01—Abstract
Summary
Summary of the 10-K filed February 15, 2013. Cited figures are marked; the original filing is the authoritative source.
CVS Caremark's 2012 10-K reports a year of strong growth in both segments.
Net revenues rose 15% to $123.1 billiona, gross profit grew 9.5% to $22.5 billion, and operating profit increased 14% to $7.2 billion. Net income attributable to CVS Caremark reached $3.9 billion, or $3.03 per diluted share, up from $2.57 in 2011. Growth was driven largely by new Pharmacy Services client starts, Medicare Part D expansion, drug cost inflation, and share gains in Retail Pharmacy, which benefited from the Express Scripts–Walgreens network impasse.
Gross margin compressed, falling to 18.3% of revenue from 19.2%, because the mix shifted toward the lower-margin Pharmacy Services segment, which earns about 5.2% gross margin versus roughly 30% in Retail. Cash generation and capital returns were strong. Operating cash flow was $6.7 billionb, and the company repurchased about $4.3 billion of stock, retiring 95 million shares.
The board also raised the quarterly dividend 38% to $0.225c per share, an annual rate of $0.90. Long-term debt was $9.1 billion, and the company refinanced about $1.3 billion of higher-coupon notes, which produced a $348 million pre-tax loss on early extinguishment of debt. Investors should weigh several risks.
The company faces a SilverScript Medicare Part D sanction imposed by CMS effective January 15, 2013, which limits enrollment and marketing. Numerous government investigations and qui tam suits remain open, including a Texas Medicaid matter, a multi-state investigation, and an Alabama class action seeking about $3.2 billiond. Reimbursement pressure from generic pricing, the proposed Medicaid FUL changes, and the ongoing pricing benchmark transition from AWP also weigh on margins.
02—Key points
Key Highlights
- Net revenues up 15.0% to $123.1 billion (2011: $107.1 billion); Pharmacy Services grew 24.7% and Retail Pharmacy grew 6.8%.
- Diluted EPS of $3.03, up 18% from $2.57; net income attributable to CVS Caremark of $3.9 billion.
- Gross margin contracted to 18.3% of revenue from 19.2%, reflecting the mix shift toward lower-margin Pharmacy Services (5.2% gross margin).
- Operating cash flow of $6.7 billion; $4.3 billion in share repurchases (95.0 million shares) under the $6.0 billion 2012 program, leaving $4.7 billion available.
- Quarterly dividend raised 38% to $0.225 per share (annualized $0.90), up from $0.1625.
- CMS imposed intermediate sanctions on the SilverScript Part D PDP effective January 15, 2013, suspending new enrollment and marketing; the company is working on a corrective action plan.
- Long-term debt of $9.1 billion; a $1.3 billion tender offer produced a $348 million pre-tax loss on early debt extinguishment, and the company issued $1.25 billion of 2.75% notes due 2022.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, CVS Health Corp kept $0.03.
- Revenue$123.12B100.0%
- Cost of revenue−$100.63B81.7%
- Gross profit$22.49B18.3%
- Operating costs−$15.28B12.4%
- Operating income$7.21B5.9%
- Interest, other & tax−$3.35B2.7%
- Net income$3.86B3.1%
Where FY2012 revenue went
$123.12B- Cost of revenue: $100.63B, 82% of revenue
- Operating costs: $15.28B, 12% of revenue
- Net income: $3.86B, 3.1% of revenue
- Interest, other & tax: $3.35B, 2.7% of revenue
Kept 3.1% as net incomeNet income $3.86B · 3.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 15, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $123.12B$107.08B | +15.0% |
| Cost of Revenue | $100.63B$86.52B | +16.3% |
| Gross Profit | $22.49B$20.56B | +9.4% |
| Operating Expenses | $15.28B$14.23B | +7.4% |
| Operating Income | $7.21B$6.33B | +13.9% |
| Interest Expense | $561.00M$588.00M | −4.6% |
| Net Income | $3.86B$3.46B | +11.7% |
| EPS (Basic) | $3.04$2.59 | +17.4% |
| EPS (Diluted) | $3.02$2.57 | +17.5% |
| Shares Outstanding (Basic) | 1.27B1.34B | −5.0% |
| Shares Outstanding (Diluted) | 1.28B1.35B | −5.0% |
05—Questions
Frequently Asked Questions
What drove the revenue and earnings growth in 2012?
Pharmacy Services revenue rose 24.7%, driven by a large number of January 2012 client starts, drug cost inflation, and Medicare Part D growth. Retail Pharmacy same-store sales rose 5.5%, aided by the Express Scripts–Walgreens network impasse, which moved Walgreens customers to CVS, and by an extra leap-year day. Diluted EPS increased to $3.03 from $2.57.
Why did gross margin decline even though profit grew?
Consolidated gross profit fell to 18.3% of revenue from 19.2%. The main cause is the shift toward Pharmacy Services, which earns about 5.2% gross margin compared with about 30% in Retail. Client pricing pressure and expanding Part D operations also weighed on margins. Lower-margin mail and specialty volume grew faster than the higher-margin retail business.
What is the regulatory risk from the SilverScript sanction?
Effective January 15, 2013, CMS suspended new enrollment and marketing for the SilverScript Part D PDP. Existing enrollees are unaffected, and CMS has granted a limited waiver that allows enrollment of certain retirees through April 30, 2013, with further extensions possible. Service issues from the 2013 plan consolidation are the root cause. The company cannot predict how long the sanction will last or what remediation CMS will require, so Part D growth and profitability could be affected.
What are the most significant legal exposures?
Key matters include a qui tam suit tied to Medicaid claims processing, in which the Company has been discussing a possible settlement with DOJ and the OIG; a Texas Medicaid enforcement action; a multi-state AG investigation; and an Alabama class action (Lauriello) that seeks about $3.2 billion. The company says it is not able to estimate a loss range beyond amounts already accrued. Accruals are not material individually or in aggregate.
How is the company returning capital to shareholders?
In 2012 the company repurchased about $4.3 billion of stock (95.0 million shares) and paid $829 million in dividends. The Board authorized a new $6.0 billion repurchase program in September 2012, of which about $4.7 billion remained at year-end. The quarterly dividend was raised 38% to $0.225, and the company has paid dividends every quarter since becoming public.
06—Continue