CVS Caremark Corporation (now CVS Health) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. The company operated Pharmacy Services, Retail Pharmacy and Corporate segments. Financial statements are unaudited; the independent accountant conducted an interim review, not an audit.
Financial performance
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $31,968 | $30,227 | $93,979 | $91,739 |
| Gross profit | $6,035 | $5,647 | $17,452 | $16,209 |
| Gross margin | 18.9% | 18.7% | 18.6% | 17.7% |
| Operating profit | $2,161 | $1,814 | $5,828 | $4,925 |
| Income from continuing operations | $1,260 | $1,011 | $3,338 | $2,753 |
| Net income attributable to CVS Caremark | $1,254 | $1,006 | $3,331 | $2,748 |
| Diluted EPS | $1.02 | $0.79 | $2.70 | $2.13 |
| Net interest expense | $122 | $134 | $374 | $397 |
- Revenue grew 5.8% in Q3 and 2.4% year to date. Operating profit rose 19.1% and 18.3%, respectively; diluted EPS increased 29.1% and 26.8%.
- Gross margin improved about 20 basis points in Q3 and 90 basis points year to date. Higher generic dispensing, rebate improvement and Pharmacy Services streamlining supported margins; generic mix also reduced revenue per prescription and pressured revenue growth.
- Q3 included a $72 million gain from a legal settlement, recorded as a reduction of operating expenses ($61 million Retail Pharmacy; $11 million Pharmacy Services). This boosted reported operating results.
Segments
- Pharmacy Services: Q3 revenue $19.5 billion, up 7.8%; operating profit $1.012 billion, versus $784 million. Nine-month revenue was $56.6 billion, up 3.3%, and operating profit was $2.186 billion, versus $1.644 billion. Generic dispensing rates rose to 81.0% for Q3 and 80.7% year to date.
- Retail Pharmacy: Q3 revenue $16.3 billion, up 5.0%; operating profit $1.471 billion, versus $1.305 billion. Nine-month revenue was $48.5 billion, up 2.3%, and operating profit was $4.604 billion, versus $4.071 billion. Pharmacy same-store sales rose 5.7% in Q3, while front-store same-store sales declined 1.0%.
Cash flow, balance sheet and capital allocation
- Operating cash flow: $4.245 billion for nine months, down from $4.940 billion. Management attributed the decline primarily to higher receivables from timing of Medicare Part D payments from CMS.
- Investing cash flow: $1.622 billion used, versus $1.183 billion used, reflecting lower sale-leaseback proceeds and purchases of available-for-sale investments. Capital expenditures were $1.330 billion.
- Financing cash flow: $2.498 billion used, versus $3.937 billion used. The company repurchased $2.272 billion of shares and paid $829 million in dividends during the nine months.
- Liquidity at September 30: Cash and cash equivalents were $1.505 billion and short-term investments $108 million. Current assets were $21.432 billion against current liabilities of $15.098 billion.
- Debt: Short-term debt was $814 million, current long-term debt $572 million and long-term debt $8.819 billion—$10.205 billion in total reported debt. Commercial paper outstanding was $814 million at a 0.28% weighted-average rate; no backup credit facilities were drawn. Long-term debt ratings were investment grade, with stable outlooks.
- On October 1, 2013, after quarter-end, CVS entered a $1.7 billion accelerated share repurchase agreement and initially received approximately 14.9 million shares. Final share settlement depends on the stock-price formula and was expected by December 30, 2013. The company had approximately $2.4 billion remaining under its repurchase authorization at September 30.
Outlook, commentary and material risks
- The filing provides no specific quantified earnings or revenue guidance. Management said favorable pharmacy-industry demand trends were expected to continue and anticipated further generic introductions, though at a slower pace.
- CMS sanctions imposed in January 2013 suspended new enrollment and marketing for the company’s SilverScript Medicare Part D plan. CVS was excluded from the 2014 annual enrollment period, except for limited enrollment under a waiver through January 31, 2014. The company was working on corrective actions but could not predict when sanctions would end or the resulting financial impact. The sanctions did not prevent Medicare Part D services for other PBM clients.
- Management cited continuing PBM pricing and competitive pressure, client demands for lower prices, retail reimbursement pressure, generic-drug mix effects, possible client losses, and regulatory and reimbursement uncertainty as risks to revenue and margins.
- Legal matters include government and qui tam investigations and litigation. CVS had agreed in principle to a $20 million SEC civil penalty relating to alleged 2009 violations; it was fully reserved, remained subject to final approval, and the company stated it would not restate prior financial statements. Management said recorded legal accruals were not material individually or in aggregate, but could not estimate possible losses beyond accrued amounts for various matters.
- The company guaranteed approximately 74 leases of former subsidiaries, with remaining terms extending through 2024; management did not expect ultimate disposition to materially affect financial condition, results or cash flows.
- A proposed lease-accounting standard was expected by the company to likely have a material effect on financial position, but not liquidity; the final impact could not yet be determined. Annual impairment testing found no goodwill or trademark impairment.
Most important facts for investors to verify
- Progress, duration and financial consequences of CMS sanctions affecting SilverScript, including member retention and remediation costs.
- Underlying earnings excluding the $72 million legal-settlement gain, and whether reported segment margin improvements persist.
- Cash-conversion trends, particularly CMS receivable timing, and the company’s capacity to fund dividends, capital spending and repurchases.
- Final settlement and share impact of the $1.7 billion accelerated repurchase agreement, alongside continuing buybacks and debt levels.
- Developments in the SEC settlement and other government investigations, litigation and lease guarantees; confirm whether any new exposures require accruals or disclosure.