10-QPeriod: Q2 FY2012

CVS HEALTH Corp Quarterly Report for Q2 Ended Jun 30, 2012

Filed August 7, 2012For Securities:CVS

Summary

CVS Health Corporation (CVS) reported strong revenue growth for the second quarter and first half of 2012, with net revenues increasing by 16.3% and 18.0% respectively, compared to the prior year periods. This growth was driven by solid performance in both the Pharmacy Services and Retail Pharmacy segments, bolstered by new client wins, drug cost inflation, and strategic acquisitions. The company demonstrated improved operating profit, reflecting effective expense management and sales leverage. Diluted earnings per share also saw a notable increase, signaling enhanced profitability. Financially, CVS Health maintained a healthy liquidity position, with significant cash provided by operating activities. The company continued its share repurchase program, returning capital to shareholders. While gross profit margins experienced some pressure, particularly in the Pharmacy Services segment due to competitive pricing and client demands, overall financial results indicate a positive trajectory and robust operational execution.

Financial Highlights

55 data points
Beta

Revenue

$30.69B

17.7% Gross Margin

Net Income

$962.00M

3.1% Net Margin

EPS (Diluted)

$0.75

Total Assets

$65.59B

Cash & Equivalents

$1.82B

Free Cash Flow

$789.00M

Financial Statements
Beta
Revenue$30.69B
Cost of Revenue$25.27B
Gross Profit$5.44B
Operating Expenses$3.74B
Operating Income$1.70B
Interest Expense$132.00M
Net Income$962.00M
EPS (Basic)$0.75
EPS (Diluted)$0.75
Shares Outstanding (Basic)1.28B
Shares Outstanding (Diluted)1.29B

Key Highlights

  • 1Net revenues increased by 16.3% to $30.7 billion in Q2 2012 and by 18.0% to $61.5 billion in the first half of 2012.
  • 2Operating profit grew to $1.7 billion in Q2 2012 and $3.1 billion in the first half of 2012.
  • 3Diluted earnings per common share increased to $0.75 in Q2 2012 from $0.60 in Q2 2011.
  • 4Pharmacy Services segment net revenues grew significantly due to new clients, drug cost inflation, and the UAM Medicare PDP Business acquisition.
  • 5Retail Pharmacy segment showed strong same-store sales growth, benefiting from the Walgreens/Express Scripts network dispute.
  • 6Net cash provided by operating activities was $4.0 billion in the first half of 2012.
  • 7The company repurchased $2.0 billion of common stock in the first half of 2012 under its share repurchase program.

Frequently Asked Questions

Revenue growth was primarily driven by an increase in net revenues across both the Pharmacy Services and Retail Pharmacy segments. This was fueled by new PBM client starts, drug cost inflation, the acquisition of the Universal American Corp. Medicare prescription drug plan, and positive same-store sales growth in the Retail Pharmacy segment.

Operating expenses increased in dollar terms but decreased as a percentage of net revenues in both the three and six-month periods. This was due to expense leverage from same-store sales growth and effective expense control initiatives across segments, although specific segments like Pharmacy Services saw increased costs related to new client integrations and expanding operations.

The contractual dispute between Express Scripts and Walgreens led to Walgreens' exit from the Express Scripts network, resulting in a significant number of Express Scripts members filling their prescriptions at CVS stores. This directly benefited CVS's Retail Pharmacy segment, contributing to higher same-store sales in pharmacy. However, the company noted that future results would be impacted by its ability to retain this business after a new agreement was reached.

Effective January 1, 2012, CVS Health changed its inventory valuation method for prescription drugs in the Retail Pharmacy Segment from LIFO to the weighted average cost method. This change was made to align inventory valuation methods across the company's pharmacy operations. The cumulative effect of this change resulted in a decrease in inventories and retained earnings, and had a modest negative impact on gross profit and earnings per share in the reported periods.