01—Abstract
Summary
Summary of the 10-K filed February 9, 2016. Cited figures are marked; the original filing is the authoritative source.
CVS Health's 2015 10-K shows a company in transition.
Net revenues rose 10% to $153.3 billiona, and net income attributable to CVS Health reached $5.2 billion, or $4.63 per diluted share, up from $3.96 in 2014. Growth was driven by the August 2015 Omnicare acquisition ($9.6 billion cash plus roughly $3.1 billion of assumed debt), the December 2015 purchase of Target's pharmacy and clinic businesses ($1.9 billion), higher generic dispensing rates, and volume growth in both segments. Gross margin compressed to 17.3% from 18.2% as the mix shifted toward the lower-margin Pharmacy Services segment (5.2% gross margin versus 30.5% for Retail/LTC), and the filing cites ongoing price compression and reimbursement pressure.
Balance sheet leverage rose sharply. Long-term debt increased to $26.3 billionb from $11.6 billion after a $14.8 billion bond issuance in July 2015, and total assets grew to $93.7 billion, with goodwill up to $38.1 billion. Free cash flow was roughly $6.0 billion (operating cash flow of $8.4 billion less $2.4 billion of capital expenditures), and the company returned about $6.6 billion to shareholders through $5.0 billion of buybacks and $1.6 billion of dividends.
The Board raised the 2016 quarterly dividend 21% to $0.425c, and $7.7 billion remained under the 2014 repurchase authorization. Investors should weigh the earnings growth and scale benefits against higher leverage, integration risk from two large acquisitions, and margin pressure from the PBM business. Management excluded Omnicare and the Target businesses (18% of total assets) from its internal control assessment for 2015, and the 10-K flags several open legal matters, including a Lauriello class action seeking roughly $3.2 billion in compensatory damages with trial scheduled for February 2016.
02—Key points
Key Highlights
- Net revenues of $153.3 billion (+10% YoY), with Pharmacy Services up 13.5% and Retail/LTC up 6.2%, aided by the Omnicare acquisition.
- Diluted EPS of $4.63 versus $3.96 in 2014 (+17%); operating profit rose 7.4% to $9.5 billion.
- Gross margin fell to 17.3% from 18.2% as the mix shifted toward lower-margin PBM revenue (Pharmacy Services gross margin 5.2%).
- Long-term debt more than doubled to $26.3 billion after a $14.8 billion senior notes issuance in July 2015 to fund Omnicare and Target.
- Operating cash flow of $8.4 billion; capital returns of $6.6 billion (buybacks $5.0 billion, dividends $1.6 billion); quarterly dividend raised 21% to $0.425 for 2016.
- Acquisitions: Omnicare ($9.6 billion, LTC leader) and Target pharmacies/clinics ($1.9 billion); Omnicare and Target excluded from 2015 ICFR assessment.
- Front store same-store sales fell 5.0% due to the tobacco exit, while pharmacy same-store sales rose 4.5%; generic dispensing reached 84.5% in Retail/LTC.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, CVS Health Corp kept $0.03.
- Revenue$153.29B100.0%
- Cost of revenue−$126.76B82.7%
- Gross profit$26.53B17.3%
- Operating costs−$17.05B11.1%
- Operating income$9.47B6.2%
- Interest, other & tax−$4.24B2.8%
- Net income$5.24B3.4%
Where FY2015 revenue went
$153.29B- Cost of revenue: $126.76B, 83% of revenue
- Net income: $5.24B, 3.4% of revenue
- Operating costs: $17.05B, 11% of revenue
- Interest, other & tax: $4.24B, 2.8% of revenue
Kept 3.4% as net incomeNet income $5.24B · 3.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 9, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $153.29B$139.37B | +10.0% |
| Cost of Revenue | $126.76B$114.00B | +11.2% |
| Gross Profit | $26.53B$25.37B | +4.6% |
| Operating Expenses | $17.05B$16.57B | +2.9% |
| Operating Income | $9.47B$8.80B | +7.7% |
| Interest Expense | $859.00M$615.00M | +39.7% |
| Net Income | $5.24B$4.64B | +12.8% |
| EPS (Basic) | $4.66$3.98 | +17.1% |
| EPS (Diluted) | $4.63$3.96 | +16.9% |
| Shares Outstanding (Basic) | 1.12B1.16B | −3.7% |
| Shares Outstanding (Diluted) | 1.13B1.17B | −3.7% |
05—Questions
Frequently Asked Questions
How did CVS's earnings and revenue change in 2015?
Net revenues rose $13.9 billion to $153.3 billion, and net income attributable to CVS Health rose $593 million to $5.2 billion, or $4.63 per diluted share versus $3.96 in 2014. Growth came from the Omnicare acquisition, higher generic dispensing, and prescription volume, partly offset by $272 million of acquisition-related costs and the $90 million legacy lawsuit charge in Corporate.
Why did gross margin decline even as revenue grew?
The Pharmacy Services segment, which earns a 5.2% gross margin, grew faster than the higher-margin Retail/LTC segment (30.5%). Price compression in PBM and reimbursement pressure in retail also weighed on margins, so consolidated gross profit as a percentage of revenue fell to 17.3% from 18.2%.
How did CVS fund its acquisitions and what does the higher debt mean for investors?
CVS issued $15 billion of senior notes in July 2015 (about $14.8 billion net) and assumed roughly $3.1 billion of Omnicare debt, bringing long-term debt to $26.3 billion from $11.6 billion. The company says its debt ratings are Baa1/BBB+ with stable outlooks, but interest expense rose to $859 million, so investors should watch leverage and coverage as integration proceeds.
What are the main legal risks disclosed in the filing?
The most notable item is the Lauriello class action in Alabama, which seeks about $3.2 billion in compensatory damages over alleged misrepresentation of insurance coverage tied to a 1999 settlement; trial was scheduled for February 19, 2016. The filing also lists multiple qui tam (whistleblower) suits, OIG and DOJ investigations, and a DEA controlled substances matter. Management says none of its accruals are individually or collectively material, but outcomes are unpredictable.
How much capital did CVS return to shareholders and what remains authorized?
In 2015 CVS repurchased 48.0 million shares for about $5.0 billion and paid $1.6 billion in dividends, with the 2013 program completed. About $7.7 billion remains under the December 2014 repurchase authorization, and the Board raised the 2016 quarterly dividend to $0.425 per share, an annual rate of $1.70.
06—Continue