CVS recorded a $5.2 billion charge after concluding that a broad governmental settlement was probable and reasonably estimable. A settlement framework contemplated approximately $5.0 billion over ten years beginning in 2023; terms, participation and definitive agreements remained uncertain. The company stated expected cash impact in 2023 and 2024 would be less than $500 million in each year, but the ultimate loss could differ materially. Private-party litigation would continue. CVS was also appealing a separate $651 million Ohio judgment payable over 15 years.
  • Transactions: The proposed cash acquisition of Signify Health was valued at approximately $8 billion and expected to close in the first half of 2023, subject to regulatory and other conditions. DOJ issued a second request for information in October 2022. The LTC business was classified as held for sale after the $2.5 billion write-down. CVS also agreed in October to sell bswift, with closing expected in Q4 2022. PayFlex was sold in June for approximately $775 million, producing a $225 million pretax gain.
  • Other risks: The filing describes ongoing PBM pricing and rebate litigation and investigations, CMS risk-adjustment audits that could result in premium refunds, and other health-care regulatory proceedings. COVID-19’s effects on operations and cash flows remain uncertain and could be materially adverse. The 2023 adoption of long-duration insurance accounting was expected to increase the future policy benefit liability by approximately $1 billion at transition, with a corresponding accumulated other comprehensive income change.
  • Other financial considerations: Nine-month other comprehensive loss was $2.6 billion, primarily reflecting unrealized investment losses as interest rates rose. Management said it did not intend, and did not expect to be required, to sell the affected debt securities before recovery of amortized cost.

Important facts for investors to verify

  1. Whether the opioid settlement framework reaches definitive terms, achieves sufficient governmental participation, and changes the estimated charge or payment schedule.
  2. Whether CMS and DOJ reviews, PBM investigations, and other litigation result in additional costs, refunds, penalties or business restrictions.
  3. How the Signify Health acquisition review and integration progress, including the effect on debt, ratings and capital allocation if completed.
  4. Whether Retail/LTC reimbursement pressure and lower COVID-related activity continue to weigh on adjusted operating income, and how the Omnicare sale proceeds and timing develop.
  5. How Health Care Benefits medical costs, Medicaid membership changes and Medicare Advantage star ratings affect future results; 21% of members were in plans with 2023 ratings of at least four stars, versus 87% for 2022 ratings.
  6. Underlying cash generation after considering the timing benefit from the early CMS payment, along with debt reduction, repurchases, dividends and the pending acquisition.

The interim financial statements were reviewed by Ernst & Young LLP, not audited; the accountant reported no material modifications were known to be necessary for GAAP conformity.