01—Abstract
Summary
Summary of the 10-K filed February 11, 2014. Cited figures are marked; the original filing is the authoritative source.
CVS Caremark's fiscal 2013 10-K shows a company that grew revenue and earnings while returning significant capital to shareholders.
Net revenues rose 3.0% to $126.8 billiona, and operating profit increased 11.5% to $8.0 billion. Net income attributable to CVS Caremark reached $4.6 billion, or $3.74 per diluted share, up from $3.02 in 2012. Growth was driven by the Pharmacy Services segment (revenue up 3.8%, operating profit up 15.2%) and the Retail Pharmacy segment (revenue up 3.1%, operating profit up 11.2%), helped by rising generic dispensing rates, specialty drug cost inflation, and same-store pharmacy sales growth of 2.6%.
Front-store same-store sales declined 0.5%, reflecting weaker customer traffic. Cash generation and capital allocation are central to the investment case. Operating cash flow fell to $5.8 billionb from $6.7 billion, mainly because of a $2.2 billion increase in receivables tied to timing of CMS Medicare Part D payments.
Management repurchased 66.2 million shares for about $4.0 billionc, paid $1.1 billion in dividends, and raised the quarterly dividend 22% to $0.275. Total debt rose to about $13.4 billion, with long-term debt at $12.8 billion, after issuing roughly $4.0 billion in senior notes to fund the January 2014 acquisition of Coram LLC for about $2.1 billion. Shareholders' equity was essentially flat at $37.9 billion.
Key risks include continued reimbursement pressure from PBM clients and payors, margin compression in the PBM business, regulatory exposure under the Affordable Care Act and Medicare Part D, and a sizable legal docket. The most material matters include the Lauriello insurance-coverage class action seeking about $3.2 billiond in damages, the In Re Pharmacy Benefit Managers Antitrust Litigation, a pending OIG settlement discussion on Medicaid claims processing, and a $20 million SEC settlement that was fully reserved. Management also flagged a potential shift in lease accounting that could materially affect the balance sheet.
02—Key points
Key Highlights
- Net revenues grew 3.0% to $126.8 billion, and operating profit rose 11.5% to $8.0 billion, with gross margin improving to 18.8% from 18.3%.
- Diluted EPS rose 24% to $3.74 from $3.02, supported by higher generic dispensing rates (80.8% in Pharmacy Services), share buybacks, and strong volume growth across channels.
- Retail Pharmacy segment operating profit reached $6.3 billion (up 11.2%), with a 30.6% gross margin. Same-store pharmacy sales rose 2.6%, but front-store same-store sales fell 0.5%.
- Operating cash flow dropped to $5.8 billion from $6.7 billion, largely due to a $2.2 billion receivables increase from timing of CMS Medicare Part D payments; capital expenditures were about $2.0 billion.
- Shareholder returns were significant: $4.0 billion in buybacks (66.2 million shares), $1.1 billion in dividends, and a 22% dividend increase to $1.10 annualized, with $6.7 billion of repurchase authorization remaining.
- Long-term debt rose to $12.8 billion after a $4.0 billion senior notes issuance, and the company agreed to acquire Coram LLC for about $2.1 billion, expanding its specialty infusion business.
- Legal exposure remains elevated, including the $3.2 billion Lauriello class action, antitrust litigation over retail pharmacy networks, and an OIG investigation of Medicaid claims. The company also disclosed a pending $20 million SEC settlement, already reserved.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, CVS Health Corp kept $0.04.
- Revenue$126.76B100.0%
- Cost of revenue−$102.98B81.2%
- Gross profit$23.78B18.8%
- Operating costs−$15.75B12.4%
- Operating income$8.04B6.3%
- Interest, other & tax−$3.44B2.7%
- Net income$4.59B3.6%
Where FY2013 revenue went
$126.76B- Cost of revenue: $102.98B, 81% of revenue
- Operating costs: $15.75B, 12% of revenue
- Net income: $4.59B, 3.6% of revenue
- Interest, other & tax: $3.44B, 2.7% of revenue
Kept 3.6% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 11, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $126.76B$123.12B | +3.0% |
| Cost of Revenue | $102.98B$100.63B | +2.3% |
| Gross Profit | $23.78B$22.49B | +5.8% |
| Operating Expenses | $15.75B$15.28B | +3.1% |
| Operating Income | $8.04B$7.21B | +11.5% |
| Interest Expense | $517.00M$561.00M | −7.8% |
| Net Income | $4.59B$3.86B | +18.8% |
| EPS (Basic) | $3.77$3.04 | +24.0% |
| EPS (Diluted) | $3.74$3.02 | +23.8% |
| Shares Outstanding (Basic) | 1.22B1.27B | −4.2% |
| Shares Outstanding (Diluted) | 1.23B1.28B | −4.2% |
05—Questions
Frequently Asked Questions
Why did operating cash flow decline in 2013 even though earnings grew?
Operating cash flow fell to $5.8 billion from $6.7 billion mainly because accounts receivable increased by about $2.2 billion. The increase reflects the timing of payments from CMS on Medicare Part D, with amounts due from CMS rising to $2.4 billion from $0.7 billion. Management attributed the decline to timing rather than a deterioration in collections, and inventory management partly offset the impact.
How sustainable is the margin improvement in the Pharmacy Services segment?
Pharmacy Services gross margin improved to 5.6% from 5.2%, driven mainly by a higher generic dispensing rate (80.8% total, up from 78.5%). Management expects generic dispensing to keep rising, but at a slower pace. The company also warned that clients are capturing a larger share of manufacturer rebates and that the retail 'spread' is under regulatory pressure, both of which could erode margins.
What are the largest legal and regulatory risks facing CVS Caremark?
The most significant matters include the Lauriello class action in Alabama, which seeks about $3.2 billion in damages related to insurance coverage for 1999 securities settlements; the consolidated In Re Pharmacy Benefit Managers Antitrust Litigation over retail network practices; and an OIG investigation with ongoing settlement discussions with DOJ regarding Medicaid claims processing. The company is also subject to a corporate integrity agreement, Medicare Part D sanctions, and ACA-driven reimbursement changes. Management states that accruals for these matters are not material individually or in aggregate.
How is the company funding acquisitions and shareholder returns with rising debt?
The company issued $4.0 billion of senior notes in December 2013 with maturities from 2016 to 2043, using the proceeds to repay commercial paper and to fund the Coram acquisition. Total debt increased to $13.4 billion. Debt ratings remain investment grade, at Baa1 (Moody's) and BBB+ (S&P), both with stable outlooks. The company also has about $2.75 billion of backup credit facilities, and no commercial paper was outstanding at year-end. Shareholder payouts of roughly $5.1 billion in buybacks and dividends in 2013 were funded by operating cash flow and debt issuance.
What does the Coram acquisition add to the business, and what does it cost?
Coram LLC, acquired from Apria Healthcare on January 16, 2014, is one of the largest U.S. providers of infusion and enteral nutrition services, caring for about 165,000 patients a year. The purchase price was about $2.1 billion, and the business will be reported within the Pharmacy Services segment. The acquisition expands the company's specialty pharmacy and infusion offering, which management views as a growth area. Coram has about 4,600 employees across 85 branch locations.
06—Continue