CVS Caremark Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; 2010 and 2009 each contained 365 days. The company operates Pharmacy Services, Retail Pharmacy and Corporate segments. This is an annual filing, not a standalone fourth-quarter report. Some detailed financial statements and management discussion are incorporated by reference to the 2010 Annual Report.
Business context
CVS Caremark described itself as the largest U.S. pharmacy health care provider, combining pharmacy benefit management (PBM), mail and specialty pharmacy, retail drugstores, MinuteClinic health clinics and online pharmacy services. At year-end it had 7,182 retail drugstores and 560 MinuteClinics. During 2010, its PBM filled or managed approximately 585 million prescriptions, while its retail pharmacies filled approximately 636 million.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net revenue | $96.413 billion | $98.729 billion | Down 2.3% |
| Gross profit | $20.257 billion | $20.380 billion | Down 0.6% |
| Operating profit | $6.165 billion | $6.438 billion | Down 4.2% |
| Income from continuing operations | $3.439 billion | $3.708 billion | Down 7.3% |
| Net income attributable to CVS Caremark | $3.427 billion | $3.696 billion | Down 7.3% |
| Diluted EPS | $2.49 | $2.55 | Down 2.4% |
| Long-term debt | $8.652 billion | $8.756 billion | Down $104 million |
| Total assets | $62.169 billion | $61.641 billion | Up $528 million |
| Shareholders’ equity | $37.700 billion | $35.768 billion | Up $1.932 billion |
Calculated from the selected financial data, gross margin was approximately 21.0% versus 20.6% in 2009, operating margin 6.4% versus 6.5%, and net margin attributable to CVS Caremark 3.6% versus 3.7%. The supplied filing text does not provide clear cash-flow totals or current-liquidity measures; the detailed cash-flow statement and MD&A are incorporated by reference.
Cash dividends were $0.35 per share in 2010, up from $0.305 in 2009. The company repurchased 42.4 million shares for approximately $1.5 billion during the first three quarters, completing its 2009 authorization; no repurchases had been made under the new $2.0 billion program by year-end.
Changes, outlook and material items
- Revenue, operating profit and net income declined year over year, while gross profit was nearly flat. Prescription drugs represented an estimated 68% of consolidated revenue in both 2010 and 2009.
- The company expected to open 225–250 new or relocated retail stores and close approximately 15 in 2011, and anticipated opening 100 new MinuteClinics.
- In December 2010, CVS Caremark agreed to acquire Universal American Corp.’s Medicare Part D business for approximately $1.25 billion, subject to approvals; management expected a close by the end of the second quarter of 2011.
- Management cited continued PBM margin pressure, weaker drug-utilization trends associated with the recession, reimbursement pressure and evolving Medicare Part D requirements. It also noted uncertainty around implementation of 2010 health reform (PPACA), including medical-loss-ratio rules and new disclosure requirements.
- In October 2010, the company resolved a pseudoephedrine-related matter, paying $75 million in civil penalties and $2.6 million in criminal forfeiture, and accepted ongoing compliance requirements.
- Other notable exposures include ongoing government investigations and litigation, including Medicaid claims matters, antitrust inquiries, wage-and-hour class actions and securities litigation. The filing does not establish outcomes for these matters. Lease-related costs associated with guarantees for former Linens ’n Things stores contributed a $15 million after-tax discontinued-operations loss in 2010.
- CEO Thomas Ryan planned to retire as CEO effective March 1, 2011; President and COO Larry Merlo was to become CEO.
Important facts for investors to verify
- Review the incorporated Annual Report for full cash-flow, liquidity, segment results, debt maturities and management’s explanation of the earnings decline.
- Track PBM client renewals, reimbursement rates, generic-drug economics and the impact of Medicare Part D pricing and regulatory changes on margins.
- Confirm closing terms, regulatory approvals, financing and integration progress for the proposed $1.25 billion Universal American acquisition.
- Monitor the outcomes and potential financial effects of government investigations, litigation and the company’s ongoing compliance agreements.
- Assess whether planned store and clinic expansion, integrated pharmacy programs and other growth initiatives deliver the expected returns.