CVS Caremark Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are with FY2010 unless otherwise stated. The filing is for CVS Caremark Corporation, the company now known as CVS Health. The 10-K incorporates its annual-report financial statements and MD&A by reference; the provided filing text does not include detailed cash-flow, segment-result, or liquidity figures.
Business context
The company operated Pharmacy Services, Retail Pharmacy, and Corporate segments, combining pharmacy benefit management (PBM), mail and specialty pharmacy, retail drugstores, MinuteClinic clinics, and online pharmacy services. At year-end it had 7,327 retail drugstores and 657 MinuteClinic locations. During 2011, it filled or managed approximately 775 million PBM prescriptions and filled approximately 658 million retail prescriptions.
Financial and operating performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net revenue | $107.100 billion | $95.778 billion | +11.8% |
| Gross profit | $20.561 billion | $20.219 billion | +1.7% |
| Gross margin | 19.2% | 21.1% | Down 1.9 percentage points |
| Operating profit | $6.330 billion | $6.137 billion | +3.1% |
| Operating margin | 5.9% | 6.4% | Down 0.5 percentage points |
| Net income attributable to CVS Caremark | $3.461 billion | $3.427 billion | +1.0% |
| Diluted EPS attributable to CVS Caremark | $2.57 | $2.49 | +3.2% |
| Net interest expense | $584 million | $536 million | +9.0% |
| Long-term debt at year-end | $9.208 billion | $8.652 billion | +$556 million |
| Total assets at year-end | $64.543 billion | $62.169 billion | +$2.374 billion |
Cash flow, cash balances, current liabilities, and detailed liquidity measures are not provided in the supplied text, so operating cash flow and liquidity cannot be assessed here. The company reported $0.50 in cash dividends per share for 2011, versus $0.35 in 2010.
Material changes and unusual items
- Revenue rose substantially, while gross profit grew much more slowly; reported gross and operating margins contracted.
- On April 29, 2011, the company acquired Universal American’s Medicare Part D business for approximately $1.3 billion. The filing does not quantify the acquisition’s contribution to FY2011 revenue or earnings in the supplied text.
- FY2011 included a $31 million net loss from discontinued operations, compared with $2 million of income in FY2010. FY2011 discontinued operations included TheraCom operating income of $18 million, a $53 million gain on its disposal, a $7 million Linens ’n Things disposal loss, and a $95 million income tax provision.
- The company repurchased approximately $2.0 billion of shares during 2011 under its 2010 program and completed a $1.0 billion accelerated share repurchase under its 2011 program, receiving a total of 27.3 million shares under the ASR. The board authorized up to $4.0 billion of repurchases under the 2011 program.
- CEO Larry Merlo became president and chief executive officer in March 2011. The company opened 161 retail stores, relocated 86, and closed 16 during the year.
Outlook, risks, and contingencies
- Management expected to open 225–250 new or relocated stores and close approximately 20 in 2012, and anticipated opening approximately 100 new MinuteClinic locations. No earnings or revenue guidance is included in the supplied text.
- The company cited ongoing pressure from lower reimbursement rates, PBM price competition, client demands, and changes in drug pricing benchmarks. It also noted continued weak drug-utilization trends associated with the economic downturn.
- Regulatory uncertainty includes implementation of health reform, Medicare Part D requirements, Medicaid reimbursement changes, and privacy and compliance rules. The proposed CMS Medicaid reimbursement rule was not final, and its impact was uncertain.
- Medco and Express Scripts announced plans to merge, subject to approvals and conditions; the company said completion and competitive effects were uncertain.
- Legal matters include government inquiries into Medicaid claims processing and prescription-discount programs, PBM network antitrust litigation, securities-related litigation and SEC subpoenas, and a multi-state investigation. A proposed FTC consent order concerning Medicare Part D price representations was accepted for public comment, remained subject to final approval, and included $5 million in proposed consumer redress. The company stated it had reserved fully for a proposed settlement of assistant-store-manager wage litigation.
- The filing describes ongoing government compliance agreements and environmental matters in Connecticut and California. Management did not expect the environmental matters to have a material adverse effect, but outcomes remained uncertain.
- The company reported that disclosure controls were adequate and effective at year-end and that no material fourth-quarter changes to internal control over financial reporting were identified.
Important facts for investors to verify
- Review the incorporated annual-report MD&A and audited statements for cash flow, cash and current-liability details, segment performance, and drivers of margin compression.
- Assess the earnings, cash-flow, and integration effects of the $1.3 billion Medicare Part D acquisition.
- Track final outcomes and potential financial or operating effects of the FTC order, government investigations, Medicaid claims litigation, and other material legal proceedings.
- Evaluate whether share repurchases and rising dividends remain supported by operating cash flow and balance-sheet capacity.
- Monitor final Medicaid reimbursement rules, Medicare Part D changes, and competitive developments following the proposed PBM merger.