CVS HEALTH Corp annual report, FY2015

CVS Health Corporation — 2015 Form 10-K Summary

Business context and reporting period

Fiscal year ended December 31, 2015. CVS Health operates Pharmacy Services, Retail/LTC and Corporate segments, combining a pharmacy benefit manager with retail pharmacies, clinics, specialty pharmacy and long-term-care services. The filing incorporates its full MD&A and financial statements by reference; the supplied text includes selected financial data but not detailed cash-flow, segment or liquidity disclosures.

Financial performance and key metrics

Metric20152014Change
Net revenues$153.290 billion$139.367 billion+10.0%
Gross profit$26.528 billion$25.367 billion+4.6%
Operating profit$9.454 billion$8.799 billion+7.4%
Income from continuing operations$5.230 billion$4.645 billion+12.6%
Net income attributable to CVS Health$5.237 billion$4.644 billion+12.8%
Diluted earnings per share$4.63$3.96+16.9%
Net interest expense$838 million$600 million+39.7%
Long-term debt$26.267 billion$11.630 billion+$14.637 billion
Total assets$93.657 billion$74.187 billion+$19.470 billion
Shareholders’ equity$37.203 billion$37.963 billion−$760 million
Cash dividends per share$1.40$1.10+27.3%

Gross margin was approximately 17.3% versus 18.2% in 2014; operating margin was approximately 6.2% versus 6.3%. Net margin attributable to CVS Health was approximately 3.4% versus 3.3%. Cash flow, cash balances, current liquidity measures and a clear liquidity ratio are not provided in the supplied filing text.

Material changes versus the prior comparable period

  • Revenue and earnings increased, while gross margin contracted and interest expense rose.
  • CVS completed its Omnicare acquisition on August 18, 2015, expanding its long-term-care and specialty pharmacy businesses.
  • On December 16, 2015, CVS acquired Target’s 1,672 pharmacies and 79 clinics. Omnicare and Target businesses together represented 18% of year-end assets and 2% of 2015 revenue, according to the filing; both acquisitions were excluded from the company’s 2015 internal-control evaluation as permitted by SEC rules.
  • Long-term debt increased substantially. CVS repurchased 48.0 million shares for approximately $5.0 billion during 2015; $7.7 billion remained authorized under the 2014 repurchase program at year-end.
  • 2014 included a $521 million loss on early extinguishment of debt; no such loss was reported for 2015.

Outlook, risks and unusual items

  • The supplied text provides no specific 2016 revenue, earnings or cash-flow guidance. Management’s detailed outlook and commentary are incorporated by reference, rather than reproduced here.
  • Management identifies reimbursement and pricing pressure, PBM and pharmacy competition, generic-drug cost and supply trends, client retention, regulatory change and government audits as significant risks. Other risks include cybersecurity and privacy incidents, system integration, litigation, seasonality and acquisition integration.
  • CVS stated that it was negotiating with the EPA over alleged historical hazardous-waste regulatory noncompliance at certain Omnicare pharmacies; it described the proceedings as not material to its business or financial position. Other legal matters are addressed in incorporated notes, whose details are not included in the supplied text.
  • CVS reported disclosure controls as adequate and effective at a reasonable-assurance level. It had no interest-rate, foreign-exchange or commodity derivative instruments outstanding at year-end and considered the related exposures not material.

Important facts for investors to verify

  • Review the incorporated audited financial statements and MD&A for operating cash flow, free cash flow, cash and current liabilities, segment results, acquisition costs, debt maturities and covenants.
  • Separate organic growth from revenue and earnings contributed by Omnicare and Target, and assess their integration and expected returns.
  • Investigate the drivers of gross-margin compression and higher interest expense, and whether those trends continued after 2015.
  • Check the incorporated legal-contingency disclosures for material claims, government investigations, settlements and potential losses.
  • Confirm subsequent share repurchases, dividend decisions and debt-reduction plans, including the final settlement of the $725 million accelerated share repurchase in January 2016.