CVS Caremark Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing is for CVS Caremark Corporation, which operated Pharmacy Services, Retail Pharmacy and Corporate segments. Financial figures below are in U.S. dollars; “nine months” refers to the year-to-date period.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $26.674B | $23.711B | $78.783B | $71.189B |
| Gross profit | $5.178B | $5.015B | $15.006B | $14.765B |
| Operating profit | $1.584B | $1.478B | $4.373B | $4.376B |
| Net income attributable to CVS Caremark | $868M | $809M | $2.397B | $2.401B |
| Diluted EPS | $0.65 | $0.59 | $1.77 | $1.74 |
| Operating cash flow | Not presented separately for the quarter | $5.035B | $3.004B |
- Revenue and margins: Revenue increased 12.5% in Q3 and 10.7% year to date. Gross margin fell about 170 basis points in both comparisons, to 19.4% for Q3 and 19.0% year to date, largely reflecting Pharmacy Services margin pressure. Operating profit rose 7.2% in Q3 but was essentially flat year to date.
- Cash flow and investment: Year-to-date operating cash flow rose $2.031B. Investing used $2.563B, including $1.406B for acquisitions and other investments; capital expenditures were $1.168B. Financing used $2.192B, including $2.553B of stock repurchases and $508M of dividends.
- Liquidity and debt: At September 30, cash and cash equivalents were $1.707B and current assets were $18.938B against current liabilities of $12.350B. Short-term debt was $530M, current long-term debt $71M and long-term debt $10.167B. The company had no borrowings under its backup credit facilities and reported $530M of commercial paper outstanding at a 0.3% weighted-average rate.
Material changes and operating trends
- Pharmacy Services: Q3 revenue grew 25.8% to $14.798B, but operating profit margin declined to 4.4% from 5.5%. Year-to-date revenue rose 22.3% to $43.0B, while operating profit fell to $1.496B from $1.763B. Growth reflected a large health-insurance carrier contract that began January 1 and the Universal American Medicare Part D acquisition. Management cited client pricing compression, including a large government contract renewal, as a major margin headwind.
- Pharmacy Services claims processed rose to 196.7M in Q3 from 144.4M; its generic dispensing rate increased to 74.3% from 72.0%. Higher generic use supported margins, but lower revenue per pharmacy-network claim and client pricing changes weighed on results.
- Retail Pharmacy: Q3 revenue rose 3.8% to $14.693B and operating profit rose to $1.123B from $1.039B. Same-store sales increased 2.3%; operating profit margin improved to 7.6% from 7.3%. The segment’s generic dispensing rate was 75.7%, versus 73.5%.
- Acquisition and divestiture: CVS acquired Universal American’s Medicare Part D business on April 29 for approximately $1.3B; results are included from that date. The company agreed to sell TheraCom for $250M and completed the sale on November 1, 2011, after quarter-end. TheraCom was classified as discontinued operations.
- Shareholder returns and financing: The company repurchased $2.553B of shares year to date. It authorized a new $4.0B buyback in August and entered a $1.0B accelerated repurchase agreement. In May, it issued $1.5B of senior notes due 2021 and 2041, using proceeds in part to repay commercial paper and other debt.
Outlook, risks and contingencies
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management planned approximately 245 new or relocated retail drugstores for 2011 and said operating cash flows, commercial paper and other financing sources were expected to cover future payments and long-term initiatives.
- Management expected competitive PBM pricing pressure and efforts by payors to reduce pharmacy reimbursement to continue. It also identified risks from client losses, rebates and discounts, generic and brand-drug trends, healthcare regulation, competition, acquisition integration and economic conditions.
- Legal matters include government inquiries and litigation concerning Medicaid claims processing, pharmacy-network antitrust allegations, prescription-transfer promotions, Medicare Part D, and securities disclosures. The company reported that assistant store manager overtime litigation had key settlement terms negotiated, but no final agreement or court approval had been completed; reserves had been established. Management generally did not expect the matters described to have a material adverse effect, while cautioning that outcomes cannot be assured.
- The company guaranteed approximately 84 leases of former subsidiaries, excluding Linens ’n Things; management did not expect the remaining guarantees to materially affect its financial condition, results or future cash flows. Operating lease obligations are not reflected on the balance sheet.
- Annual impairment tests found no goodwill or trademark impairment. The Pharmacy Services reporting unit’s fair value exceeded carrying value by approximately 15%; Retail Pharmacy had a substantial excess. The interim financial statements received an independent accountant’s review, not an audit.
Important facts for investors to verify
- Whether Pharmacy Services can stabilize margins amid contract repricing and continued client pricing pressure.
- How much of revenue and cash-flow growth reflects the new carrier contract, the Medicare Part D acquisition and working-capital timing, and how those effects compare with underlying growth.
- Final purchase-price allocation and realized returns from the approximately $1.3B Universal American acquisition, and the completed $250M TheraCom sale.
- Debt, liquidity and capital-return plans, including completion of the accelerated repurchase and execution of the authorized buyback.
- Developments in the disclosed legal proceedings and investigations, lease guarantees, and any resulting settlements, penalties or changes to business practices.